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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934 For the Quarterly Period Ended September 30, 1998
[ ] Transition report pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934 For the transition period from
__________ to ___________
Commission file number 1-13810
SOCKET COMMUNICATIONS, INC.
(Name of small business issuer as specified in its charter)
Delaware 94-3155066
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
37400 Central Court, Newark, CA 94560
(Address of principal executive offices including zip code)
(510) 744-2700
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. YES X NO
--- ---
Number of shares of Common Stock ($0.001 par value) outstanding as of
November 10, 1998 was 7,365,914 shares.
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Part I. Financial information
Condensed Balance Sheets - September 30, 1998 and
December 31, 1997.......................................
Condensed Statements of Operations - Three Months and
Nine Months Ended September 30, 1998 and 1997...........
Condensed Statements of Cash Flows - Nine Months Ended
September 30, 1998 and 1997.............................
Notes to Condensed Financial Statements...................
Management's Discussion and Analysis of Financial
Condition and Results of Operations.....................
Part II. Other information
Item 2. Changes in Securities and Use of Proceeds.........
Item 6. Exhibits and Reports on Form 8-K..................
Signatures................................................
</TABLE>
<PAGE>
PART I. FINANCIAL INFORMATION
SOCKET COMMUNICATIONS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1998 1997 *
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $429,849 $276,900
Accounts receivable, net........................... 885,789 899,296
Inventories........................................ 447,873 195,127
Prepaid expenses................................... 51,750 9,048
------------ ------------
Total current assets............................ 1,815,261 1,380,371
Property and equipment:
Machinery and office equipment..................... 598,280 600,851
Computer equipment................................. 501,947 530,239
------------ ------------
1,100,227 1,131,090
Accumulated depreciation........................... (890,984) (807,502)
------------ ------------
209,243 323,588
Other assets........................................ 68,603 66,305
------------ ------------
Total assets.................................... $2,093,107 $1,770,264
============ ============
LIABILITIES AND STOCKHOLDERS' DEFICIT
Current liabilities:
Bank lines of credit............................... $545,687 $523,941
Convertible subordinated notes..................... -- 1,950,000
Accounts payable and accrued expenses.............. 1,498,786 1,962,354
Accrued payroll and related expenses............... 199,078 277,553
Deferred revenue................................... 201,012 178,625
Current portion of capital leases and
equipment financing notes........................ 52,021 61,804
------------ ------------
Total current liabilities....................... 2,496,584 4,954,277
Long-term portion of capital leases and
equipment financing notes.......................... -- 40,931
Stockholders' net capital deficiency:
Preferred stock, $0.001 par value; Authorized
shares - 3,000,000 Series B Convertible
Preferred Stock:
Designated shares- 37,500; Issued and
outstanding shares - 30,065 at September 30,
1998 and none at December 31, 1997........... 1,565,976 --
Series C Convertible Preferred Stock:
Designated shares - 175,000; Issued and
outstanding shares - 163,468 at September 30,
1998 and none at December 31, 1997........... 1,714,043 --
Common stock, $0.001 par value:
Authorized shares - 15,000,000
Issued and outstanding shares - 7,316,027 at
September 30, 1998 and 6,501,275 at
December 31, 1997............................. 7,316 6,501
Additional paid-in capital......................... 13,883,339 13,208,038
Accumulated deficit................................ (17,574,151) (16,439,483)
------------ ------------
Total stockholders' net capital deficiency...... (403,477) (3,224,944)
------------ ------------
Total liabilities and stockholders' net
capital deficiency....................... $2,093,107 $1,770,264
============ ============
</TABLE>
* Derived from audited financial statements.
See accompanying notes.
<PAGE>
SOCKET COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Nine Months Ended
September 30, September 30,
----------------------- -------------------------
1998 1997 1998 1997
----------- ----------- ------------ ------------
<S> <C> <C> <C> <C>
Revenues....................... $1,368,091 $1,350,019 $4,030,023 $3,543,459
Cost of revenue................ 537,115 681,479 1,621,446 1,767,186
----------- ----------- ------------ ------------
Gross profit................... 830,976 668,540 2,408,577 1,776,273
----------- ----------- ------------ ------------
Operating expenses:
Research and development.... 248,141 260,110 753,853 805,002
Sales and marketing......... 499,635 651,710 1,457,414 2,204,744
General and administrative.. 251,347 495,222 840,136 1,361,026
----------- ----------- ------------ ------------
Total operating expenses. 999,123 1,407,042 3,051,403 4,370,772
----------- ----------- ------------ ------------
Operating income (loss)........ (168,147) (738,502) (642,826) (2,594,499)
Interest income................ -- 17 4 2,159
Interest expense............... (18,631) (45,333) (95,205) (108,791)
----------- ----------- ------------ ------------
Net income (loss).............. (186,778) (783,818) (738,027) (2,701,131)
Preferred stock dividend....... (64,452) (5,156) (146,641) (44,094)
Accretion of preferred stock... -- -- (250,000) --
----------- ----------- ------------ ------------
Net loss applicable to
common stockholders.......... ($251,230) ($788,974) ($1,134,668) ($2,745,225)
=========== =========== ============ ============
Net loss per share applicable
to common stockholders....... ($0.03) ($0.14) ($0.16) ($0.57)
=========== =========== ============ ============
Weighted average shares
outstanding.................. 7,316,027 5,541,844 7,015,889 4,783,992
=========== =========== ============ ============
</TABLE>
See accompanying notes.
<PAGE>
SOCKET COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1998 1997
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss............................................ ($738,027) ($2,701,131)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................... 151,967 206,545
Changes in operating assets and liabilities:
Accounts receivable........................... 13,507 19,563
Inventories................................... (252,746) (73,248)
Prepaid expenses.............................. (42,702) (2,300)
Other assets.................................. (2,298) (22,553)
Accounts payable and accrued expenses......... (306,355) 612,803
Accrued payroll and related expenses.......... (78,475) 80,653
Deferred revenue.............................. 22,387 (39,340)
------------ ------------
Net cash used in operating activities....... (1,232,742) (1,919,008)
INVESTING ACTIVITIES
Purchase of equipment............................... (37,622) (116,715)
------------ ------------
Net cash used in investing activities....... (37,622) (116,715)
FINANCING ACTIVITIES
Proceeds from sale of preferred stock, net of
costs of $30,646.......... 1,469,354 --
Payments on capital leases and equipment
financing notes................ (50,714) (93,982)
Proceeds from issuance of convertible notes......... -- 1,600,000
Preferred stock dividends paid...................... (17,073) (30,318)
Stock options and warrants exercised................ -- 3,777
Proceeds (repayment) from borrowing under bank
lines of credit.......... 21,746 98,972
------------ ------------
Net cash provided by financing activities... 1,423,313 1,578,449
------------ ------------
Net increase(decrease) in cash and cash equivalents... 152,949 (457,274)
Cash and cash equivalents at beginning of period...... 276,900 618,344
------------ ------------
Cash and cash equivalents at end of period............ $429,849 $161,070
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest.............................. $40,422 $13,771
Dividends accrued but unpaid........................ $4,608 $13,776
Dividends paid in common stock...................... $142,033 --
Notes payable and accrued interest
converted to preferred stock...................... $1,714,043 --
Notes payable and accrued interest
converted to common stock......................... $380,705 --
Accretion of preferred stock........................ $250,000 --
Warrants issued in connection with
preferred stock financing......................... $153,378 --
</TABLE>
See accompanying notes.
<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 September 30, 1998, the Company had cumulative losses of
$17,574,151, a net capital deficiency of $403,477, and a working capital
deficit of $681,323. On November 9, 1998, the Company sold $750,000 of
Series D Convertible Preferred Stock with net financing proceeds of
approximately $675,000 (see Note 10). Had this transaction been completed
as of September 30, 1998, the Company would have had cash balances of
approximately $1,105,000, a net worth of approximately $272,000 and a
working capital deficit of approximately $6,000. With the completion of
this financing transaction, the Company believes its existing capital
resources will be sufficient to satisfy its working capital requirements
at least through the first quarter of 1999. 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 Company intends to raise additional working
capital sufficient to bring the Company back into compliance with the
listing requirements of the Pacific Exchange and to fund working capital
requirements in 1999 and beyond, which the Company intends to accomplish
through the issuance of additional equity securities. 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 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 September 30, 1998 are not
necessarily indicative of the results that may be expected for the year
ending December 31, 1998.
NOTE 2 - Cash Equivalents
Cash equivalents consist mainly of money market funds, which are highly
liquid financial instruments that are readily convertible to cash. The
Company has not incurred losses related to these instruments. As of
September 30, 1998 and December 31, 1997, the Company had no material
investments in debt or equity securities.
NOTE 3 - Inventories
Inventories consist principally of raw materials and sub-assemblies,
which are stated at the lower of cost (first-in, first-out) or market.
September 30, December 31,
1998 1997
------------ ------------
Raw materials and sub-assemblies........ $432,766 $179,267
Finished goods.......................... 15,107 15,860
------------ ------------
$447,873 $195,127
============ ============
NOTE 4 - Income Taxes
Due to the Company's loss position, there was no provision for income
taxes for the three and nine months ended September 30, 1998 and 1997.
NOTE 5 - Net Loss Per Share and Net Loss Per Share Applicable to Common
Stockholders
In 1997, the Financial Accounting Standards Board issued Statement No.
128, Earnings per Share. Statement 128 replaced the calculation of
primary and fully diluted loss per share with basic and diluted loss per
share. Unlike primary loss per share, basic loss per share excludes any
dilutive effects of options, warrants and convertible securities. Diluted
net loss per share includes potential common shares, when dilutive, from
stock options and warrants, from convertible preferred stock, and
convertible notes. As the Company has experienced losses in all periods
presented, no potential common shares have been included in the net loss
per share calculation as they are antidilutive.
The Company is required to accrue dividends on shares of its
outstanding preferred stock. Dividends of $64,452 and $5,156 for the
quarters ended September 30, 1998 and 1997 respectively, and $146,641 and
$44,094 for the nine months ended September 30, 1998 and 1997
respectively, and accretion of $250,000 for the nine months ended
September 30, 1998, were added to the net loss to determine the net loss
per share applicable to common stockholders.
Note 6 - Recent Pronouncements
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 130, "Reporting Comprehensive Income" ("FAS
130"). FAS 130 establishes standards for the reporting and display of
comprehensive income and its components; however, the adoption of FAS 130
had no material impact on the Company's net loss or stockholders' equity.
Total comprehensive loss for the three and nine month periods ended
September 30, 1998, amounted to approximately $251,000 and $1,135,000,
respectively. Total comprehensive loss for the three and nine month
periods ended September 30, 1997, amounted to approximately $789,000 and
$2,745,000, respectively.
As of January 1, 1998, the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an
Enterprise and Related Information" ("FAS 131"). FAS 131 changes the
way companies report selected segment information in annual financial
statements and also requires those companies to report selected segment
information in interim financial reports to stockholders. The Company has
not yet reached a conclusion as to the appropriate segments, if any, it
will be required to report to comply with FAS 131.
NOTE 7 - 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% (9.75% at September 30,
1998). The New Agreement contains covenants that require the Company to
maintain certain financial ratios including current ratio and tangible net
worth. As of September 30, 1998 the Company was not in compliance with
the covenants and has obtained a waiver from the bank. As of September
30, 1998 and December 31, 1997, outstanding borrowings under the Agreement
were $455,741 and $268,908 respectively, which were the amounts available
under the line.
In 1997, the company entered into an international credit agreement
("Original International Agreement") with a commercial lending
institution, which expired on August 15, 1998. In August 1998 the Company
entered into a new international credit agreement ("New International
Agreement") with a commercial lending institution which will expire on
August 31, 1999. This New International Agreement is secured by the
Company's international receivables and by the Company's current and
future assets. The credit facility under the New International Agreement
allows the Company to borrow up to $500,000 based on the level of
qualified international receivables. As of September 30, 1998 and December
31, 1997, outstanding borrowings under the International Agreement were
$89,946 and $255,033 respectively, which were the amounts available under
the line.
NOTE 8 - 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 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 Section 4(2) of the
Securities Act of 1933, as amended (the "Series B Transaction"). 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, $0.001 par value, at
$56.50 per share, pursuant to exercise of the option to invest an
additional $500,000 expiring on February 15, 1998. On March 18, 1998,
such 8,850 shares of Series B were exchanged for a like number of Series
B-1 Convertible Preferred Stock, $.001 par value (the "Series B-1
Transaction"). Each share of Series B-1 Convertible Preferred Stock is
convertible into 100 shares of Common Stock at the option of the holder,
in whole or in part, at any time for a period of two years following
February 6, 1998. The Series B-1 stock will convert into a total of
885,000 shares of Common Stock. The conversion ratio for the Series B-1
Transaction was based upon 80% of the average high and low sales price of
the Company's Common Stock for the ten days prior to the Series B-1
Closing. Dividends accrue at the rate of 8% and are payable quarterly in
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 18, 1998, (the "Series B-2 Closing"), the Company sold 8,715
shares of Series B-2 Convertible Preferred Stock, $0.001 par value, at
$57.375 per share, pursuant to exercise of the option to invest an
additional $500,000 (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 to market price given to the Series B-2 holders.
These transactions resulted in the valuation of warrants of approximately
$153,378 which was recorded as additional paid in capital in the first
quarter of 1998.
NOTE 9 - Conversion of Convertible Subordinated Notes into Series C
Convertible Preferred Shares and Common Stock
On March 31, 1998, $1,750,000 of convertible subordinated notes and
$140,076 of accrued interest were converted into 95,037 shares of Series C
Preferred Stock, 51,574 shares of Series C-1 Preferred Stock and 671,803
shares of Common Stock. On May 15, 1998, $200,000 of convertible
subordinated notes and $13,353 of accrued interest were converted into
16,857 shares of Series C-2 Preferred Stock and 84,535 shares of Common
Stock. Series C, C-1, and C-2 Preferred Stock plus accrued dividends at
8% per annum are convertible into Common Stock at the option of the
holder, with a mandatory conversion date of March 31, 2000 for Series C
and C-1 and May 15, 2000 for Series C-2. At September 30, 1998, Series C,
C-1, and C-2 shares, if converted, would have converted into 2,991,521
shares of Common Stock.
NOTE 10 - Subsequent Event: Sale of Series D Convertible Preferred Stock
On November 9, 1998, the Company sold 130,719 shares of its Series D
Convertible Preferred Stock, $0.001 par value, at $5.7375 per share (total
of $750,000) pursuant to Section 4(2) of the Securities Act of 1933, as
amended. Each share of Series D Convertible Preferred Stock is convertible
into 10 shares of Common Stock at the option of the holder, in whole or in
part, at any time for a period of three years following the date of sale.
The Series D stock will convert into a total of 1,307,190 shares of Common
Stock. The Company also issued three-year warrants to acquire 495,730
shares of Common Stock at $0.57375 per share.
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, including its data
collection serial PC card for bar code scanning, and its Ethernet PC card
adapters for mobile computers are its principal sources of revenues. The
Company focused its development, beginning in 1996, on connection products
for devices using the Windows CE operating system from Microsoft. These
devices include the three categories of handheld computers (H/PC, which
began shipping in November 1996, Palm-size PC, which began shipping in
June 1998, and H/PC Professional which began shipping in October 1998) and
embedded devices. In December 1996, the Company expanded its standard
serial and Ethernet PC card lines into a family of PC card products,
including a ruggedized serial PC card, a dual serial PC card and an
Ethernet/serial multifunction PC card. In October 1997, the Company
introduced a barcode scanner PC card and a low power Ethernet card for
Windows CE handheld computers. In August through October 1998, the Company
began shipping its serial and Ethernet card products in a CompactFlashT
form factor ("CF+") for use with smaller Windows CE handheld devices,
such as the Palm-size PC computer.
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, as described in
the next paragraph, the development in 1998 of wireless receivers that
utilize the higher speed FLEX networks.
The Company has a number of strategic relationships that are important
to its product development and marketing programs. In June 1998, the
Company signed a contract with Motorola Corporation ("Motorola" ) to
adapt the Company's messaging software, introduced in 1996, to work as a
software driver with Motorola's Windows CE 2.0 CompactFlash wireless
receiver and embedded module products currently under development. The
Company earned development revenues of $100,000 and $75,000 from this
contract in the second and third quarters of 1998, respectively, and
expects to earn additional development revenues in the fourth quarter of
1998. The Company will also earn a royalty on all receivers sold after
the product begins volume shipments, with shipments expected to commence
in the first quarter of 1999.* The Company announced in September 1998
that it had reached agreement with Symbol Technologies ("Symbol") to
make available for Windows CE-based Handheld PCs and Windows notebooks bar
code laser scanner solutions which combine the Company's serial data
collection PC and CF+ cards with Symbol's handheld laser scanners. The
first laser scanning products are expected to commence shipment in the
fourth quarter of 1998.* The Company believes that it has also developed
strong working relationships with Microsoft Corporation ("Microsoft")
and with Windows CE handheld computer manufacturers for integrating
connection solutions into Windows CE devices, with other 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
transfer of their applications to the Windows CE operating system . The
Company expects to continue to work closely with such companies in
providing connection solutions for Windows-CE based applications and
devices.
Although the Company believes that its focus on the Windows CE operating
system for handheld computers and its strategic relationship with
Motorola, Symbol and other strategic partners position the Company for
additional revenue growth, the Company has incurred significant quarterly
and annual operating losses in every fiscal period since its inception,
and the Company may continue to incur quarterly operating losses at least
through the fourth quarter of 1998 and possibly longer.* The Company's
ability to achieve profitability will be highly dependent upon factors
including: 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 future
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 September 30, 1998, the Company had a net capital
deficiency of $403,477 and a working capital deficit of $681,323. In
November 1998, the Company sold $750,000 of Series D Convertible Preferred
Stock in a private placement offering. This financing will increase the
net working capital of the Company by an estimated $675,000 after giving
effect to the costs of the financing. See "-Liquidity and Capital
Resources" and "-Risk Factors" for a discussion of the Company's need
for future 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 quarter and nine months ended September 30, 1998 of
$1,368,091 and $4,030,023 increased 1.3% and 13.7%, respectively, over
revenues of $1,350,019 and $3,543,459 in the corresponding periods a year
ago. Revenues for the quarter increased as a result of substantially
higher sales of data collection bar code scanning PC cards and higher
sales of low-power Ethernet PC cards, both introduced in the fourth
quarter of 1997, offset by lower sales of standard Ethernet PC cards. The
Company shipped a large order of standard Ethernet PC cards to a major
customer in the third quarter of 1997. Revenues for the nine months
increased primarily due to higher sales of data collection bar code
scanning PC cards. Increases in the sales of low-power Ethernet PC cards
during 1998 were offset by lower sales of standard Ethernet PC cards, so
that total Ethernet PC card sales for both periods were flat.
Gross Profit
The Company's gross profit for the third quarter of 1998 was 60.7% of
revenue compared to 49.5% for the same quarter a year ago. The Company's
gross profit for the nine months of 1998 was 59.8% of revenue compared to
50.1% for the same period a year ago. The increases resulted primarily
from favorable product mix from increasing sales volumes of newer, higher
margin products for the quarter and nine month periods compared to the
corresponding periods a year ago.
Research and Development
Research and development expenses for the quarter and nine months ended
September 30, 1998 were $248,141 and $753,853, a 4.6% and 6.4% decrease,
respectively, compared to $260,110 and $805,002 for the corresponding
periods a year ago. The decreases primarily reflected lower outside
contract engineering services in 1998. To date, the Company has not
capitalized any software development costs. The Company expects to
moderately increase its research and development expenses in the fourth
quarter of 1998.
Sales and Marketing
Sales and marketing expenses for the quarter and nine months ended
September 30, 1998 were $499,635 and $1,457,414, respectively, a 23.3% and
33.9% decrease, respectively, compared to $651,710 and $2,204,744 for the
corresponding periods a year ago. The decreases primarily reflected lower
1998 staffing levels, severance costs associated with staff reductions in
the second and third quarters of 1997, and the expense in 1997 of a new
products marketing study. The Company expects to moderately increase its
sales and marketing expenses in the fourth quarter of 1998.*
General and Administrative
General and administrative expenses for the quarter and nine months
ended September 30, 1998 were $251,347 and $840,136, a 49.2% and 38.3%
decrease, respectively, compared to $495,222 and $1,361,026 for the
corresponding periods a year ago. The decreases primarily reflected
professional fees associated with financing and contemplated (subsequently
discontinued) merger activities of the Company during the first three
quarters of 1997, and one-time severance costs for the Company's former
CEO whose services terminated in April 1997. The Company expects to incur
moderate increases in its general and administrative expenses in the
fourth quarter of 1998.*
Interest and Other Income / Expense
Interest income primarily reflects interest on cash balances and is
negligible. Interest expense for the quarter and nine months ended
September 30, 1998 was $18,631 and $95,205, respectively, and is related
to interest on convertible subordinated notes issued in 1997 and to
interest on equipment lease financing obligations and bank credit line
balances outstanding. Interest expense for the quarter and nine months
ended September 30, 1997 was $45,333 and $108,791, respectively, and
related to interest on equipment lease financing obligations, to interest
on convertible subordinated notes issued in 1997 and to bank credit line
balances outstanding. The decrease in interest expense in 1998 reflected
the conversion into equity in March and May 1998 of all outstanding
convertible subordinated notes.
Preferred Stock Dividend; Accretion of Preferred Stock
Preferred stock dividends in 1998 reflect dividends earned at 8% per
annum on Series B and Series C preferred stock issued during the first and
second quarters of 1998. Preferred stock dividends in 1997 reflect
dividends earned at 6% per annum on Series A preferred stock issued in
November 1996 and converted at the option of the holder into common stock
at various dates through November 1997. Accretion of preferred stock for
the nine month period in 1998 reflected a purchase price discount of 20%
from market for $1.0 million of Series B Preferred Stock issued during the
first quarter of 1998. The accounting effect of accretion is to increase
by 20% the amount of the Series B Preferred Stock and to charge
accumulated deficit by the same amount as if the Series B Preferred Stock
had been issued at market price.
Year 2000 Compliance
The Year 2000 issue is the result of many currently installed computer
programs being written using two digits rather than four to define the
applicable year. As a result, these computer programs are unable to
distinguish between 21st century dates and 20th century dates, and could
cause computer system failures or miscalculations that result in
significant business disruptions.
The Company has evaluated its products and its internal systems and
communicated with its key suppliers relating to the existence of Year 2000
issues that could adversely affect the suppliers' ability to deliver
product to the Company. The Company's products do not use or rely on
computer date information and are therefore not affected by the Year 2000
date change. The Company is in the process of updating its general
accounting system software to the most recent version, which should make
its accounting system Year 2000 compliant. The Company expects to
complete the update and appropriate testing of its general accounting
system by the end of 1998 at a cost of approximately $5,000. The Company
believes that all of its other internal systems are Year 2000 compliant
and that no significant costs will be incurred in completing the
accounting system upgrade. The Company has also communicated with its
major suppliers, and is not aware of any compliance issues. In the event
that any such suppliers encounter Year 2000 issues, the Company believes
that it has sufficient alternate suppliers that would mitigate any
disruption affecting its business, results of operations, or financial
condition.
The Company has not assessed its non-information technology systems to
determine whether there are any Year 2000 issues. The Company believes
that its most reasonably likely worst case Year 2000 scenarios would
relate to problems with the systems of third parties rather than with the
Company's internal systems or its products. It is clear that the Company
has the least ability to assess and remedy the Year 2000 problems of third
parties and the Company believes the risks are greatest with
infrastructure (e.g. electricity supply, water and sewer service),
telecommunications, transportation supply chains and critical suppliers of
materials. The Company has not yet established a contingency plan to
address a reasonable worst case scenario.
Liquidity and Capital Resources
Net cash used for operating activities for the nine months ended
September 30, 1998 was $1,232,742, resulting primarily from the net loss,
an increase in inventories, and decreases in accounts payable and accrued
payroll and related expenses. Net cash used for operating activities in
the nine months ended September 30, 1997 was $1,919,008, resulting
primarily from the net loss and an increase in inventories, partially
offset by increases in accounts payable and accrued expenses and accrued
payroll and related expenses.
Net cash provided by financing activities during the first nine months
of 1998 of $1,423,313 resulted primarily from proceeds from the issuance
of Series B Convertible Preferred Stock of $1,500,000 net of financing
costs of $30,646 during the first quarter of 1998, and partially offset by
payments on capital leases, equipment financing notes, and dividends. Net
cash provided by financing activities during the first nine months of 1997
of $1,578,449 resulted from proceeds from the issuance of subordinated
convertible notes of $1,600,000 and increases in borrowings under the bank
lines of credit, partially offset by payments of capital leases and
equipment financing notes and payment of dividends to Series A Preferred
stockholders.
Future Capital Needs; Independent Auditors' Report Contained Explanatory
Paragraph Regarding Going Concern.
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. As of September 30, 1998, the
Company had cash and cash equivalents of $429,849. In November 1998, the
Company sold $750,000 of Series D Convertible Preferred Stock (with net
proceeds of approximately $675,000) and continues to utilize its
receivables based bank credit lines to finance its operations. The
Company believes its existing capital resources will be sufficient to
satisfy its working capital requirements through the end of 1998 and
beyond. However, the Company intends to raise additional capital to bring
itself back into full compliance with the listing requirements of the
Pacific Exchange.*(see "Risk Factors, Illiquidity of Trading Market").
There can be no assurances that such additional capital will be available
on acceptable terms, if at all, and such terms may be dilutive to existing
stockholders.
Risk Factors
Need to Raise Additional Capital; Independent Auditors' Report Contained
Explanatory Paragraph Regarding Going Concern.
As of September 30, 1998, we had cash and cash equivalents of $429,849.
We sold $750,000 of Series D Convertible Preferred Stock in November 1998
(resulting in net proceeds of approximately $675,000) and continue to
utilize our receivables-based bank credit lines to finance our operations.
We believe our existing capital resources will be sufficient to satisfy
our working capital requirements through at least the first quarter of
1999. The Report of Independent Auditors on our financial statements for
the year ended December 31, 1997 contains an explanatory paragraph
regarding our need for additional financing and indicating substantial
doubt about our ability to continue as a going concern. We intend to
raise additional capital to fund our working capital requirements in 1999
and beyond. We may not be able to raise additional capital on acceptable
terms, if at all. If we do, the additional capital may be on terms that
are dilutive to existing stockholders. Our inability to secure any
necessary funding would significantly impair our ability to operate and
would adversely affect our financial condition.
Illiquidity of Trading Market; Possible Delisting of Securities from the
Pacific Exchange
Our Common Stock trades on the OTC Bulletin Board. Our Common Stock is
also quoted on the Pacific Exchange. The continued listing criteria of the
Pacific Exchange requires us 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 our Common Stock, (iii) total net
tangible assets (the same as net capital for Socket) 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. We have not been in compliance with
the net tangible asset requirements of the Pacific Exchange since December
31, 1996, nor, except for brief periods of time, with the share bid price
requirements of the Pacific Exchange. Therefore, we have been subject to
possible delisting procedures since December 31, 1996. In November 1998,
the Pacific Exchange granted us a further extension of time to come into
compliance with the continued listing criteria and advised us that it
would next review our qualification for continued listing in January 1999.
As of September 30, 1998, we had a net capital deficiency of $403,477. On
November 9, 1998, we completed the sale of $750,000 of Series D
Convertible Preferred Stock (with net financing proceeds of approximately
$675,000). Had the financing transaction been completed as of September
30, 1998, we would have improved our net capital to a positive net worth
of approximately $272,000. We will need to further increase our net worth
from $272,000 to $500,000, by raising additional equity capital or through
profitability, in order to comply with the Pacific Exchange's minimum
listing criteria, and we may not be successful in doing so. In that case,
the Pacific Exchange may decide to initiate delisting proceedings against
us. If our Common Stock becomes delisted from the Pacific Exchange,
trading in our stock will become subject to the Commission's "penny
stock" rules, which will make it more difficult for our stockholders to
dispose of our stock. The "penny stock" rules under the Securities
Exchange Act of 1934, as amended, generally 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, our delisting from the Pacific Exchange and our 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 our
securities and therefore would severely adversely affect the market
liquidity for our securities.
Significant Dilutive Effect of Shares Eligible for Future Sale on Market
Price of the Common Stock
As of September 30, 1998, there were 1,918,508 shares of Common Stock
issuable upon the exercise of options under our 1995 and 1993 Stock Plans,
as amended, and 3,892,463 shares of our Common Stock issuable upon
exercise of warrants. Certain of these warrants include dilution
adjustments whenever we issue Common Stock or securities converting into
Common Stock at prices below $6.00 per share. In addition, 3,006,500
shares are issuable upon the conversion of Series B Convertible Preferred
Stock, an aggregate of 2,879,518 shares of Common Stock are issuable upon
conversion of Series C Convertible Preferred Stock plus additional shares
for accrued dividends through the date of conversion, and 1,307,190 shares
are issuable upon the conversion of Series D Preferred Stock (See Notes 8,
9 and 10 to Notes to Condensed Financial Statements). All of the Common
Stock underlying the Series B and Series C Convertible Preferred Stock,
the Common Stock dividends on that Preferred Stock, and certain other
shares of Common Stock have been registered on a Form S-3 registration
statement. Accordingly, that Common Stock may be sold into the market
under that registration statement without restriction or the volume
limitations of Rule 144 under the Securities Act of 1933, as amended. The
sale of these common shares in the market, and the appearance that such
shares are available for sale, has in the past and could in the future
adversely affect the market price of our Common Stock and could make it
more difficult to sell equity securities in the future.
We intend to issue additional equity securities in 1998 and 1999 in
order to increase our working capital and to achieve compliance with the
net tangible asset requirements of the Pacific Exchange.* To the extent
we do so, existing stockholders may experience substantial dilution,
particularly if the terms of such issuance include discounts to market
prices or the issuance of warrants, as we did in connection with the
issuance of $1,500,000 of Series B Convertible Preferred Stock and the
issuance of $750,000 of Series D Convertible Preferred Stock. In
addition, the holders of Series D Convertible Preferred Stock have
registration rights and may request us to register at any time the common
shares that will be issued upon conversion. In addition, the holders of
warrants to purchase 495,729 shares of Common Stock have registration
rights under which we will register the common shares issued upon the
exercise of warrants. Registered shares are immediately eligible to be
sold in the public market without restriction under Rule 144 under the
Securities Act of 1933, which, given the relatively low trading volumes
for our Common Stock, would likely have a significant depressant effect on
the per share market price of our Common Stock.
History of Operating Losses; No Assurance of Profitability
We were incorporated in March 1992 and we have incurred significant
operating losses in every fiscal period since inception. Although we have
reduced our operating losses during 1998, we are likely to continue to
incur quarterly operating losses at least through the fourth quarter of
1998 and possibly longer.* Profitability, if any, will depend upon
increased market acceptance of our serial and Ethernet cards, our ability
to obtain additional capital to fund our working capital requirements,
market acceptance of mobile computers that use Microsoft's Windows CE
operating system, the continuation of our development contract with
Motorola, the expansion of development and OEM customer relationships to
increase development and product sales revenues, the development of
successful new products for new and existing markets, our ability to
increase gross margins through higher sales volumes and contract
manufacturing efficiencies, expand our distribution capability, perform on
development contracts, and manage our operating expenses. There can be no
assurance that we 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 such as ours has
been slow to emerge, and it may not develop sufficiently to enable us to
achieve broad commercial acceptance of our products. Because this market
is relatively new and has developed slowly, and because current and future
competitors are likely to introduce a variety of competing wireless data
communications solutions, it is difficult to predict the rate at which
this market will grow, if at all. Although we intend to conform our
products to meet emerging standards in the wireless data communications
market, industry standards may not emerge or, if they become established,
that we will be able to conform to these new standards in a timely
fashion. Even if the market for wireless data communications products
does develop, there can be no assurance that our products will achieve
commercial success within such market.
Dependence on the Market for Mobile Computers; Dependence on Market
Success of Windows CE
Substantially all of our products are designed for use in mobile
computers, including notebooks, handheld PCs and, beginning in the second
half of 1998, Palm-size PCs and H/PC Professionals (Windows-CE based mini
notebooks). We expect to continue to derive a significant portion of
revenues from the sale of our 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 mobile computers or a reduction in the growth rate
of such sales, would likely reduce demand for our products. In addition,
our ability to compete successfully will depend on our ability to identify
and ensure compliance with evolving industry standards. Unanticipated
changes in industry standards could render our products incompatible with
products developed by major hardware manufacturers and software
developers, including Microsoft and Motorola. We could be required, as a
result, to invest significant time and resources to redesign our products
to ensure compliance with relevant standards. If our products are not in
compliance with prevailing industry standards for a significant period of
time, we would miss opportunities to have our 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.
Beginning in 1996, we implemented a strategy of focusing our product
development efforts on mobile computers and other devices that use the
Windows CE operating system of Microsoft. As a result, our success is
substantially dependent on the commercial success of handheld PCs (H/PCs,
Palm-size PCs and H/PC Professionals) and other devices that operate on
the Windows CE operating system. Therefore, our future success depends on
factors outside of our 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. Any delays in or failure
of Windows CE to achieve market acceptance would reduce the number of
potential customers of our products, which could adversely affect our
business.
Rapid Technological Change; Dependence on Product Development
The market for our products is characterized by rapidly changing
technology, evolving industry standards and short product life cycles.
Accordingly, our success will depend on a number of factors, including our
ability to identify emerging standards in the field of mobile computing
products, enhance our products by adding additional features to
differentiate our products from those of our competitors, maintain
superior or competitive performance in our products and bring products to
market quickly. Given the emerging nature of the mobile computing products
market, there can be no assurance that our products or technology will not
be rendered obsolete by alternative technologies. Further, short product
life cycles expose our products to the risk of obsolescence and require
frequent new product introductions. If we do develop or obtain access to
advanced mobile communications technologies as they become available, or
if we do not develop and introduce competitive new products on a timely
basis, our future operating results will be adversely affected.
Risk of Product Defects
Although we perform testing prior to new product introductions, our
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, we 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 us to recall previously shipped products to make design
modifications or cause unfavorable publicity, any of which could adversely
affect our business.
Potential Quarterly Fluctuations; Absence of Significant Order Backlog
We have experienced significant quarterly fluctuations in operating
results and we anticipate such fluctuations in the future. We generally
ship orders as received and as a result typically have 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, we have often recognized a
substantial portion of our revenues in the last month of the quarter.
This subjects us to the risk that even modest delays in orders adversely
affect our quarterly operating results. Our operating results may also
fluctuate due to factors such as the demand for our products, the size and
timing of customer orders, unanticipated delays or problems in the
introduction of our new products and product enhancements or the
introduction of new products and product enhancements by our 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 we base our staffing and other
operating expenses 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, our
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
our Common Stock would be adversely affected.
Dependence on Strategic Alliances and Business Relationships
Our 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, we have entered into alliances or relationships with Compaq
Computer Corporation, Lucent Technologies, Hitachi Corporation, Microsoft,
Mitsubishi Corporation, Motorola, the National Dispatch Center, Symbol
and Welch Allyn. Our success will depend not only on our continued
relationships with these parties, but also on our ability to enter into
additional strategic arrangements with new partners on commercially
reasonable terms. We believe that, in particular, relationships with
application software developers are important in creating commercial uses
for our products. Any future relationships may require us to share
control over our development, manufacturing and marketing programs or to
relinquish rights to certain versions of our technology. Also, our
strategic partners may revoke their commitment to our products or services
at any time in the future, or may develop their own competitive products
or services. Also, the hardware or software of such companies that is
integrated into our products may contain defects or errors. Accordingly,
there can be no assurance that our strategic relationships will result in
sustained business alliances, successful product or service offerings or
the generation of significant revenues for us. 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.
As part of our strategy, we believe that we have developed a close
working relationship with Microsoft to design products for use with the
handheld PCs and other products that use Microsoft's Windows CE operating
system. Beginning in 1997, we have increasingly devoted significant
research and development resources to design activities for Windows CE
based products, diverting financial and personnel resources from other
development projects. These design activities are not undertaken pursuant
to any agreement under which Microsoft is obligated to continue the
collaboration or to support resulting products. Consequently, Microsoft
may terminate its collaborations with us for a variety of reasons
including our failure to meet agreed-upon standards or for reasons beyond
our control, including changing market conditions, increased competition,
discontinued product lines and product obsolescence. Although we believe
that our recent agreements with Motorola and Symbol to develop laser
scanning handheld products for use with Windows CE handheld computers will
enhance our collaboration with Microsoft, there can be no assurance that
Microsoft will not in the future discontinue collaborating with us on the
design of our products. This would result in our having expended
significant research and development resources without benefit and having
lost potential revenues from the development and sale of alternative
products.
Dependence on Key Employees, Need to Hire Additional Sales and Marketing
and Product Development Personnel
Our future success will depend 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 we will be able
to retain our existing key managerial, technical or sales and marketing
personnel. The loss of key personnel in the future has in the past and
could in the future, adversely affect our business.
We believe our ability to achieve increased revenues and to develop
successful new products and product enhancements will depend in part upon
our ability to attract and retain highly skilled sales and marketing and
product development personnel. Competition for such personnel is intense,
and we may not be able to retain such key employees, and there are no
assurances that we will be successful in attracting and retaining such
personnel in the future. In addition, our ability to hire and retain such
personnel will depend upon our 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 adversely affect our
business.
Distribution Risks, Product Returns and Warranties
We sell our products primarily through distributors, resellers and
OEMs. To date we have not achieved significant OEM sales and there can be
no assurance that we will achieve significant sales through this channel.
Our 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 our revenue in 1997. Our agreements with OEMs, distributors and
resellers, in large part, are nonexclusive and may be terminated on short
notice by either party without cause. Our OEMs, distributors and
resellers are not within our control, are not obligated to purchase
products from us and may represent other lines of products. A reduction
in sales effort or discontinuance of sales of our products by our OEMs,
distributors and resellers could lead to reduced sales. Use of
distributors also entails the risk that distributors will build up
inventories in anticipation of a growth in sales. If such growth does not
occur as anticipated, these distributors may substantially decrease the
amount of product ordered in subsequent quarters. Such fluctuations could
contribute to significant variations in our future operating results. The
loss or ineffectiveness of any of our major distributors could adversely
affect our operating results.
We allow our distributors to return a portion of our inventory to us
for full credit against other purchases. In addition, in the event we
reduce our prices, we credit our distributors for the difference between
the purchase price of products remaining in their inventory and our
reduced price for such products. Actual returns and price protection may
adversely affect future operating results, particularly since we seek to
continually introduce new and enhanced products and are likely to face
increasing price competition.
Export Sales
Export sales (sales to customers outside the United States) accounted
for approximately 49% of our revenue in 1997 and approximately 36% of our
revenue in the first nine months of 1998. Accordingly, our 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, our export sales are currently denominated
predominately in United States dollars. Accordingly, an increase in the
value of the United States dollar relative to foreign currencies could
make our 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.
PART II. OTHER INFORMATION
Item 1. Not applicable.
Item 2. Changes in Securities and Use of Proceeds.
On November 9, 1998, the Company sold $750,000 of Series D Convertible
Preferred Stock in a private placement offering. Series D Convertible
Preferred Stock accrues dividends at the rate of 8% per annum and is
convertible into Common Stock at the option of the holder at a price of
$0.57375 per share, with a mandatory conversion date of November 9, 2001.
Proceeds will be used to increase the Company's working capital balances.
Series B Convertible Preferred Stock dividends of 8% per annum are
payable quarterly in cash or in Common Stock at the option of the Company.
If paid in Common Stock, the number of dividend shares is determined by
dividing the dividend amount by the average of the high and low selling
prices for the Common Stock on the ten trading days prior to the end of
the quarter. In July 1998, the Company issued 43,860 shares of Common
Stock to the holders of Series B Convertible Preferred Stock for payment
of dividends of $30,000 for the three months ended June 30, 1998. In
October 1998, the Company issued 49,887 shares of Common Stock to the
holders of Series B Convertible Preferred Stock for payment of dividends
of $30,000 for the three months ended September 30, 1998.
Item 3. Not applicable.
Item 4. Not applicable
Item 5. Not applicable
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
3.1 Certificate of Designations of Preferences and Rights of Series D
Convertible Preferred Stock
10.1 Series D Convertible Preferred Stock Purchase Agreement
10.2 Common Stock Purchase Warrant dated November 9, 1998 to The Harmat
Organization
10.3 Common Stock Purchase Warrant dated November 9, 1998 to Global
Holdings, L.P.
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 September 30, 1998.
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SOCKET COMMUNICATIONS, INC.
---------------------------
Registrant
Date: November 13, 1998 /S/ DAVID W. DUNLAP
---------------------
David W. Dunlap
Vice President of Finance
and Administration and
Chief Financial Officer
Exhibit 3.1
CERTIFICATE OF DESIGNATIONS
OF PREFERENCES AND RIGHTS OF SERIES D 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 D 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 D Convertible Preferred
Stock:
1. Designation. The new series of Preferred Stock shall be
designated "Series D Convertible Preferred Stock." The number of
shares constituting the Series D Convertible Preferred Stock shall be
175,000. 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 D Convertible Preferred Stock to a number
equal to or greater than the number of shares of Series D Convertible
Preferred Stock issued and outstanding at the time of the amendment. The
"Initial Price" of shares of the Series D Convertible Preferred Stock
shall be $5.7375 per share and the "Original Issue Date" shall mean the
date on which shares of Series D Convertible Preferred Stock are first
issued to investors. The relative rights, preferences, privileges and
restrictions granted to or imposed upon the Series D Convertible
Preferred Stock or the holders thereof are specified below.
2. Dividend Rights of Series D Convertible Preferred Stock. The
holders of the Series D 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 D 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
accrued dividends shall be paid within twenty (20) business days after a
Quarter End; 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
closing 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 D 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"), the
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"), and the Series D
Convertible Preferred Stock in an amount equal to the number of shares of
the applicable Series B Preferred Stock, the applicable Series C
Preferred Stock and the applicable Series D Convertible 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, the Series
C Preferred Stock and the Series D Convertible Preferred Stock
(collectively, the "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, the Series
C Preferred Stock and the Series D Convertible Preferred Stock shall be
insufficient to permit the payment to such holders of their full
respective preferential amounts, then the entire assets and property of
the Company legally available for distribution shall be distributed
ratably among the holders of the Series B Preferred Stock, the Series C
Preferred Stock and the Series D Convertible Preferred Stock such that
the same percentage of the preferential amount to which each series of
Preferred Stock is entitled is paid on each share of Preferred Stock. If
upon occurrence of such event, the assets and property thus distributed
among the holders of the Series B Preferred Stock, the Series C Preferred
Stock and the Series D Convertible Preferred Stock are sufficient to
permit the payment to such holders of their full respective preferential
amounts, then the Company shall make a distribution out of the remaining
assets and property of the Company legally available for distribution to
the holders of Common Stock in an amount equal to the Stated Value. In
the event that both the holders of the Preferred Stock and the holders of
Common Stock are paid their respective preferential amounts, thereafter
the holders of the Common Stock and the holders of the Preferred Stock
are entitled to share pro rata in all remaining assets of the Company
available for 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, the Series C Preferred Stock and the
Series D Convertible Preferred Stock, as the case may be, are then
convertible.
4. Conversion. The holders of the Series D Convertible
Preferred Stock shall have conversion rights as follows:
4.1 Right to Convert. Each share of Series D 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 D Convertible Preferred
Stock. Each share of Series D 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 D Convertible Preferred Stock shall be $0.57375. (The number
of shares of Common Stock into which each share of Series D 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.
4.2 Automatic Conversion. All shares of Series D
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,
(ii) the third anniversary of the Original Issue Date (the "Mandatory
Conversion Date"), (iii) upon written notice by the Company if,
following the second anniversary of the Original Issue Date, the closing
sale price of the Company's Common Stock as quoted on the OTC Bulletin
Board (or other automated quotation system, such as the Nasdaq Stock
Market, in which the Common Stock is quoted in the future) is $3.00 per
share or greater for twenty (20) consecutive trading days, or (iv) upon
the closing of a private or public equity financing of at least
$3,000,000 in proceeds to the Company at a per share price of $3.00 per
share or greater of Common Stock (or an equivalent price if securities
other than Common Stock are issued).
4.3 Mechanics of Conversion. No fractional shares of
Common Stock shall be issued upon conversion of Series D 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, which
shall be based on the average closing price of the Common Stock over the
ten (10) trading days immediately preceding the conversion date. Before
any holder of Series D 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 D 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 4.2 above, the outstanding shares of Series D
Convertible Preferred Stock shall be converted automatically without any
further action by the holders of such shares and whether or not the
certificates representing such shares are surrendered to the Company or
its transfer agent; provided further, however, that the Company shall not
be obligated to issue certificates evidencing the shares of Common Stock
issuable upon such automatic conversion unless either the certificates
evidencing such shares of Series D 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, and no bond shall be
required.
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 D 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 D 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 D 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. Notwithstanding the foregoing, in the event of an
automatic conversion pursuant to clause (ii) of Section 4.2 and, in the
written opinion of counsel to the Company, at the time of such conversion
a holder of Series D Convertible Preferred Stock is subject to the volume
of limitations of paragraph (e) of Rule 144 promulgated under the
Securities Act of 1933, as amended (the "Act"), then, with respect to
such holder (to the exclusion of holders that are not subject to such
volume limitations, if any), such automatic conversion shall not be
deemed made unless and until a registration statement under the Act
covering the shares of Common Stock issuable upon conversion of the
Series D Convertible Preferred Stock is effective under the Act. In
addition, in the event of an automatic conversion pursuant to clause
(iii) or (iv) of Section 4.2, such automatic conversion shall not be
deemed made unless and until a registration statement under the Act
covering the shares of Common Stock issuable upon conversion of the
Series D Convertible Preferred Stock is effective under the Act.
Reversion of Series D Convertible Preferred Stock into
Undesignated Preferred Stock. Upon the conversion of any shares of
Series D Convertible Preferred Stock into Common Stock, the shares so
converted shall revert to the status of authorized but undesignated
Preferred Stock.
4.4 Adjustments to Conversion Price for Diluting Issues.
(i) Special Definition. For purposes of this
paragraph 4.4, "Additional Shares of Common" shall mean all shares of
Common Stock issued (or, pursuant to paragraph 4.4(iii), deemed to be
issued) by the Corporation after the Original Issue Date, other than
shares of Common Stock issued or issuable:
(1) upon conversion of shares of Preferred
Stock;
(2) to the Corporation's employees, officers,
directors and consultants as may be determined by the Corporation's Board
of Directors from time to time, other than upon the exercise of options
or warrants, not to exceed an aggregate of 1,000,000 shares so long as
the Series D Convertible Preferred Stock is outstanding;
(3) as a dividend or distribution on Preferred
Stock or pursuant to any event for which adjustment is made pursuant to
paragraph 4.4(vi)(1) or (2) hereof;
(4) pursuant to commercial borrowing, secured
lending or lease financing transactions approved by the Board of
Directors (including upon exercise of warrants in connection with such
transactions), not to exceed 250,000 shares in connection with any such
transaction;
(5) upon exercise of any options or warrants to
purchase the Company's Common Stock or Preferred Stock outstanding as of
the Original Issue Date or granted subsequent to the Original Issue Date
pursuant to any stock plan approved by the Company's Board of Directors,
not to exceed an aggregate of 4,735,000 shares so long as the Series D
Convertible Preferred Stock is outstanding.
(ii) No Adjustment of Conversion Price. No adjustment
in the Conversion Price of a particular share of Series D Convertible
Preferred Stock shall be made in respect of the issuance of Additional
Shares of Common unless the consideration per share for an Additional
Share of Common issued or deemed to be issued by the Corporation is less
than the Conversion Price in effect on the date of, and immediately prior
to such issue, for such share of Series D Convertible Preferred Stock.
(iii) Deemed Issue of Additional Shares of Common. In
the event the Corporation at any time or from time to time after the
Original Issue Date shall issue any options, warrants or convertible
securities, then the maximum number of shares of Common Stock issuable
upon the exercise of such options or warrants or, in the case of
convertible securities, the conversion or exchange of such convertible
securities, shall be deemed to be Additional Shares of Common issued as
of the time of such issue, provided that Additional Shares of Common
shall not be deemed to have been issued unless the consideration per
share (determined pursuant to paragraph 4.4(v) hereof) of such Additional
Shares of Common would be less than the Conversion Price in effect on the
date of and immediately prior to such issue, and provided further that in
any such case in which Additional Shares of Common are deemed to be
issued:
(1) no further adjustment in the Conversion
Price shall be made upon the subsequent issue of convertible securities
or shares of Common Stock upon the exercise of such options or warrants
or conversion or exchange of such convertible securities;
(2) if such options, warrants or convertible
securities by their terms provide, with the passage of time or otherwise,
for any increase or decrease in the consideration payable to the
Corporation, or increase or decrease in the number of shares of Common
Stock issuable, upon the exercise, conversion or exchange thereof, the
Conversion Price computed upon the original issue thereof (or upon the
occurrence of a record date with respect thereto), and any subsequent
adjustments based thereon, shall, upon any such increase or decrease
becoming effective, be recomputed to reflect such increase or decrease
insofar as it affects such options or warrants or the rights of
conversion or exchange under such convertible securities;
(3) no readjustment pursuant to clause (2)
above shall have the effect of increasing the Conversion Price to an
amount which exceeds the lower of (i) the Conversion Price on the
original adjustment date, or (ii) the Conversion Price that would have
resulted from any issuance of Additional Shares of Common between the
original adjustment date and such readjustment date;
(4) upon the expiration of any such options or
warrants or any rights of conversion or exchange under such convertible
securities which shall not have been exercised, the Conversion Price
computed upon the original issue thereof (or upon the occurrence of a
record date with respect thereto) and any subsequent adjustments based
thereon shall, upon such expiration, be recomputed as if:
(a) in the case of convertible securities
or options or warrants for Common Stock, the only Additional Shares of
Common issued were the shares of Common Stock, if any, actually issued
upon the exercise of such options or warrants or the conversion or
exchange of such convertible securities and the consideration received
therefor was the consideration actually received by the Corporation for
the issue of such exercised options or warrants plus the consideration
actually received by the Corporation upon such exercise or for the issue
of all such convertible securities which were actually converted or
exchanged, plus the additional consideration, if any, actually received
by the Corporation upon such conversion or exchange, and
(b) in the case of options or warrants
for convertible securities, only the convertible securities, if any,
actually issued upon the exercise thereof were issued at the time of
issue of such options or warrants, and the consideration received by the
Corporation for the Additional Shares of Common deemed to have been then
issued was the consideration actually received by the Corporation for the
issue of such exercised options or warrants, plus the consideration
deemed to have been received by the Corporation (determined pursuant to
paragraph 4.4(v)) upon the issue of the convertible securities with
respect to which such options or warrants were actually exercised;
(5) if such record date shall have been fixed
and such options, warrants or convertible securities are not issued on
the date fixed therefor, the adjustment previously made in the Conversion
Price which became effective on such record date shall be canceled as of
the close of business on such record date, and thereafter the Conversion
Price shall be adjusted pursuant to this paragraph 4.4(iii) as of the
actual date of their issuance.
(iv) Adjustment of Conversion Price Upon Issuance of
Additional Shares of Common. In the event the Corporation, on or before
the date on which the Series D Convertible Preferred Stock is converted
into Common Stock, issues Additional Shares of Common (including Addi-
tional Shares of Common deemed to be issued pursuant to
paragraph 4.4(iii)) without consideration or for a consideration per
share less than the Conversion Price for the Series D Preferred Stock in
effect on the date of and immediately prior to such issue (a "Dilutive
Issuance"), then and in such event such Conversion Price shall be
reduced, concurrently with such issue, to a price equal to such
consideration per share of the Additional Shares of Common.
(v) Determination of Consideration. For purposes of this
subsection 4.4, the consideration received by the Corporation for the
issue of any Additional Shares of Common shall be computed as follows:
(1) Cash and Property. Such consideration shall:
(a) insofar as it consists of cash, be computed
at the aggregate amount of cash received by the Corporation excluding
amounts paid or payable for accrued interest or accrued dividends;
(b) insofar as it consists of property other
than cash, be computed at the fair value thereof at the time of such
issue, as determined in good faith by the Board of Directors or, if one
or more directors has a financial interest in the issue of Additional
Shares of Common, by a majority of the disinterested directors of the
Company; and
(c) in the event Additional Shares of Common
are issued together with other shares or securities or other assets of
the Corporation for consideration which covers both, be the proportion of
such consideration so received, computed as provided in clauses a) and b)
above, as determined in good faith by the Board of Directors or, if one
or more directors has a financial interest in the issue of Additional
Shares of Common, by a majority of the disinterested directors of the
Company.
(2) Options and Convertible Securities. The
consideration per share received by the Corporation for Additional Shares
of Common deemed to have been issued pursuant to paragraph 4.4 (iii),
relating to options, warrants and convertible securities, shall be
determined by dividing
(a) the total amount, if any, received or
receivable by the Corporation as consideration for the issue of such
options, warrants or convertible securities, plus the minimum aggregate
amount of additional consideration (as set forth in the instruments
relating thereto, without regard to any provision contained therein for a
subsequent adjustment of such consideration) payable to the Corporation
upon the exercise of such options or warrants or the conversion or
exchange of such convertible securities, or in the case of options or
warrants for convertible securities, the exercise of such options for
convertible securities and the conversion or exchange of such convertible
securities by
(b) the maximum number of shares of Common
Stock (as set forth in the instruments relating thereto, without regard
to any provision contained therein for a subsequent adjustment of such
number) issuable upon the exercise of such options or warrants or the
conversion or exchange of such convertible securities.
(vi) Adjustments to Conversion Rate.
(1) Adjustments for Subdivisions, Splits,
Combinations, Consolidations, Reorganizations or Reclassifications of
Common Stock. In the event that after the Original Issue Date 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 D
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 D Convertible Preferred
Stock converted.
(2) Adjustments for Other Dividends and
Distributions. In the event the Company at any time after the date of
the Original Issue Date 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 D Convertible Preferred Stock shall
receive upon conversion, in addition to the number of shares of Common
Stock receivable thereupon, the stock or securities to which the holder
would have been entitled had the holder held, at the time of said
dividend or other distribution, the same number of shares of Common Stock
as the number of Series D 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 4.4 with
respect to the rights of the holders of the Series D Convertible
Preferred Stock.
(vii) Certificate as to Adjustments. Upon the
occurrence of each adjustment or readjustment of the Conversion Price or
Conversion Rate of the Series D Convertible Preferred Stock pursuant to
this Section 4.4, 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 D 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 furnish or cause to be furnished to any holder
of Series D Convertible Preferred Stock 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 D Convertible
Preferred Stock.
(viii) Reservation of Stock Issuable Upon
Conversion. The Company shall at all times reserve and keep available
out of its authorized but unissued shares of Common Stock solely for the
purpose of effecting the conversion of the shares of the Series D
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 D 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 D Convertible Preferred Stock, in addition to such
other remedies as shall be available to the holder of such Series D
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 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, any consolidation or merger involving
the Company and any other person (other than a consolidation or merger
with a wholly-owned subsidiary of the Company, provided that the Company
is the surviving or the continuing corporation and no change occurs in
the Common Stock), or any transfer of all or substantially all the assets
of the Company to any other person; or
(c) any voluntary or involuntary dissolution,
liquidation or winding up of the Company;
then, and in each such case, the Company shall cause to be mailed to the
holders of record of the outstanding shares of the Series D 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.
6. Voting Rights. Except as otherwise required by law, the
holders of Series D Convertible Preferred Stock shall be entitled to
notice of any stockholders' meeting in accordance with the Bylaws of the
Corporation (which notice shall specify the number of votes the holder of
the Series D Convertible Preferred Stock shall be entitled to cast so
long as the only such holder is The Harmat Organization, Inc.) and to
vote together as a single class with the holders of the Common Stock
(except that holders of the Series D Convertible Preferred shall be
entitled to vote separately on (i) any alteration of the rights of the
Series D Convertible Preferred; (ii) any change in the authorized numbers
of shares of the Series D Convertible Preferred; (iii) the redemption or
repurchase of shares of Series D Convertible Preferred; or (iv) with
respect to those matters required by law to be submitted to a separate
class or series vote) upon the election of directors and upon any other
matter submitted to shareholders for a vote, on the following basis.
Each share of Series D Convertible Preferred Stock issued and outstanding
shall have the number of votes equal to the number of shares of Common
Stock into which it is convertible, as adjusted from time to time under
Section 4 hereof. Fractional votes shall not, however, be permitted and
any fractional voting rights resulting from the above formula (after
aggregating all shares into which shares of Series D Convertible
Preferred Stock held by each holder could be converted) shall be rounded
to the nearest whole number (with one-half being rounded upward).
7. Covenants. In addition to any other rights provided by law,
the Company shall not, without first obtaining the affirmative vote or
written consent of the holders of not less than a majority of the
outstanding shares of the Series D 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 D Convertible
Preferred Stock authorized hereby;
(b) redeem or repurchase any outstanding shares of
Series D Convertible Preferred Stock;
(c) authorize or issue shares of any class of stock
having any preference or priority as to dividends or assets superior to
any such preference or priority of the Series D Convertible Preferred
Stock; or
(d) reclassify any shares of Common Stock into shares
having any preference or priority as to dividends or assets superior to
any such preference or priority of the Series D Convertible Preferred
Stock.
IN WITNESS WHEREOF, said Socket Communications, Inc. has caused
this Certificate of Designations of Preferences and Rights of the
Series D Convertible Preferred Stock to be duly executed by its President
and Chief Executive Officer and attested to by its Secretary this 6th day
of November, 1998.
/s/ Charlie Bass_________________________
Charlie Bass
Chief Executive Officer
ATTEST:
/s/ David W. Dunlap______________________
David W. Dunlap
Secretary
SOCKET COMMUNICATIONS, INC.
SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
November __, 1998
TABLE OF CONTENTS
Page
1. Purchase and Sale of Stock and Warrants 1
1.1 Issuance of Series D Convertible Preferred Stock and Investor
Warrant 1
1.2 Consulting Agreement with Global Holdings 1
1.3 Closing Date 1
1.4 Delivery 1
2. Representations and Warranties of the Company 2
2.1 Organization, Good Standing and Qualification 2
2.2 Capitalization 2
2.3 Subsidiaries 2
2.4 Authorization 2
2.5 Valid Issuance of Preferred and Common Stock 3
2.6 Governmental Consents 3
2.7 Litigation 4
2.8 Patents and Trademarks 4
2.9 Compliance with Other Instruments 4
2.10 Permits 5
2.11 Disclosure 5
2.12 Title to Property and Assets 5
2.13 Company Financial Statements 5
2.14 Taxes and Tax Returns 5
2.15 Brokers or Finders 6
3. Representations and Warranties of the Investor 6
3.1 Experience 6
3.2 Investment 6
3.3 Rule 144 6
3.4 Access to Data 6
3.5 Authorization 7
3.6 High Degree of Risk 7
4. Conditions of Investor's Obligations at Closing 7
4.1 Representations and Warranties 7
4.2 Performance 7
4.3 Compliance Certificate 8
4.4 Blue Sky 8
4.5 Issuance of Investor Warrant 8
4.6 Consulting Agreement with Global Holdings 8
4.7 Opinion of Counsel 8
5. Conditions of the Company's Obligations at Closing 8
5.1 Representations and Warranties 8
5.2 Payment of Purchase Price 8
5.3 Blue Sky 8
5.4 Proceedings and Documents 8
6. Registration Rights; Restrictions on Transfer 8
6.1 Certain Definitions 8
6.2 Restrictions on Transferability 10
6.3 Restrictive Legend 10
6.4 Notice of Proposed Transfers 10
6.5 Company Registration 11
6.6 Registration on Form S-3 12
6.7 Expenses of Registration 13
6.8 Indemnification 13
6.9 Information by Holder 15
6.10 Transfer or Assignment of Rights 15
6.13 "Lock-Up" Agreement 16
7. Preemptive Rights 16
8. Observer Rights 17
10. Miscellaneous 18
10.1 Governing Law 18
10.2 Survival 18
10.3 Successors and Assigns 18
10.4 Entire Agreement; Amendment 18
10.5 Notices, etc 18
10.6 Delays or Omissions 18
10.7 California Corporate Securities Law 19
10.8 Expenses 19
10.9 Finder's Fee 19
10.10 Counterparts 19
10.11 Severability 19
Exhibit A Certificate of Designations, Preferences and Rights of
Series B Preferred Stock
Exhibit B Form of Warrant To Investor
Exhibit C Form of Warrant To Global Holdings, L.P.
Exhibit D Form of Consulting Agreement
Exhibit E Schedule of Exceptions
Exhibit F Form of Opinion of Counsel
SOCKET COMMUNICATIONS, INC.
SERIES D CONVERTIBLE PREFERRED STOCK PURCHASE AGREEMENT
This Series D Convertible Preferred Stock Purchase Agreement is
made as of November 9, 1998, by and between Socket Communications, Inc.,
a Delaware corporation (the "Company"), The Harmat Organization, Inc.,
a Delaware corporation (the "Investor") and Global Holdings, L.P., a
Delaware limited partnership ("Global Holdings").
The parties hereby agree as follows:
1. Purchase and Sale of Stock and Warrants1. Purchase and Sale
of Stock and Warrants. Purchase and Sale of Stock and Warrants tc \l 11
". Purchase and Sale of Stock and Warrants" .
1.1 Issuance of Series D Convertible Preferred Stock and
Investor Warrant1.1 Issuance of Series D Convertible Preferred Stock
and Investor Warrant.1 Issuance of Series D Convertible Preferred Stock
and Investor Warrant tc \l 21 ".1 Issuance of Series D Convertible
Preferred Stock and Investor Warrant" .
(a) The Board of Directors of the Company shall adopt
and file with the Secretary of State of Delaware, on or before the
Closing (as defined below), the Certificate of Designations of
Preferences and Rights of Series D Convertible Preferred Stock (the
"Certificate of Designations") in the form attached hereto as
Exhibit A.
(b) Subject to the terms and conditions of this
Agreement, the Investor agrees to purchase from the Company at the
Closing, and the Company agrees to sell and issue to the Investor at the
Closing, 130,179 shares of Series D Convertible Preferred Stock (the
"Shares") and a warrant to purchase 435,729 shares of Common Stock in
the form attached hereto as Exhibit B (the "Investor Warrant") for an
aggregate purchase price of $750,000.
1.2 Consulting Agreement with Global Holdings1.2
Consulting Agreement with Global Holdings.2 Consulting
Agreement with Global Holdings tc \l 21 ".2 Consulting Agreement with
Global Holdings" . The Company agrees to pay to Global Holdings $50,000
in cash at the Closing and to issue to Global Holdings at the Closing a
warrant to purchase 60,000 shares of Common Stock in the form attached
hereto as Exhibit C (the "Global Holdings Warrant") pursuant to the
terms of a Consulting Agreement in the form attached hereto as Exhibit D
(the "Consulting Agreement").
1.3 Closing Date1.3 Closing Date.3 Closing Date tc \l
21 ".3 Closing Date" . The closing of the purchase and sale of the
Shares hereunder (the "Closing") shall be held at 10:00 a.m.
(California time) on such date that the Company and the Investor mutually
agree but no later than November __,1998 (the date of such Closing being
referred to as the "Closing Date"). The place of the Closing
(including the place of delivery to the Investor by the Company of the
certificate evidencing the Shares and the Investor Warrant being
purchased and the place of payment to the Company by the Investor of the
purchase price therefor) shall be at the offices of Wilson Sonsini
Goodrich & Rosati, 650 Page Mill Road, Palo Alto, California 94304-1050,
or at such other location as the Company and the Investor may agree.
1.4 Delivery1.4 Delivery.4 Delivery tc \l 21 ".4
Delivery" . At the Closing, the Company will deliver to the
Investor a certificate representing the Shares and the Investor Warrant
against payment of the purchase price therefor, by check or wire transfer
in immediately available funds, in the amount of $750,000. At the
Closing, the Company will also deliver to Global Holdings the $50,000
cash payment referred to in Section 1.2 above and the Global Holdings
Warrant pursuant to the terms of the Consulting Agreement.
2. Representations and Warranties of the Company2.
Representations and Warranties of the Company. Representations and
Warranties of the Company tc \l 12 ". Representations and Warranties
of the Company" . Except as set forth in (i) the Company's Form 10-K for
the year ended December 31, 1997 and Form 10-Q for the quarter ended June
30, 1998, copies of which have been provided to the Investor, or (ii) the
Schedule of Exceptions attached hereto as Exhibit E, the Company hereby
represents and warrants to the Investor as follows:
2.1 Organization, Good Standing and Qualification2.1
Organization, Good Standing and Qualification.1 Organization, Good
Standing and Qualification tc \l 22 ".1 Organization, Good Standing and
Qualification" . The Company is a corporation duly organized, validly
existing and in good standing under the laws of the State of Delaware and
has all requisite corporate power and authority to carry on its business
as currently conducted. The Company is duly qualified to transact
business and is in good standing in each jurisdiction in which the
failure to so qualify would have a material adverse effect on its
business or properties. True and accurate copies of the Company's
Amended and Restated Certificate of Incorporation and Bylaws, each as
amended and in effect at the Closing, have been delivered to the
Investor.
2.2 Capitalization2.2 Capitalization.2 Capitalization tc
\l 22 ".2 Capitalization" . The authorized capital stock of the
Company consists of 15,000,000 shares of Common Stock, $0.001 par value
("Common Stock"), of which 7,365,914 shares are issued and outstanding
as of November 2, 1998, and 3,000,000 shares of Preferred Stock
("Preferred Stock"), of which 37,500 shares are designated Series B
Convertible Preferred Stock, 12,500 of which are issued and outstanding,
8,850 shares are designated Series B-1 Convertible Preferred Stock, all
of which are issued and outstanding, 8,715 shares are designated Series
B-2 Convertible Preferred Stock, all of which are issued and outstanding,
95,037 shares are designated Series C Convertible Preferred Stock, all of
which are issued and outstanding, 51,574 shares are designated Series C-1
Convertible Preferred Stock, all of which are issued and outstanding, and
16,857 shares are designated Series C-2 Convertible Preferred Stock, all
of which are issued and outstanding. All such issued and outstanding
shares have been duly authorized and validly issued and are fully paid
and nonassessable. An aggregate of 1,918,508 shares of Common Stock are
reserved for issuance under the Company's 1993 Stock Option Plan/Stock
Issuance Plan and the Company's 1995 Stock Plan. Except as set forth on
Schedule 2.2 of Exhibit E, there are no outstanding rights, options,
warrants, preemptive rights, rights of first refusal or similar rights
for the purchase or acquisition from the Company of any securities of the
Company.
2.3 Subsidiaries2.3 Subsidiaries.3 Subsidiaries tc \l
22 ".3 Subsidiaries" . The Company does not presently own or
control, directly or indirectly, any interest in any other corporation,
association, or other business entity. The Company is not a participant
in any joint venture, partnership, or similar arrangement.
2.4 Authorization2.4 Authorization.4 Authorization tc
\l 22 ".4 Authorization" . Except as set forth in Schedule 2.4 of
Exhibit E, all corporate action on the part of the Company, its officers,
directors and shareholders necessary for the authorization, execution and
delivery of this Agreement, the performance of all obligations of the
Company hereunder and thereunder, and the authorization, issuance (or
reservation for issuance), sale and delivery of the Shares, the Investor
Warrant and the Global Holdings Warrant (together, the "Warrants")
being sold hereunder, and the Common Stock issuable upon conversion of
the Shares and upon exercise of the Warrants, has been taken or will be
taken prior to the Closing, and this Agreement constitutes a valid and
legally binding obligation of the Company, enforceable in accordance with
its terms, subject to: (i) judicial principles limiting the availability
of specific performance, injunctive relief, and other equitable remedies;
and (ii) bankruptcy, insolvency, reorganization, moratorium or other
similar laws now or hereafter in effect generally relating to or
affecting creditors' rights.
2.5 Valid Issuance of Preferred and Common Stock2.5 Valid
Issuance of Preferred and Common Stock.5 Valid Issuance of Preferred and
Common Stock tc \l 22 ".5 Valid Issuance of Preferred and Common
Stock" . The Shares and the Investor Warrant being purchased by the
Investor hereunder, when issued, sold and delivered in accordance with
the terms of this Agreement for the consideration expressed herein, and
the Global Holdings Warrant, when issued, sold and delivered in
accordance with the terms of this Agreement for the consideration
expressed in Section 1.2 hereof, will be duly and validly issued, fully
paid, and nonassessable, and will be free of restrictions on transfer
other than restrictions on transfer under this Agreement, such Warrants
and applicable state and federal securities laws. Except as set forth in
Schedule 2.5 of Exhibit E, the Common Stock issuable upon conversion of
the Series D Convertible Preferred Stock and the Common Stock issuable
upon exercise of the Warrants has been duly and validly reserved for
issuance and, upon issuance in accordance with the terms of the
Certificate of Designations and the Amended and Restated Certificate of
Incorporation (the "Certificate of Incorporation") or upon issuance in
accordance with the terms of such Warrants, as the case may be, will be
duly and validly issued, fully paid, and nonassessable and will be free
of restrictions on transfer other than restrictions on transfer under
this Agreement, such Warrants and applicable state and federal securities
laws. So long as the number of shares of Common Stock of the Company
outstanding on a fully-diluted, as-converted basis exceeds the number of
authorized Common Stock of the Company, at the 1999 Annual Meeting of
Stockholders (which shall be held prior to June 30, 1999) the Company
shall seek stockholder approval of an amendment to its Certificate of
Incorporation to increase its authorized Common Stock so that the number
of authorized shares of Common Stock will thereafter exceed the number of
shares outstanding on a fully-diluted, as-converted basis, and the
Company shall use its reasonable best efforts to obtain such stockholder
approval.
2.6 Governmental Consents2.6 Governmental Consents.6
Governmental Consents tc \l 22 ".6 Governmental Consents" . No
consent, approval, order or authorization of, or registration,
qualification, designation, declaration or filing with, any federal,
state or local governmental authority on the part of the Company is
required in connection with the offer, sale or issuance of the Shares
(and the Common Stock issuable upon conversion of the Shares) or the
Warrants (and the Common Stock issuable upon exercise of the Warrants)
(together with the Shares and the Common Stock issuable upon conversion
thereof, the "Securities") or the consummation of any other transaction
contemplated hereby, except for the following: (i) the filing of the
Certificate of Designations in the office of the Secretary of State of
the State of Delaware, which shall be filed by the Company on or prior to
the Closing; (ii) the filing of such notices as may be required under the
Securities Act of 1933, as amended (the "Securities Act"); and
(iii) the filing of any notices required under applicable state
securities laws (the "Applicable Blue Sky Law"). Based in part on the
representations of the Investor set forth in Section 3 below and of
Global Holdings set forth in the Global Holdings Warrant, the offer, sale
and issuance of the Shares and the Warrants in conformity with the terms
of this Agreement are exempt from the registration requirements of
Section 5 of the Securities Act and from the qualification requirements
of Applicable Blue Sky Law.
2.7 Litigation2.7 Litigation.7 Litigation tc \l
22 ".7 Litigation" . There is no action, suit, proceeding or
investigation pending or, to the best of the Company's knowledge,
currently threatened before any court, administrative agency or other
governmental body against the Company which questions the validity of
this Agreement and the Investor Rights Agreement or the right of the
Company to enter into it, or to consummate the transactions contemplated
hereby or thereby, or which could result, either individually or in the
aggregate, in any material adverse change in the condition (financial or
otherwise), business, property, assets or liabilities of the Company.
The foregoing includes, without limitation, actions, suits, proceedings
or investigations pending or threatened (or any basis therefor known to
the Company) involving the prior employment of any of the Company's
employees, their use in connection with the Company's business of any
information or techniques allegedly proprietary to any of their former
employers, or their obligations under any agreements with prior
employers. The Company is not a party or subject to, and none of its
assets is bound by, the provisions of any order, writ, injunction,
judgment or decree of any court or government agency or instrumentality.
2.8 Patents and Trademarks2.8 Patents and Trademarks.8
Patents and Trademarks tc \l 22 ".8 Patents and Trademarks" .
The Company has sufficient title and ownership of all patents,
trademarks, service marks, trade names, copyrights, trade secrets,
information, proprietary rights and processes (collectively,
"Intellectual Property") necessary for its business as now conducted
without any conflict with or infringement of the rights of others. There
are no outstanding options, licenses, or agreements of any kind relating
to the foregoing, nor is the Company bound by or a party to any options,
licenses or agreements of any kind with respect to the Intellectual
Property of any other person or entity. Except as set forth in Schedule
2.8 of Exhibit E, the Company has not received any communications
alleging that any material Intellectual Property of the Company has
violated or would violate any of the Intellectual Property of any other
person or entity.
2.9 Compliance with Other Instruments2.9 Compliance
with Other Instruments.9 Compliance with Other Instruments tc \l 22
".9 Compliance with Other Instruments" . Except as set forth in
Schedule 2.9 of Exhibit E, the Company is not in violation or default of
any provision of its Certificate of Incorporation or Bylaws, each as
amended and in effect on and as of the Closing. Except as set forth in
Schedule 2.9 of Exhibit E, the Company is not in violation or default of
any material provision of any instrument, mortgage, deed of trust, loan,
contract, commitment, judgment, decree, order or obligation to which it
is a party or by which it or any of its properties or assets are bound
or, to the best of its knowledge, of any provision of any federal, state
or local statute, rule or governmental regulation, except for such
violations or defaults which would not materially adversely affect the
Company's business or properties. The execution, delivery and
performance of and compliance with this Agreement, and the issuance and
sale of the Shares and the Warrants, will not result in any such
violation, be in conflict with or constitute, with or without the passage
of time or giving of notice, a default under any such provision, require
any consent or waiver under any such provision (other than any consents
or waivers that have been obtained), or result in the creation of any
mortgage, pledge, lien, encumbrance or charge upon any of the properties
or assets of the Company pursuant to any such provision.
2.10 Permits2.10 Permits.10 Permits tc \l 22 ".10
Permits" . The Company has all franchises, permits, licenses, and
any similar authority necessary for the conduct of its business as now
being conducted by it, the lack of which could materially and adversely
affect the Company's business or properties, and the Company believes it
can obtain, without undue burden or expense, any similar authority for
the conduct of its business as planned to be conducted. The Company is
not in default in any material respect under any of such franchises,
permits, licenses, or other similar authority.
2.11 Disclosure2.11 Disclosure.11 Disclosure tc \l
22 ".11 Disclosure" . No representation, warranty or statement by
the Company in this Agreement, or in any written statement or certificate
furnished to the Investor pursuant to this Agreement or the transactions
contemplated hereby, contains any untrue statement of a material fact or,
when taken together, omits to state a material fact necessary to make the
statements made herein or therein, in light of the circumstances under
which they were made, not misleading.
2.12 Title to Property and Assets2.12 Title to Property
and Assets.12 Title to Property and Assets tc \l 22 ".12 Title
to Property and Assets" . Except as set forth in Schedule 2.12 of
Exhibit E, the Company has good and marketable title to all of its
properties and assets free and clear of all mortgages, liens and
encumbrances, except liens for current taxes and assessments not yet due
and possible minor liens and encumbrances which do not, in any case, in
the aggregate, materially detract from the value of the property subject
thereto or materially impair the operations of the Company. With respect
to the property and assets it leases, the Company is in compliance with
such leases and, to the best of its knowledge, holds a valid leasehold
interest free of all liens, claims or encumbrances.
2.13 Company Financial Statements2.13 Company Financial
Statements.13 Company Financial Statements tc \l 22 ".13 Company
Financial Statements" . The Company's audited balance sheets as of
December 31, 1997, and the related audited statements of income and cash
flow for the twelve-month period ended December 31, 1997, included in the
Company's Form 10-K for the year ended December 31, 1997, and the
Company's unaudited balance sheets as of June 30, 1998 and the related
unaudited statements of income and cash flow for the six-month period
ended June 30, 1998 included in the Company's Form 10-Q for the quarter
ended June 30, 1998 (collectively the "Company Financials"), are
correct in all material respects and have been prepared in accordance
with U.S. generally accepted accounting principles consistent with the
reporting practices and principles ("GAAP"), applied on a basis
consistent throughout the periods indicated and consistent with each
other. The Company Financials present fairly the financial condition,
operating results and cash flows of the Company as of the dates and
during the periods indicated therein.
2.14 Taxes and Tax Returns2.14 Taxes and Tax Returns.14
Taxes and Tax Returns tc \l 22 ".14 Taxes and Tax Returns" .
The Company has accurately prepared all United States income tax returns
and all state and municipal tax returns required to be filed by it, if
any, has paid all taxes, assessments, fees and charges when and as due
under such returns and has made adequate provision for the payment of all
other taxes, assessments, fees and charges shown on such returns or on
assessments received by the Company. To the best of the Company's
knowledge, no deficiency assessment or proposed adjustment of the
Company's United States income tax or state or municipal taxes is
pending. The Company has withheld or collected from each payment made to
each of its employees, the amount of all taxes, including, but not
limited to, federal income taxes, Federal Insurance Contribution Act
taxes and Federal Unemployment Tax Act taxes, required to be withheld or
collected therefrom, and have paid the same to the proper tax receiving
officers or authorized depositaries.
2.15 Brokers or Finders2.15 Brokers or Finders.15 Brokers
or Finders tc \l 22 ".15 Brokers or Finders" . Except as
specifically provided in this Agreement, the Company has not agreed to
incur, directly or indirectly, any liability for brokerage or finders'
fees, agents' commissions or other similar charges in connection with
this Agreement or any of the transactions contemplated hereby.
3. Representations and Warranties of the Investor3.
Representations and Warranties of the Investor. Representations and
Warranties of the Investor tc \l 13 ". Representations and Warranties
of the Investor" . The Investor hereby represents and warrants that:
3.1 Experience3.1 Experience.1 Experience tc \l
23 ".1 Experience" . Such Investor is experienced in evaluating
companies such as the Company, is able to fend for itself in transactions
such as the one contemplated by this Agreement, has such knowledge and
experience in financial and business matters that Investor is capable of
evaluating the merits and risks of Investor's prospective investment in
the Company, and has the ability to bear the economic risks of the
investment.
3.2 Investment3.2 Investment.2 Investment tc \l
23 ".2 Investment" . Such Investor is acquiring the Securities for
investment for such Investor's own account and not with the view to, or
for resale in connection with, any distribution thereof. Such Investor
understands that the Securities have not been registered under the
Securities Act by reason of a specific exemption from the registration
provisions of the Securities Act which depends upon, among other things,
the bona fide nature of the investment intent as expressed herein. Such
Investor further represents that it does not have any contract,
undertaking, agreement or arrangement with any person to sell, transfer
or grant participation to any third person with respect to any of the
Securities. Such Investor understands and acknowledges that the offering
of the Securities pursuant to this Agreement will not, and any issuance
of Common Stock on conversion may not, be registered under the Securities
Act on the ground that the sale provided for in this Agreement and the
issuance of securities hereunder is exempt from the registration
requirements of the Securities Act.
3.3 Rule 1443.3 Rule 144.3 Rule 144 tc \l 23 ".3
Rule 144" . Such Investor acknowledges that the Securities must be
held for at least one (1) year pursuant to Rule 144 promulgated under the
Securities Act unless subsequently registered under the Securities Act or
an exemption from such registration is available. Such Investor is aware
of the provisions of Rule 144, which permit limited resale of shares
purchased in a private placement subject to the satisfaction of certain
conditions. Such Investor covenants that, in the absence of an effective
registration statement covering the stock in question, such Investor will
sell, transfer, or otherwise dispose of the Securities only in a manner
consistent with such Investor's representations and covenants set forth
in this Section 3. In connection therewith, such Investor acknowledges
that the Company will make a notation on its stock books regarding the
restrictions on transfers set forth in this Section 3 and will transfer
securities on the books of the Company only to the extent not
inconsistent therewith.
3.4 Access to Data3.4 Access to Data.4 Access to Data tc
\l 23 ".4 Access to Data" . Such Investor has received and reviewed
information about the Company and has had an opportunity to discuss the
Company's business, management and financial affairs with its management
and to review the Company's facilities. Such Investor understands that
such discussions, as well as any written information issued by the
Company, were intended to describe the aspects of the Company's business
and prospects which the Company believes to be material, but were not
necessarily a thorough or exhaustive description. The foregoing,
however, does not limit or modify the representations and warranties of
the Company in Section 2 of this Agreement or the right of the Investor
to rely thereon.
3.5 Authorization3.5 Authorization.5 Authorization tc
\l 23 ".5 Authorization" . This Agreement when executed and delivered
by such Investor will constitute a valid and legally binding obligation
of such Investor, enforceable in accordance with its terms, subject to:
(i) judicial principles respecting election of remedies or limiting the
availability of specific performance, injunctive relief, and other
equitable remedies; and (ii) bankruptcy, insolvency, reorganization,
moratorium or other similar laws now or hereafter in effect generally
relating to or affecting creditors' rights.
3.6 High Degree of Risk3.6 High Degree of Risk.6 High
Degree of Risk tc \l 23 ".6 High Degree of Risk" . Such Investor is
aware that the securities offered hereby involve a high degree of risk
and that Investor may suffer a total loss of its investment. The
Investor has been provided with, among other things, the Company's
periodic reports filed with the Securities and Exchange Commission under
the Securities Exchange Act of 1934, as amended, including the Company's
most recently filed Annual Report on Form 10-K and Quarterly Report on
Form 10-Q. Such Investor has read the information in such reports,
including the information under the caption "Risk Factors" included in
the "Management's Discussion and Analysis of Financial Condition and
Results of Operations" section. Such Investor is further aware that
following the investment contemplated herein, the Company may need to
raise additional capital to maintain continued listing of its Common
Stock on the Pacific Exchange. Should the Company's Common Stock be
delisted from the Pacific Exchange, such Investor understands that it
would find it more difficult to dispose of, or obtain accurate quotations
as to the price of, the Company's securities, and that the ability or
willingness of broker-dealers to sell or make a market in the Company's
Common Stock, and therefore such Investor understands that its ability to
sell the Company's Common Stock in the secondary market would be
materially adversely affected.
4. Conditions of Investor's Obligations at Closing4.
Conditions of Investor's Obligations at Closing. Conditions of
Investor's Obligations at Closing tc \l 14 ". Conditions of Investor's
Obligations at Closing" . The obligations of the Investor under
subsection 1.1(b) of this Agreement are subject to the fulfillment on or
before each Closing of each of the following conditions, the waiver of
which shall not be effective against any Investor who does not consent in
writing thereto:
4.1 Representations and Warranties4.1 Representations and
Warranties.1 Representations and Warranties tc \l 24 ".1
Representations and Warranties" . The representations and
warranties of the Company contained in Section 2 shall be true on and as
of the Closing with the same effect as though such representations and
warranties had been made on and as of the date of such Closing.
4.2 Performance4.2 Performance.2 Performance tc \l
24 ".2 Performance" . The Company shall have performed and complied
with all agreements, obligations and conditions contained in this
Agreement that are required to be performed or complied with by it on or
before the Closing.
4.3 Compliance Certificate4.3 Compliance Certificate.3
Compliance Certificate tc \l 24 ".3 Compliance Certificate" .
The President of the Company shall deliver to the Investor at the
Closing a certificate stating that the conditions specified in
Sections 4.1 and 4.2 have been fulfilled.
4.4 Blue Sky4.4 Blue Sky.4 Blue Sky tc \l 24 ".4 Blue
Sky" . The Company shall have obtained all necessary permits and
qualifications, if any, or secured an exemption therefrom, required by
any state or country prior to the offer and sale of the Shares.
4.5 Issuance of Investor Warrant4.5 Issuance of
Investor Warrant.5 Issuance of Investor Warrant tc \l 24 ".5
Issuance of Investor Warrant" . Upon the Closing, the Company
shall have delivered to the Investor the Investor Warrant.
4.6 Consulting Agreement with Global Holdings4.6
Consulting Agreement with Global Holdings.6 Consulting
Agreement with Global Holdings tc \l 24 ".6 Consulting Agreement with
Global Holdings" . At the Closing, the Company shall have delivered to
Global Holdings the Consulting Agreement and shall have paid to Global
Holdings in cash a consulting fee of $50,000 and shall have delivered to
Global Holdings the Global Holdings Warrant in accordance with the
Consulting Agreement.
4.7 Opinion of Counsel4.7 Opinion of Counsel.7 Opinion
of Counsel tc \l 24 ".7 Opinion of Counsel" . At the closing,
Wilson Sonsini Goodrich & Rosati, P.C., counsel to the Company, shall
have delivered to the Investor an opinion in the form attached hereto as
Exhibit F.
5. Conditions of the Company's Obligations at Closing5.
Conditions of the Company's Obligations at Closing. Conditions of
the Company's Obligations at Closing tc \l 15 ". Conditions of the
Company's Obligations at Closing" . The obligations of the Company to
the Investor under this Agreement are subject to the fulfillment on or
before each Closing of each of the following conditions by that Investor:
5.1 Representations and Warranties5.1 Representations and
Warranties.1 Representations and Warranties tc \l 25 ".1
Representations and Warranties" . The representations and
warranties of the Investor contained in Section 3 shall be true on and as
of the Closing with the same effect as though such representations and
warranties had been made on and as of the Closing.
5.2 Payment of Purchase Price5.2 Payment of Purchase
Price.2 Payment of Purchase Price tc \l 25 ".2 Payment of Purchase
Price" . The Investor shall have delivered the purchase price specified
in Section 1.1 against delivery of the Shares.
5.3 Blue Sky5.3 Blue Sky.3 Blue Sky tc \l 25 ".3 Blue
Sky" . The Company shall have obtained all necessary permits and
qualifications, if any, or secured an exemption therefrom, required by
any state or country for the offer and sale of the Shares.
5.4 Proceedings and Documents5.4 Proceedings and
Documents.4 Proceedings and Documents tc \l 25 ".4 Proceedings and
Documents" . All corporate and other proceedings in connection with the
transactions contemplated at the Closing hereby, and all documents and
instruments incident to these transactions, shall be reasonably
satisfactory in substance to the Company and its counsel.
6. Registration Rights; Restrictions on Transfer6. Registration
Rights; Restrictions on Transfer. Registration Rights; Restrictions on
Transfer tc \l 16 ". Registration Rights; Restrictions on Transfer" .
6.1 Certain Definitions.1 Certain Definitions.1 Certain
Definitions tc \l 26 ".1 Certain Definitions" . As used in
Sections 6 and 7 hereof, the following terms shall have the following
respective meanings:
"Commission" shall mean the Securities and Exchange
Commission or any other Federal agency at the time administering the
Securities Act.
"Common Stock" shall mean all shares of Common Stock of the
Company.
"Conversion Stock" shall mean the Common Stock issued or
issuable upon conversion of shares of Series D Preferred.
"Exchange Act" shall mean the Securities Exchange Act of
1934, as amended, or any similar successor federal statute and the rules
and regulations thereunder, all as the same shall be in effect from time
to time.
"Holders" shall mean the Investor and any holder of
Registrable Securities to whom the registration rights conferred by this
Agreement have been transferred in compliance with Sections 6.2 and 6.10
hereof.
"Preferred Stock" shall mean all shares of all Series of
Preferred Stock of the Company.
"Registrable Securities" shall mean (i) Common Stock held
by the Investor or issued or issuable upon conversion of the Series D
Preferred, (ii) the Warrant Stock or (iii) any Common Stock issued as a
dividend or other distribution with respect to or in exchange for or in
replacement of the stock referenced in (i) or (ii) above.
The terms "register", "registered" and "registration"
shall refer to a registration effected by preparing and filing a
registration statement in compliance with the Securities Act and
applicable rules and regulations thereunder, and the declaration or
ordering of the effectiveness of such registration statement.
"Registration Expenses" shall mean all expenses incurred by
the Company in compliance with Sections 6.5 and 6.6 hereof, including,
without limitation, all registration and filing fees, printing expenses,
fees and disbursements of counsel for the Company which shall include any
fees and disbursements for legal services provided by counsel for the
Company on behalf of the Holders up to a maximum of $10,000 of fees and
disbursements, blue sky fees and expenses for state qualifications or
registrations.
"Restricted Securities" shall mean the securities of the
Company required to bear or bearing the legend set forth in Section 3
hereof.
"Securities Act" shall mean the Securities Act of 1933, as
amended, or any similar successor federal statute and the rules and
regulations thereunder, all as the same shall be in effect from time to
time.
"Selling Expenses" shall mean all underwriting discounts,
selling commissions and expense allowances applicable to the sale of
Registrable Securities and all fees and disbursements of counsel for any
Holder (other than the fees and disbursements of the Company's counsel
included in Registration Expenses).
"Warrant Stock" shall mean the Common Stock issued or
issuable upon exercise of the Warrants.
6.2 Restrictions on Transferability6.2 Restrictions on
Transferability.2 Restrictions on Transferability tc \l 26 ".2
Restrictions on Transferability" . The Series D Preferred, the
Conversion Stock, the Warrant Stock and any other securities issued in
respect of the foregoing upon any stock split, stock dividend,
recapitalization, merger, consolidation, or similar event, shall not be
transferred except upon the conditions specified in this Agreement, which
conditions are intended to ensure compliance with the provisions of the
Securities Act. Any transferee of such securities shall take and hold
such securities subject to the provisions and upon the conditions
specified in this Agreement.
6.3 Restrictive Legend.3 Restrictive Legend.3
Restrictive Legend tc \l 26 ".3 Restrictive Legend" . Each
certificate representing the Series D Preferred, the Conversion Stock,
the Warrant Stock and any other securities issued in respect of the
foregoing upon any stock split, stock dividend, recapitalization, merger,
consolidation or similar event, shall (unless otherwise permitted or
unless the securities evidenced by such certificate shall have been
registered under the Securities Act) be stamped or otherwise imprinted
with a legend substantially in the following form (in addition to any
legend required under applicable state securities laws):
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE BEEN ACQUIRED
FOR INVESTMENT AND HAVE NOT BEEN REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "ACT") OR ANY STATE
SECURITIES LAWS. SUCH SHARES MAY NOT BE SOLD OR OFFERED FOR
SALE IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH
REGISTRATION IS NOT REQUIRED UNDER THE ACT.
THE SECURITIES REPRESENTED BY THIS CERTIFICATE ARE SUBJECT
TO, AND MAY BE TRANSFERRED ONLY IN COMPLIANCE WITH, THAT
CERTAIN STOCK PURCHASE AGREEMENT AMONG THE HOLDER OF THESE
SECURITIES AND CERTAIN OTHER HOLDERS OF THE COMPANY'S STOCK,
A COPY OF WHICH IS ON FILE AT THE PRINCIPAL OFFICE OF THE
ISSUER.
Upon request of a holder of such a certificate, the Company
shall remove the foregoing legend from the certificate or issue to such
holder a new certificate therefor free of any transfer legend, if, with
such request, the Company shall have received either the opinion referred
to in Section 6.4(i) or the "no-action" letter referred to in
Section 6.4(ii) to the effect that any transfer by such holder of the
securities evidenced by such certificate will not violate the Securities
Act and applicable state securities laws, unless any such transfer legend
may be removed pursuant to Rule 144(k) or any successor rule, in which
case no such opinion or "no-action" letter shall be required.
6.4 Notice of Proposed Transfers6.4 Notice of Proposed
Transfers.4 Notice of Proposed Transfers tc \l 26 ".4 Notice of
Proposed Transfers" . The holder of each certificate representing
Restricted Securities by acceptance thereof agrees to comply in all
respects with the provisions of this Section 6.4. Prior to any proposed
transfer of any Restricted Securities (other than under circumstances
described in Section 6.5 and 6.6 hereof), the holder thereof shall give
written notice to the Company of such holder's intention to effect such
transfer. Each such notice shall describe the manner and circumstances
of the proposed transfer in sufficient detail, and shall be accompanied
by either (i) if required, a written opinion of legal counsel to the
holder who shall be reasonably satisfactory to the Company, addressed to
the Company, to the effect that the proposed transfer of the Restricted
Securities may be effected without registration under the Securities Act
or (ii) a "no-action" letter from the Commission to the effect that the
distribution of such securities without registration will not result in a
recommendation by the staff of the Commission that action be taken with
respect thereto, whereupon the holder of such Restricted Securities shall
be entitled to transfer such Restricted Securities in accordance with the
terms of the notice delivered by such holder to the Company. The Company
will not require such a legal opinion or "no action" letter (i) in any
transaction in compliance with Rule 144 promulgated under the Securities
Act, (ii) in any transaction in which the Investor distributes Restricted
Securities solely to its stockholders on a pro rata basis for no
consideration, or (iii) in any transaction in which a holder which is a
partnership distributes Restricted Securities solely to partners thereof
on a pro rata basis for no consideration; provided that each transferee
agrees in writing to be subject to the terms of the section 4. Each
certificate evidencing the Restricted Securities transferred as above
provided shall bear the restrictive legend set forth in Section 3 above.
6.5 Company Registration.5 Company Registration.5 Company
Registration tc \l 26 ".5 Company Registration"
(i) If at any time, the Company shall determine to
register any of its securities either for its own account or the account
of a holder or holders of its securities (other than Holders of
Registrable Securities) exercising their respective demand registration
rights, other than (i) a registration relating solely to employee benefit
plans, (ii) a registration relating solely to a Commission Rule 145
transaction, the Company will:
(1) promptly give to each Holder written notice
thereof; and
(2) include in such registration (and any
related qualification under blue sky laws or other compliance), and in
any underwriting involved therein, all of the Registrable Securities
specified in a written request or requests made by any Holder within 30
days after receipt of the written notice from the Company, except as set
forth in Section 6.5(ii) below. Such written request may specify all or
a part of a Holder's Registrable Securities.(2) include in such
registration (and any related qualification under blue sky laws or other
compliance), and in any underwriting involved therein, all of the
Registrable Securities specified in a written request or requests made by
any Holder within 30 days after receipt of the written notice from the
Company, except as set forth in Section 6.5(ii) below. Such written
request may specify all or a part of a Holder's Registrable
Securities.(2) include in such registration (and any related
qualification under blue sky laws or other compliance), and in any
underwriting involved therein, all of the Registrable Securities
specified in a written request or requests made by any Holder within 30
days after receipt of the written notice from the Company, except as set
forth in Section 6.5(ii) below. Such written request may specify all or
a part of a Holder's Registrable Securities. tc \l 4 "(2) include in
such registration (and any related qualification under blue sky laws or
other compliance), and in any underwriting involved therein, all of the
Registrable Securities specified in a written request or requests made by
any Holder within 30 days after receipt of the written notice from the
Company, except as set forth in Section 6.5(ii) below. Such written
request may specify all or a part of a Holder's Registrable Securities."
(ii) If the registration of which the Company gives
notice is for a registered public offering involving an underwriting, the
Company shall so advise the Holders as a part of the written notice given
pursuant to Section 6.5(i)(1). In such event the right of any Holder
registration pursuant to this Section 6.5 shall be conditioned upon such
Holder's participation in such underwriting and the inclusion of such
Holder's Registrable Securities in the underwriting to the extent
provided herein. All Holders proposing to distribute their securities
through such underwriting shall (together with the Company) enter into an
underwriting agreement in customary form with the underwriter or
underwriters selected by the Company. Notwithstanding any other
provision of this Section 6.5, if the managing underwriters of the
offering advise the Company in writing that marketing factors require a
limitation on the number of shares to be underwritten, the Company may
limit the number of Registrable Securities to be included in the
registration and underwriting. In such event, the Company shall so
advise all Holders requesting registration and the number of Registrable
Securities that are entitled to be included in the registration and
underwriting shall be reduced to the extent required by the underwriters'
limitation, in proportion, as nearly as practicable, to the number of
Registrable Securities held by each Holder. If any Holder disapproves of
the terms of any such underwriting, such Holder may elect to withdraw
therefrom by written notice to the Company and the underwriter. Any
Registrable Securities or other securities excluded or withdrawn from
such underwriting shall be withdrawn from such registration.(ii) If the
registration of which the Company gives notice is for a registered public
offering involving an underwriting, the Company shall so advise the
Holders as a part of the written notice given pursuant to Section
6.5(i)(1). In such event the right of any Holder registration pursuant
to this Section 6.5 shall be conditioned upon such Holder's participation
in such underwriting and the inclusion of such Holder's Registrable
Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such
underwriting shall (together with the Company) enter into an underwriting
agreement in customary form with the underwriter or underwriters selected
by the Company. Notwithstanding any other provision of this Section 6.5,
if the managing underwriters of the offering advise the Company in
writing that marketing factors require a limitation on the number of
shares to be underwritten, the Company may limit the number of
Registrable Securities to be included in the registration and
underwriting. In such event, the Company shall so advise all Holders
requesting registration and the number of Registrable Securities that are
entitled to be included in the registration and underwriting shall be
reduced to the extent required by the underwriters' limitation, in
proportion, as nearly as practicable, to the number of Registrable
Securities held by each Holder. If any Holder disapproves of the terms
of any such underwriting, such Holder may elect to withdraw therefrom by
written notice to the Company and the underwriter. Any Registrable
Securities or other securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration.(ii) If the
registration of which the Company gives notice is for a registered public
offering involving an underwriting, the Company shall so advise the
Holders as a part of the written notice given pursuant to Section
6.5(i)(1). In such event the right of any Holder registration pursuant
to this Section 6.5 shall be conditioned upon such Holder's participation
in such underwriting and the inclusion of such Holder's Registrable
Securities in the underwriting to the extent provided herein. All
Holders proposing to distribute their securities through such
underwriting shall (together with the Company) enter into an underwriting
agreement in customary form with the underwriter or underwriters selected
by the Company. Notwithstanding any other provision of this Section 6.5,
if the managing underwriters of the offering advise the Company in
writing that marketing factors require a limitation on the number of
shares to be underwritten, the Company may limit the number of
Registrable Securities to be included in the registration and
underwriting. In such event, the Company shall so advise all Holders
requesting registration and the number of Registrable Securities that are
entitled to be included in the registration and underwriting shall be
reduced to the extent required by the underwriters' limitation, in
proportion, as nearly as practicable, to the number of Registrable
Securities held by each Holder. If any Holder disapproves of the terms
of any such underwriting, such Holder may elect to withdraw therefrom by
written notice to the Company and the underwriter. Any Registrable
Securities or other securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration. tc \l 3 "(ii)
If the registration of which the Company gives notice is for a
registered public offering involving an underwriting, the Company shall
so advise the Holders as a part of the written notice given pursuant to
Section 6.5(i)(1). In such event the right of any Holder registration
pursuant to this Section 6.5 shall be conditioned upon such Holder's
participation in such underwriting and the inclusion of such Holder's
Registrable Securities in the underwriting to the extent provided herein.
All Holders proposing to distribute their securities through such
underwriting shall (together with the Company) enter into an underwriting
agreement in customary form with the underwriter or underwriters selected
by the Company. Notwithstanding any other provision of this Section 6.5,
if the managing underwriters of the offering advise the Company in
writing that marketing factors require a limitation on the number of
shares to be underwritten, the Company may limit the number of
Registrable Securities to be included in the registration and
underwriting. In such event, the Company shall so advise all Holders
requesting registration and the number of Registrable Securities that are
entitled to be included in the registration and underwriting shall be
reduced to the extent required by the underwriters' limitation, in
proportion, as nearly as practicable, to the number of Registrable
Securities held by each Holder. If any Holder disapproves of the terms
of any such underwriting, such Holder may elect to withdraw therefrom by
written notice to the Company and the underwriter. Any Registrable
Securities or other securities excluded or withdrawn from such
underwriting shall be withdrawn from such registration."
6.6 Registration on Form S-3.6 Registration on Form S-
3.6 Registration on Form S-3 tc \l 26 ".6 Registration on Form S-
3" .
(i) The Company shall file a Registration Statement
on Form S-3 or other appropriate registration document under the
Securities Act of 1933, as amended, for resale of the Registrable
Securities and shall maintain the shelf registration effective for as
long as a registration statement is required for resale of the Common
Stock (it being agreed that such a registration statement shall be
required so long as a Holder is subject to the volume limitations of Rule
144(e) under the Securities Act). The Company shall use reasonable
efforts to file such Registration Statement within ninety (90) days of a
request by a Holder.
(ii) Notwithstanding the foregoing, the Company shall
not be obligated to take any action pursuant to this Section 6.6:
(1) in any particular jurisdiction in which the
Company would be required to execute a general consent to service of
process in effecting such registration, qualification or compliance
unless the Company is already subject to service in such jurisdiction and
except as may be required by the Securities Act;
(2) if the Company, within ten (10) days of the
receipt of the request of the Investor or the holders of a majority of
the Registrable Securities, as the case may be, gives notice of its bona
fide intention to effect the filing of a registration statement with the
Commission within sixty (60) days of receipt of such request (other than
a registration of securities in a Rule 145 transaction or with respect to
an employee benefit plan);
(3) during the period starting with the date of
filing of, and ending on the date 90 days immediately following the
effective date of, any registration statement pertaining to securities of
the Company (other than a registration of securities in a Rule 145
transaction or with respect to an employee benefit plan), provided that
the Company is actively employing in good faith all reasonable efforts to
cause such registration statement to become effective; or
(4) if the Company shall furnish to the
Investor or Global Holdins, as the case may be, a certificate signed by
the President of the Company stating that in the good faith judgment of
the Board of Directors it would be seriously detrimental to the Company
or its stockholders for registration statements to be filed in the near
future, in which case the Company's obligation to use its best efforts to
file a registration statement shall be deferred for a period not to
exceed ninety (90) days from the receipt of the request to file such
registration by the Investor, provided that the Company may not exercise
this deferral right more than once per twelve-month period.
(iii) In the event that the Company fails to perform
any of its obligations under this Section 6.6 and such failure to perform
remains uncured, the Company shall not have the right to call the
Investor Warrant, notwithstanding any provision in such warrant to the
contrary, for so long as such failure to perform remains uncured.
6.7 Expenses of Registration6.7 Expenses of
Registration.7 Expenses of Registration tc \l 26 ".7 Expenses of
Registration" . The Company shall bear all Registration Expenses
incurred in connection with any registration, qualification or compliance
pursuant to this Agreement and all underwriting discounts, selling
commissions and expense allowances applicable to the sale of any
securities by the Company for its own account in any registration. All
Selling Expenses shall be borne by the Holders, if any, whose securities
are included in such registration pro rata on the basis of the number of
their Registrable Securities so registered.
6.8 Indemnification6.8 Indemnification.8
Indemnification tc \l 26 ".8 Indemnification" .
(i) The Company will indemnify each Holder, each of
its officers, directors, agents, employees and partners, and each person
controlling such Holder, with respect to each registration, qualification
or compliance effected pursuant to this Agreement, and each underwriter,
if any, and each person who controls any underwriter, and their
respective counsel against all claims, losses, damages and liabilities
(or actions, proceedings or settlements in respect thereof) arising out
of or based on any untrue statement (or alleged untrue statement) of a
material fact contained in any prospectus, offering circular or other
document prepared by the Company (including any related registration
statement, notification or the like) incident to any such registration,
qualification or compliance, or based on any omission (or alleged
omission) to state therein a material fact required to be stated therein
or necessary to make the statements therein not misleading, or any
violation by the Company of the Securities Act or any rule or regulation
thereunder applicable to the Company and relating to action or inaction
required of the Company in connection with any such registration,
qualification or compliance, and will reimburse each such Holder, each of
its officers, directors, agents, employees and partners, and each person
controlling such Holder, each such underwriter and each person who
controls any such underwriter, for any legal and any other expenses as
they are reasonably incurred in connection with investigating and
defending any such claim, loss, damage, liability or action, provided
that the Company will not be liable in any such case to the extent that
any such claim, loss, damage, liability or expense arises out of or is
based on any untrue statement (or alleged untrue statement) or omission
(or alleged omissions) based upon written information furnished to the
Company by such Holder or underwriter and stated to be specifically for
use therein.
(ii) Each Holder whose Registrable Securities are
included in any registration, qualification or compliance effected
pursuant to this Agreement will indemnify the Company, each of its
directors and officers and each underwriter, if any, of the Company's
securities covered by such a registration statement, each person who
controls the Company or such underwriter within the meaning of the
Securities Act and the rules and regulations thereunder, each other such
Holder and each of their officers, directors and partners, and each
person controlling such Holder, and their respective counsel against all
claims, losses, damages and liabilities (or actions in respect thereof)
arising out of or based on any untrue statement (or alleged untrue
statement) of a material fact contained in any such registration
statement, prospectus, offering circular or other document, or any
omission (or alleged omission) to state therein a material fact required
to be stated therein or necessary to make the statements therein not
misleading, and will reimburse the Company and such Holders, directors,
officers, partners, persons, underwriters or control persons for any
legal or any other expenses as they are reasonably incurred in connection
with investigating or defending any such claim, loss, damage, liability
or action, in each case to the extent, but only to the extent, that such
untrue statement (or alleged untrue statement) or omission (or alleged
omission) is made in such registration statement, prospectus, offering
circular or other document in reliance upon and in conformity with
written information furnished to the Company by such Holder and stated to
be specifically for use therein; provided, however, that the obligations
of such Holders hereunder shall be limited to an amount equal to the net
proceeds to each such Holder sold under such registration statement,
prospectus, offering circular or other document as contemplated herein.
(iii) Each party entitled to indemnification under this
Section 6.8 (the "Indemnified Party") shall give notice to the party
required to provide indemnification (the "Indemnifying Party") promptly
after such Indemnified Party has actual knowledge of any claim as to
which indemnity may be sought, and shall permit the Indemnifying Party to
assume the defense of any such claim or any litigation resulting
therefrom, provided that counsel for the Indemnifying Party, who shall
conduct the defense of such claim or any litigation resulting therefrom,
shall be approved by the Indemnified Party (whose approval shall not
unreasonably be withheld), and the Indemnified Party may participate in
such defense at such party's expense; and provided further that if any
Indemnified Party reasonably concludes that there may be one or more
legal defenses available to it that are not available to the Indemnifying
Party, or that such claim or litigation involves or could have an effect
on matters beyond the scope of this Agreement, then the Indemnified Party
may retain its own counsel at the expense of the Indemnifying Party; and
provided further that the failure of any Indemnified Party to give notice
as provided herein shall not relieve the Indemnifying Party of its
obligations under this Agreement unless and only to the extent that such
failure to give notice results in material prejudice to the Indemnifying
Party. No Indemnifying Party, in the defense of any such claim or
litigation, shall, except with the consent of each Indemnified Party,
consent to entry of any judgment or enter into any settlement which does
not include as an unconditional term thereof the giving by the claimant
or plaintiff to such Indemnified Party of a release from all liability in
respect to such claim or litigation. Each Indemnified Party shall
furnish such information regarding itself or the claim in question as an
Indemnifying Party may reasonably request in writing and as shall be
reasonably required in connection with defense of such claim and
litigation resulting therefrom.
(iv) If the indemnification provided for in this
Section 6.8 is held by a court of competent jurisdiction to be
unavailable to an Indemnified Party with respect to any loss, liability,
claim, damage or expense referred to herein, then the Indemnifying Party,
in lieu of indemnifying such Indemnified Party hereunder, shall
contribute to the amount paid or payable by such Indemnified Party as a
result of such loss, liability, claim, damage or expense in such
proportion as is appropriate to reflect the relative fault of the
Indemnifying Party on the one hand and of the Indemnified Party on the
other in connection with the statements or omissions which resulted in
such loss, liability, claim, damage or expense as well as any other
relevant equitable considerations. The relative fault of the
Indemnifying Party and of the Indemnified Party shall be determined by
reference to, among other things, whether the untrue or alleged untrue
statement of a material fact or the omission to state a material fact
relates to information supplied by the Indemnifying Party or by the
Indemnified Party and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or
omission.
6.9 Information by Holder6.9 Information by Holder.9
Information by Holder tc \l 26 ".9 Information by Holder" . Each
Holder of Registrable Securities to be included in a registration
referred to in this agreement shall furnish to the Company such
information regarding such Holder, the securities to be offered and sold
and the intended plan of distribution of the securities by such Holder as
the Company may reasonably request in writing and as shall be reasonably
required in connection with any registration, qualification or compliance
referred to in this Agreement and shall promptly advise the Company in
writing of any material changes to such information while the
registration is in effect.
6.10 Transfer or Assignment of Rights.10 Transfer or
Assignment of Rights.10 Transfer or Assignment of Rights tc \l 26 ".10
Transfer or Assignment of Rights" . The rights to cause the Company
to register a Holder's securities granted by the Company under this
Agreement may be transferred or assigned by a Holder to a transferee or
assignee of any of the Restricted Securities, provided that the Company
is given written notice prior to the time that such right is exercised,
stating the name and address of said transferee or assignee and
identifying the securities with respect to which such registration rights
are being transferred or assigned; provided further that the transferee
or assignee of such rights assumes in writing the obligations of the
Holder under this Agreement.
6.11 Registration Procedures. In the case of each
registration effected by the Company pursuant to this Section 6, the
Company will keep each Holder who is entitled to registration rights
hereunder advised in writing as to the initiation of each registration
and as to the completion thereof. At its expense, the Company will:
(a) Prepare and file with the Commission such
amendments and supplements to such registration statement and the
prospectus used in connection with such registration statement as may be
necessary to comply with the provisions of the Securities Act with
respect to the disposition of securities covered by such registration
statement;
(b) Furnish such number of prospectuses and other
documents incident thereto, including supplements and amendments, as a
Holder may reasonably request; and
(c) Furnish to each selling Holder a copy of all
documents filed with and all correspondence from or to the Commission in
connection with any such offering other than nonsubstantive cover letters
and the like.
6.12 Rule 144 Reporting. With a view to making available
the benefits of certain rules and regulations of the Commission which may
permit the sale of the Restricted Securities to the public without
registration, the Company agrees to:
(a) Make and keep public information available, as
those terms are understood and defined in Rule 144 under the Securities
Act; and
(b) Use its reasonable best efforts to file with the
Commission in a timely manner all reports and other documents required of
the Company under the Securities Act and the Exchange Act.
6.13 "Lock-Up" Agreement6.13 Lock-Up Agreement.13
Lock-Up Agreement tc \l 26 ".13 Lock-Up Agreement" . The
Holders agree, if requested by the Company in connection with a public
offering of the company's securities, not to sell or otherwise transfer
or dispose of any securities of the Company held by such Holders during a
period of time determined by the Company and its underwriters (not to
exceed 90 days) following the effective date of the registration
statement of the Company filed under the Securities Act relating to such
public offering.
Such agreement shall be in writing in a form reasonably
satisfactory to the Company and such underwriter. The Company may impose
stop-transfer instructions with respect to the Shares (or securities)
subject to the foregoing restriction until the end of said period.
70 Preemptive Rights70 Preemptive Rights Preemptive
Rights tc \l 270 " Preemptive Rights" . The Company hereby grants
to the Investor a right (the "Preemptive Right") to purchase all or any
part of the Investor's pro rata share of any "New Securities" (as
defined in this section 7) that the Company may, from time to time,
propose to sell and issue solely for cash. Such pro rata share, for
purposes of this Preemptive Right, is the ratio of (x) the sum of the
number of shares of Common Stock then held by the Investor immediately
prior to the issuance of the New Securities, assuming the full conversion
of any Series D Preferred and full exercise of the Warrants, to (y) the
total number of shares of Common Stock held by all stockholders of the
Company immediately prior to the issuance of the New Securities (after
giving effect to the exercise and/or conversion, as the case may be, of
all shares of Preferred Stock and of all outstanding options and warrants
to purchase Common Stock or any other securities convertible into Common
Stock). This Preemptive Right shall be subject to the following
provisions:
(1) "New Securities" shall mean any Common
Stock or Preferred Stock of the Company, whether or not authorized on the
date hereof, and rights, options or warrants to purchase Common Stock or
Preferred Stock and securities of any type whatsoever that are, or may
become, convertible into Common Stock or Preferred Stock; provided,
however, that "New Securities" does not include the following:
(a) shares of capital stock of the
Company issuable upon conversion or exercise of any currently outstanding
securities or any New Securities issued in accordance with this
Agreement;
(b) shares, options or warrants granted
to officers, directors and employees of, and consultants to, the Company
which are approved by the Board of Directors; or
(c) shares of Common Stock or Preferred
Stock issued in connection with any pro rata stock split, stock dividend
or recapitalization by the Company (in which case, all numbers of shares
and per share amounts referenced in this Section 7(1) will be adjusted
accordingly); or
(d) shares issued in a registered public
offering.
(2) In the event that the Company proposes to
undertake an issuance of New Securities for cash, it shall give the
Investor written notice (the "Notice") of its intention, describing the
type of New Securities, the price, and the general terms upon which the
Company proposes to issue the same. The Investor shall have twenty (20)
business days after receipt of such notice to agree to purchase all or
any portion of their respective pro rata shares of such New Securities at
the price and upon the terms specified in the notice by giving written
notice to the Company and stating therein the quantity of New Securities
to be purchased.
(3) In the event that any New Securities
subject to the Preemptive Right are not purchased by the Investor within
the twenty (20) business day period specified above, the Company shall
have ninety (90) days thereafter to sell (or enter into an agreement
pursuant to which the sale of New Securities that had been subject to the
Preemptive Right shall be closed, if at all, within sixty (60) days from
the date of said agreement) the New Securities with respect to which the
rights of the Investor were not exercised at a price and upon terms,
including manner of payment, no more favorable to the purchasers thereof
than specified in the Notice. In the event the Company has not sold all
offered New Securities within such ninety (90) day period (or sold and
issued New Securities in accordance with the foregoing within sixty (60)
days from the date of such agreement), the Company shall not thereafter
issue or sell any New Securities, without first again offering such New
Securities to the Investor in the manner provided above.
(4) This Preemptive Right is nonassignable by
the Investor.
(5) This Preemptive Right shall terminate as to
the Investor at such time as such Investor ceases to own any Series D
Preferred, Registrable Securities or the Investor Warrant.
(6) This Preemptive Right shall terminate, in
any case, after three years from the date hereof.
80 Observer Rights80 Observer Rights Observer Rights tc
\l 280 " Observer Rights" . The Company shall permit Matthew
Schilowitz, so long as he and the Investor in the aggregate own no less
than five percent (5%) of the total number of shares of Common Stock
outstanding on an as-converted basis, to attend all meetings of the Board
of Directors, and the Company agrees to provide to Mr. Schilowitz copies
of written materials provided to all members of the Board of Directors at
the same time and in the same manner that such materials are provided to
the members of the Board of Directors.
90 Confidentiality. Each party hereto agrees that, except
with the prior written permission of the other parties or as required by
applicable law, it shall at all times keep confidential and not divulge,
furnish or make accessible to anyone any confidential information,
knowledge or data concerning or relating to the business or financial
affairs of the other parties to which such party has been or shall become
privy by reason of this Agreement. The parties hereto further agree that
there shall be no press release or other public statement issued by
either party relating to this Agreement or the transactions contemplated
hereby, unless the parties otherwise agree in writing the applicable law
requires.
100 Miscellaneous100 Miscellaneous Miscellaneous tc
\l 1100 " Miscellaneous" .
10.1 Governing Law10.1 Governing Law.1 Governing Law tc
\l 210 ".1 Governing Law" . This Agreement shall be governed in all
respects by the laws of the State of Delaware, without regard to any
provisions thereof relating to conflicts of laws among different
jurisdictions.
10.2 Survival10.2 Survival.2 Survival tc \l 210 ".2
Survival" . The representations, warranties, covenants and
agreements made herein shall survive any investigation made by the
Investor and the closing of the transactions contemplated hereby. All
statements as to factual matters contained in any certificate or exhibit
delivered by or on behalf of the Company pursuant hereto shall be deemed
to be the representations and warranties of the Company hereunder as of
such date of such certificate or exhibit.
10.3 Successors and Assigns10.3 Successors and Assigns.3
Successors and Assigns tc \l 210 ".3 Successors and Assigns" . Except as
otherwise provided herein, the provisions hereof shall inure to the benefit of,
and be binding upon, the successors, assigns, heirs, executors and
administrators of the parties hereto.
10.4 Entire Agreement; Amendment10.4 Entire Agreement;
Amendment.4 Entire Agreement; Amendment tc \l 210 ".4 Entire
Agreement; Amendment" . This Agreement and the other documents delivered
pursuant hereto constitute the full and entire understanding and
agreement among the parties with regard to the subjects hereof and
thereof. Neither this Agreement nor any term hereof may be amended,
waived, discharged or terminated other than by a written instrument
signed by the party against whom enforcement of any such amendment,
waiver, discharge or termination is sought.
10.5 Notices, etc10.5 Notices, etc.5 Notices, etc tc \l
210 ".5 Notices, etc" . All notices and other communications
required or permitted hereunder shall be in writing and shall be deemed
effectively given upon delivery to the party to be notified in person or
by courier service or five days after deposit with the United States
mail, by First Class mail, postage prepaid, addressed (a) if to the
Investor, at the Investor's address, or (b) if to Global Holdings, at
Global Holdings address, or (c) if to any other holder of any securities,
at such address as such holder shall have furnished the other parties
hereto in writing, or, until any such holder so furnishes an address to
the Company, then to and at the address of the last holder of such Shares
who has so furnished an address to the Company, or (d) if to the Company,
to Socket Communications, Inc. 37400 Central Court Newark, CA 94560, and
addressed to the attention of the President, or at such other address as
the Company shall have furnished to the Investor. If notice is provided
by mail, notice shall be deemed to be given three (3) business days after
proper deposit in the U.S. Mail.
10.6 Delays or Omissions10.6 Delays or Omissions.6 Delays
or Omissions tc \l 210 ".6 Delays or Omissions" . No delay or
omission to exercise any right, power or remedy accruing to any holder of
any Shares upon any breach or default of the Company under this Agreement
shall impair any such right, power or remedy of such holder, nor shall it
be construed to be a waiver of any such breach or default, or an
acquiescence therein, or of or in any similar breach or default
thereafter occurring; nor shall any waiver of any single breach or
default be deemed a waiver of any other breach or default theretofore or
thereafter occurring. Any waiver, permit, consent or approval of any
kind or character on the part of any holder of any breach or default
under this Agreement, or any waiver on the part of any holder of any
provisions or conditions of this Agreement, must be in writing and shall
be effective only to the extent specifically set forth in such writing or
as provided in this Agreement. All remedies, either under this Agreement
or by law or otherwise afforded to any holder, shall be cumulative and
not alternative.
10.7 California Corporate Securities Law.7 California
Corporate Securities Law.7 California Corporate Securities Law tc \l
210 ".7 California Corporate Securities Law" . THE SALE OF THE
SECURITIES WHICH ARE THE SUBJECT OF THIS AGREEMENT HAS NOT BEEN QUALIFIED
WITH THE COMMISSIONER OF CORPORATIONS OF THE STATE OF CALIFORNIA AND THE
ISSUANCE OF SUCH SECURITIES OR THE PAYMENT OR RECEIPT OF ANY PART OF THE
CONSIDERATION THEREFOR PRIOR TO SUCH QUALIFICATION IS UNLAWFUL, UNLESS
THE SALE OF SECURITIES IS EXEMPT FROM THE QUALIFICATION BY SECTION 25100,
25102, OR 25105 OF THE CALIFORNIA CORPORATIONS CODE. THE RIGHTS OF ALL
PARTIES TO THIS AGREEMENT ARE EXPRESSLY CONDITIONED UPON SUCH
QUALIFICATION BEING OBTAINED, UNLESS THE SALE IS SO EXEMPT.
10.8 Expenses10.8 Expenses.8 Expenses tc \l 210 ".8
Expenses" . The Company and the Investor shall bear their own
expenses and legal fees incurred on its behalf with respect to this
Agreement and the transactions contemplated hereby.
10.9 Finder's Fee10.9 Finder's Fee.9 Finder's Fee tc \l
210 ".9 Finder's Fee" . The Company and the Investor shall each
indemnify and hold the other harmless from any liability for any
commission or compensation in the nature of a finder's fee (including the
costs, expenses and legal fees of defending against such liability) for
which the Company or the Investor, or any of their respective partners,
employees, or representatives, as the case may be, is responsible.
10.10 Counterparts10.10 Counterparts.10 Counterparts tc \l
210 ".10 Counterparts" . This Agreement may be executed in any number
of counterparts, each of which shall be enforceable against the parties
actually executing such counterparts, and all of which together shall
constitute one instrument.
10.11 Severability10.11 Severability.11 Severability tc \l
210 ".11 Severability" . In the event that any provision of this
Agreement becomes or is declared by a court of competent jurisdiction to
be illegal, unenforceable or void, this Agreement shall continue in full
force and effect without said provision; provided that no such
severability shall be effective if it materially changes the economic
benefit of this Agreement to any party.
IN WITNESS WHEREOF, the parties have executed this Agreement as of
the date first above written.
SOCKET COMMUNICATIONS, INC. THE HARMAT ORGANIZATION, INC.
By: By:
Name: David Dunlap, Name:
Title: Vice President, Finance and Administration, Title:
and Chief Financial Officer
GLOBAL HOLDINGS, L.P.
By:
Name:
Title:
EXHIBIT A
CERTIFICATE OF DESIGNATIONS, PREFERENCES AND RIGHTS
OF SERIES D CONVERTIBLE PREFERRED STOCK
EXHIBIT B
WARRANT TO INVESTOR
EXHIBIT C
WARRANT TO GLOBAL HOLDINGS, L.P.
EXHIBIT D
CONSULTING AGREEMENT
EXHIBIT E
SCHEDULE OF EXCEPTIONS
EXHIBIT F
FORM OF OPINION OF COUNSEL
Exhibit 10.2
THIS WARRANT AND THE SHARES OF COMMON STOCK WHICH MAY BE PURCHASED UPON
THE EXERCISE OF THIS WARRANT HAVE BEEN ACQUIRED SOLELY FOR INVESTMENT AND
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH
REGISTRATION OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS
COUNSEL THAT SUCH SALE, OFFER, PLEDGE OR HYPOTHECATION IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE ACT AND OF ANY
APPLICABLE STATE SECURITIES LAWS UNLESS SOLD PURSUANT TO RULE 144 OF THE
ACT.
SOCKET COMMUNICATIONS, INC. November 9, 1998
COMMON STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, THE HARMAT ORGANIZATION,
INC., a Delaware corporation (together with any registered assignee(s),
the "Holder") is entitled, upon the terms and subject to the conditions
hereinafter set forth, at such times after the date hereof as are set
forth below, to acquire from Socket Communications, Inc., a Delaware
corporation (the "Company"), in whole or from time to time in part, up to
Four Hundred Thirty-Five Thousand Seven Hundred Twenty-Nine (435,729)
fully paid and nonassessable shares of Common Stock, $.001 par value, of
the Company ("Warrant Shares") at a purchase price per share (the
"Exercise Price") of $0.57375. Such number of shares, type of security
and Exercise Price are subject to adjustment as provided herein, and all
references to "Warrant Shares" and "Exercise Price" herein shall be deemed
to include any such adjustment or series of adjustments. This Warrant is
granted by the Company to the Holder pursuant to that certain Series D
Preferred Stock Purchase Agreement of even date herewith by and among the
Company, the Holder and Global Holdings, L.P., a Delaware limited
partnership (the "Stock Purchase Agreement").
1. Term
(a) Commencement of Exercisability. The Warrant is
exercisable, in whole or in part, at any time and from time to time from
the date hereof through the Expiration Date (as defined in Section 1(b)
below), subject to Section 4 below.
(b) Termination and Expiration. If not earlier exercised,
the Warrant shall expire on the third anniversary of the date hereof (the
"Expiration Date"), subject to Section 4 below.
2. Method of Exercise; Payment; Issuance of New Warrant. Subject
to Section 1 hereof, exercise of this Warrant shall be made, in whole or
in part, by the surrender of this Warrant (with the notice of exercise
form attached hereto as Exhibit A duly executed) at the principal office
of the Company and by the payment to the Company of an amount equal to the
Exercise Price multiplied by the number of Warrant Shares being purchased,
which amount may be paid in cash or by check. In the event of any
exercise of the rights represented by this Warrant, certificates for the
Warrant Shares so purchased shall be delivered to the Holder hereof within
a reasonable time and, unless this Warrant has been fully exercised or
expired, a new Warrant representing that portion of the Warrant Shares, if
any, with respect to which this Warrant shall not then have been
exercised, shall also be issued to the Holder within such reasonable time.
3. Stock Fully Paid; Reservation of Warrant Shares. All of the
Warrant Shares issuable upon the exercise of the rights represented by
this Warrant will, upon issuance and receipt of the Exercise Price
therefor, be fully paid and nonassessable, and free from all taxes, liens
and charges with respect to the issue thereof. During the period within
which the rights represented by this Warrant may be exercised, the Company
shall at all times have authorized and reserved for issuance a sufficient
number of shares of Common Stock to provide for the exercise of the rights
represented by this Warrant.
4. Company Right to Call Warrant.
(a) In the event at any time from and after the date hereof
until the Expiration Date the closing sale price of the Company's Common
Stock as quoted on the OTC Bulletin Board (or other automated quotation
system, such as the Nasdaq Stock Market, in which the Common Stock is
quoted in the future) is $2.00 per share or greater for twenty (20)
consecutive trading days, the Company may, at its option, elect to call
this Warrant, or any portion thereof, at a redemption price per share of
$0.10, payable in cash or in shares of Common Stock of the Company. In
the event that on the Redemption Date (as defined in Section 4(c) below)
the assets of the Company legally available for redemption shall be
insufficient to pay the holder of the Warrant in cash the full amount to
which such holder shall be entitled pursuant to this Section 4(a), the
Company, at its option, may either (i) pay such amount in shares of
Common Stock of the Company (with the per share value of the Common Stock
being the average of the closing prices of the Common Stock on the OTC
Bulletin Board over the ten (10) trading days immediately preceding the
Redemption Date), provided that a registration statement under the Act
covering such shares of Common Stock is effective as of the Redemption
Date, or (ii) redeem for cash such portion of the Warrant as it shall have
legally available funds to redeem, and the remainder of the Warrant shall
be redeemed in cash on the earliest practicable date next following the
day on which the Company shall first have funds legally available for the
redemption of such shares.
(b) Rights of Warrant Holder Following Call. On and after
the Redemption Date, provided that the redemption price has been duly paid
or segregated and held in trust by a duly authorized independent paying
agent for the benefit of the persons entitled thereto, the Warrant shall
no longer be deemed to be outstanding and all rights of the holder of the
Warrant, including the right to exercise the Warrant as provided in
Section 2 above, shall cease, except for the right to receive the moneys
or shares of Common Stock, as the case may be, payable upon such
redemption, without interest thereon, upon surrender of the Warrant.
(c) Notice of Intent to Call Warrant. In the event the
Company elects to call the Warrant as provided in Section 4(a) above, the
Company shall provide sixty (60) days written notice to the holder of the
Warrant of such election, and the date fixed for redemption (the
"Redemption Date") shall be the sixtieth (60th) day after the date of
such notice. Notice of redemption shall be given by first class mail to
such holder's address as shown on the books of the Company and will
specify (i) information with respect to the trading price levels of the
Company's Common Stock that give rise to the Company's right to call this
Warrant under this Section 4, (ii) the date fixed for redemption,
(iii) the applicable redemption price and (iv) in the case of a partial
redemption, the portion of the Warrant to be redeemed.
5. Adjustment of Exercise Price and Number of Shares of Warrant
Shares. Subject to the provisions of Section 2 hereof, the number and
kind of securities purchasable upon the exercise of this Warrant and the
Exercise Price therefor shall be subject to adjustment from time to time
upon the occurrence of certain events, as follows:
(a) In the event the Company shall at any time following the
date hereof subdivide the outstanding shares of Common Stock, or shall
issue a stock dividend on its outstanding Common Stock, the number of
shares of Common Stock issuable upon exercise of this Warrant immediately
prior to such subdivision or to the issuance of such stock dividend shall
be proportionately increased, and the Exercise Price shall be propor-
tionately decreased; and in the event the Company shall at any time
following the date hereof combine the outstanding shares of Common Stock,
the number of shares of Common Stock issuable upon exercise of this
Warrant immediately prior to such combination shall be proportionately
decreased, and the Exercise Price shall be proportionately increased,
effective at the close of business on the date of such subdivision, stock
dividend or combination, as the case may be.
(b) If the Company is, following the date hereof,
recapitalized through the subdivision or combination of its outstanding
shares of Common Stock into a larger or smaller number of shares, the
number of shares of Common Stock for which this Warrant may be exercised
shall be increased or reduced in the same proportion as the increase or
decrease in the outstanding shares of Common Stock and the then applicable
Exercise Price shall be adjusted by multiplying by a fraction with a
numerator equal to the number of shares of Common Stock purchasable upon
exercise hereof immediately prior to such subdivision or combination and
the denominator of which shall be the number of shares of Common Stock
purchasable immediately following such subdivision or combination.
(c) Subject to Section 1 hereof, in the event of any
consolidation or merger of the Company with another entity in a bona fide
transaction (i.e., not a mere recapitalization, reincorporation for the
purpose of changing corporate domicile, or similar transaction), at any
time prior to the Expiration Date, the Holder shall have the right upon
exercise of this Warrant, to receive the same kind and number of Warrant
Shares and other securities, cash or other property as would have been
distributed to the Holder had the Holder exercised this Warrant
immediately prior to such consolidation or merger.
6. Fractional Shares. No fractional shares of Common Stock will
be issued in connection with any exercise hereunder, but in lieu thereof
the Company shall make a cash payment therefor upon the basis of the
Exercise Price then in effect.
7. Transfer, Exchange, Assignment or Loss of Warrant and Warrant
Shares.
(a) This Warrant and the Warrant Shares to be issued or
issuable upon exercise of this Warrant, may not be assigned or transferred
except as provided in this Section 7 and in accordance with and subject to
the provisions of the Securities Act of 1933, as amended, and the Rules
and Regulations promulgated thereunder (said Act and such Rules and
Regulations being hereinafter collectively referred to as the "Act").
Upon exercise of this Warrant, the holder hereof shall confirm in writing,
in the form of Exhibit B, that the shares of Series D Preferred so
purchased are being acquired for investment and not with a view toward
distribution or resale. Any purported transfer or assignment made other
than in accordance with this Section 7 shall be null and void and of no
force and effect.
(b) The holder of this Warrant by acceptance hereof agrees
to comply in all respects with the provisions of Section 6.4 of that Stock
Purchase Agreement with respect to any proposed transfer of this Warrant
or any part hereof.
(c) Each certificate for Warrant Shares or for any Warrant
Shares issued or issuable upon exercise of this Warrant shall contain a
legend substantially to the effect as set forth in Section 6.3 of the
Stock Purchase Agreement.
(d) Any assignment permitted hereunder shall be made by
surrender of this Warrant to the Company at its principal office with the
Assignment Form attached hereto as Exhibit C duly executed. In such event
the Company shall, upon payment by the Holder of any issuance or transfer
tax incurred or to be incurred by the Company with respect to such
transfer, execute and deliver a new Warrant in the name of the assignee
named in such instrument of assignment and this Warrant shall promptly be
canceled. This Warrant may be divided or combined with other warrants
which carry the same rights upon presentation thereof at the principal
office of the Company together with a written notice signed by the Holder
thereof, specifying the names and denominations in which new warrants are
to be issued. Upon any partial transfer, the Company will sign, issue and
deliver to the Holder a new Warrant with respect to any portion not so
transferred.
(e) Upon receipt by the Company of evidence satisfactory to
it of the loss, theft, destruction or mutilation of this Warrant (provided
that an affidavit of the Holder shall be satisfactory for such purpose),
and of indemnity satisfactory to it (provided that if the Holder is the
original Holder of this Warrant, its own indemnification agreement shall
under all circumstances be satisfactory, and no bond shall be required),
and upon surrender and cancellation of this Warrant, if mutilated, the
Company will execute and deliver a new Warrant of like tenor and date and
any such lost, stolen, or destroyed Warrant shall thereupon become void.
(f) In order to ensure compliance with the restrictions
referred to herein, the Company may issue appropriate "stop transfer"
instructions to its transfer agent.
(g) The Company shall not be required (i) to transfer on its
books the Warrant or any Warrant Shares that have been sold or otherwise
transferred in violation of any of the provisions of this Warrant or the
Investor Rights Agreement or (ii) to treat as owner of such Warrant Shares
or to accord the right to vote or pay dividends to an purchaser or other
transferee to whom such Warrant Shares shall have been so transferred.
8. Representations and Covenants of the Holderand Covenants of
the HolderCovenants of the Holder tc \l 2 "Covenants of the Holder" .
The Holder represents that this Warrant and any Warrant Shares issued or
issuable upon exercise of this Warrant, to be received will be acquired
for investment for its own account, not as a nominee or agent, and not
with a view to the sale or distribution of any part thereof, and that it
has no present intention of selling, granting any participation in or
otherwise distributing the same. Such Holder understands and
acknowledges that the offering of this Warrant, and any issuance of Common
Stock on conversion thereof , will not be registered under the Securities
Act on the ground that the sale provided for in this Agreement and the
issuance of securities hereunder is exempt from registration pursuant to
Section 4(2) of the Act, and that the Company's reliance on such exemption
is predicated on the Holder's representations set forth herein. Such
Holder represents that it is experienced in evaluating companies such as
the Company, is able to fend for itself in investments such as this one,
and has such knowledge and experience in financial and business matters
that it is capable of evaluating the merits and risks of its prospective
investment in the Company.
9. Rights of Stockholders. No holder of this Warrant shall be
entitled, as a Warrant holder, to vote or receive dividends or be deemed
the holder of Common Stock or any other securities of the Company which
may at any time be issuable on the exercise hereof for any purpose, nor
shall anything contained herein be construed to confer upon the holder of
this Warrant, as such, any of the rights of a stockholder of the Company
or any right to vote for the election of directors or upon any matter
submitted to stockholders at any meeting thereof, or to give or withhold
consent to any corporate action (whether upon any recapitalization,
issuance of stock, reclassification of stock, change of par value or
change of stock to no par value, consolidation, merger, conveyance, or
otherwise) or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise until the Warrant shall have been
exercised and the Warrant Shares purchasable upon the exercise hereof
shall have become deliverable, as provided herein.
10. Registration and Other Rights. The shares of Common Stock
obtained upon exercise of this Warrant shall have the registration and
other rights set forth in the Stock Purchase Agreement and the term
"Registrable Securities" as defined in the Stock Purchase Agreement shall
include the Common Stock obtained upon exercise of this Warrant.
11. Notices, Etc. All notices and other communications from the
Company to the Holder shall be mailed by first class registered or
certified mail, postage prepaid, at such address as may have been
furnished to the Company in writing by the Holder.
12. Governing Law, Headings. This Warrant is being delivered in
the State of Delaware and shall be construed and enforced in accordance
with and governed by the laws of such State. The headings in this Warrant
are for purposes of reference only, and shall not limit or otherwise
affect any of the terms hereof.
"COMPANY" "HOLDER"
SOCKET COMMUNICATIONS, INC. THE HARMAT ORGANIZATION, INC.
By: /s/ David Dunlap By: /s/ Matthew Schilowitz
Name: David Dunlap Name: Matthew Schilowitz
Title: Vice President, Finance and Administration, Title: President
and Chief Financial Officer
Exhibit 10.3
THIS WARRANT AND THE SHARES OF COMMON STOCK WHICH MAY BE PURCHASED UPON
THE EXERCISE OF THIS WARRANT HAVE BEEN ACQUIRED SOLELY FOR INVESTMENT AND
HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE
"ACT"), OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD,
OFFERED FOR SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH
REGISTRATION OR AN OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS
COUNSEL THAT SUCH SALE, OFFER, PLEDGE OR HYPOTHECATION IS EXEMPT FROM THE
REGISTRATION AND PROSPECTUS DELIVERY REQUIREMENTS OF THE ACT AND OF ANY
APPLICABLE STATE SECURITIES LAWS UNLESS SOLD PURSUANT TO RULE 144 OF THE
ACT.
SOCKET COMMUNICATIONS, INC. November 9, 1998
COMMON STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, GLOBAL HOLDINGS, L.P., a
Delaware limited partnership, (together with any registered assignee(s),
the "Holder") is entitled, upon the terms and subject to the conditions
hereinafter set forth, at such times after the date hereof as are set
forth below, to acquire from Socket Communications, Inc., a Delaware
corporation (the "Company"), in whole or from time to time in part, up to
Sixty Thousand (60,000) fully paid and nonassessable shares of Common
Stock, $.001 par value, of the Company ("Warrant Shares") at a purchase
price per share (the "Exercise Price") of $0.57375. Such number of
shares, type of security and Exercise Price are subject to adjustment as
provided herein, and all references to "Warrant Shares" and "Exercise
Price" herein shall be deemed to include any such adjustment or series of
adjustments. This Warrant is granted by the Company to the Holder
pursuant to that certain Series D Preferred Stock Purchase Agreement of
even date herewith by and among the Company, The Harmat Organization, Inc.
and the Holder (the "Stock Purchase Agreement").
1. Term
(a) Commencement of Exercisability. The Warrant is
exercisable, in whole or in part, at any time and from time to time from
the date hereof through the Expiration Date (as defined in Section 1(b)
below).
(b) Termination and Expiration. If not earlier exercised,
the Warrant shall expire on the third anniversary of the date hereof (the
"Expiration Date").
2. Method of Exercise; Payment; Issuance of New Warrant. Subject
to Section 1 hereof, exercise of this Warrant shall be made, in whole or
in part, by the surrender of this Warrant (with the notice of exercise
form attached hereto as Exhibit A duly executed) at the principal office
of the Company and by the payment to the Company of an amount equal to the
Exercise Price multiplied by the number of Warrant Shares being purchased,
which amount may be paid in cash or by check. In the event of any
exercise of the rights represented by this Warrant, certificates for the
Warrant Shares so purchased shall be delivered to the Holder hereof within
a reasonable time and, unless this Warrant has been fully exercised or
expired, a new Warrant representing that portion of the Warrant Shares, if
any, with respect to which this Warrant shall not then have been
exercised, shall also be issued to the Holder within such reasonable time.
3. Stock Fully Paid; Reservation of Warrant Shares. All of the
Warrant Shares issuable upon the exercise of the rights represented by
this Warrant will, upon issuance and receipt of the Exercise Price
therefor, be fully paid and nonassessable, and free from all taxes, liens
and charges with respect to the issue thereof. During the period within
which the rights represented by this Warrant may be exercised, the Company
shall at all times have authorized and reserved for issuance a sufficient
number of shares of Common Stock to provide for the exercise of the rights
represented by this Warrant.
4. Adjustment of Exercise Price and Number of Shares of Warrant
Shares. Subject to the provisions of Section 2 hereof, the number and
kind of securities purchasable upon the exercise of this Warrant and the
Exercise Price therefor shall be subject to adjustment from time to time
upon the occurrence of certain events, as follows:
(a) In the event the Company shall at any time following the
date hereof subdivide the outstanding shares of Common Stock, or shall
issue a stock dividend on its outstanding Common Stock, the number of
shares of Common Stock issuable upon exercise of this Warrant immediately
prior to such subdivision or to the issuance of such stock dividend shall
be proportionately increased, and the Exercise Price shall be propor-
tionately decreased; and in the event the Company shall at any time
following the date hereof combine the outstanding shares of Common Stock,
the number of shares of Common Stock issuable upon exercise of this
Warrant immediately prior to such combination shall be proportionately
decreased, and the Exercise Price shall be proportionately increased,
effective at the close of business on the date of such subdivision, stock
dividend or combination, as the case may be.
(b) If the Company is, following the date hereof,
recapitalized through the subdivision or combination of its outstanding
shares of Common Stock into a larger or smaller number of shares, the
number of shares of Common Stock for which this Warrant may be exercised
shall be increased or reduced in the same proportion as the increase or
decrease in the outstanding shares of Common Stock and the then applicable
Exercise Price shall be adjusted by multiplying by a fraction with a
numerator equal to the number of shares of Common Stock purchasable upon
exercise hereof immediately prior to such subdivision or combination and
the denominator of which shall be the number of shares of Common Stock
purchasable immediately following such subdivision or combination.
(c) Subject to Section 1 hereof, in the event of any
consolidation or merger of the Company with another entity in a bona fide
transaction (i.e., not a mere recapitalization, reincorporation for the
purpose of changing corporate domicile, or similar transaction), at any
time prior to the Expiration Date, the Holder shall have the right upon
exercise of this Warrant, to receive the same kind and number of shares of
Warrant Shares and other securities, cash or other property as would have
been distributed to the Holder had the Holder exercised this Warrant
immediately prior to such consolidation or merger. If the Holder of this
Warrant fails to exercise this Warrant prior to such consolidation or
merger, this Warrant shall terminate and be of no further force or effect
as of the closing of such consolidation or merger.
5. Fractional Shares. No fractional shares of Common Stock will
be issued in connection with any exercise hereunder, but in lieu thereof
the Company shall make a cash payment therefor upon the basis of the
Exercise Price then in effect.
.
6. Transfer, Exchange, Assignment or Loss of Warrant and Warrant
Shares.
(a) This Warrant and the Warrant Shares to be issued or
issuable upon exercise of this Warrant, may not be assigned or transferred
except as provided in this Section 6 and in accordance with and subject to
the provisions of the Securities Act of 1933, as amended, and the Rules
and Regulations promulgated thereunder (said Act and such Rules and
Regulations being hereinafter collectively referred to as the "Act").
Upon exercise of this Warrant, the holder hereof shall confirm in writing,
in the form of Exhibit B, that the shares of Series D Preferred so
purchased are being acquired for investment and not with a view toward
distribution or resale. Any purported transfer or assignment made other
than in accordance with this Section 6 shall be null and void and of no
force and effect.
(b) The holder of this Warrant by acceptance hereof agrees
to comply in all respects with the provisions of Section 6.4 of that Stock
Purchase Agreement with respect to any proposed transfer of this Warrant
or any part hereof.
(c) Each certificate for Warrant Shares or for any Warrant
Shares issued or issuable upon exercise of this Warrant shall contain a
legend substantially to the effect as set forth in Section 6.3 of the
Stock Purchase Agreement.
(d) Any assignment permitted hereunder shall be made by
surrender of this Warrant to the Company at its principal office with the
Assignment Form attached hereto as Exhibit C duly executed. In such event
the Company shall, upon payment by the Holder of any issuance or transfer
tax incurred or to be incurred by the Company with respect to such
transfer, execute and deliver a new Warrant in the name of the assignee
named in such instrument of assignment and this Warrant shall promptly be
canceled. This Warrant may be divided or combined with other warrants
which carry the same rights upon presentation thereof at the principal
office of the Company together with a written notice signed by the Holder
thereof, specifying the names and denominations in which new warrants are
to be issued.
(e) Upon receipt by the Company of evidence satisfactory to
it of the loss, theft, destruction or mutilation of this Warrant (provided
that an affidavit of the Holder shall be satisfactory for such purpose),
and of indemnity satisfactory to it (provided that if the Holder is the
original Holder of this Warrant, its own indemnification agreement shall
under all circumstances be satisfactory, and no bond shall be required),
and upon surrender and cancellation of this Warrant, if mutilated, the
Company will execute and deliver a new Warrant of like tenor and date and
any such lost, stolen, or destroyed Warrant shall thereupon become void.
Upon any partial transfer, the Company will sign, issue and deliver to the
Holder a new Warrant with respect to any portion not so transferred.
(f) In order to ensure compliance with the restrictions
referred to herein, the Company may issue appropriate "stop transfer"
instructions to its transfer agent.
(g) The Company shall not be required (i) to transfer on its
books the Warrant or any Warrant Shares that have been sold or otherwise
transferred in violation of any of the provisions of this Warrant or (ii)
to treat as owner of such Warrant Shares or to accord the right to vote or
pay dividends to an purchaser or other transferee to whom such Warrant
Shares shall have been so transferred.
7. Representations and Covenants of the Holderand Covenants of
the HolderCovenants of the Holder tc \l 2 "Covenants of the Holder" .
The Holder represents that this Warrant and any Warrant Shares issued or
issuable upon exercise of this Warrant, to be received will be acquired
for investment for its own account, not as a nominee or agent, and not
with a view to the sale or distribution of any part thereof, and that it
has no present intention of selling, granting any participation in or
otherwise distributing the same. Such Holder understands and
acknowledges that the offering of this Warrant, and any issuance of Common
Stock on conversion thereof , will not be registered under the Securities
Act on the ground that the sale provided for in this Agreement and the
issuance of securities hereunder is exempt from registration pursuant to
Section 4(2) of the Act, and that the Company's reliance on such exemption
is predicated on the Holder's representations set forth herein. Such
Holder represents that it is experienced in evaluating companies such as
the Company, is able to fend for itself in investments such as this one,
and has such knowledge and experience in financial and business matters
that it is capable of evaluating the merits and risks of its prospective
investment in the Company.
8. Rights of Stockholders. No holder of this Warrant shall be
entitled, as a Warrant holder, to vote or receive dividends or be deemed
the holder of Common Stock or any other securities of the Company which
may at any time be issuable on the exercise hereof for any purpose, nor
shall anything contained herein be construed to confer upon the holder of
this Warrant, as such, any of the rights of a stockholder of the Company
or any right to vote for the election of directors or upon any matter
submitted to stockholders at any meeting thereof, or to give or withhold
consent to any corporate action (whether upon any recapitalization,
issuance of stock, reclassification of stock, change of par value or
change of stock to no par value, consolidation, merger, conveyance, or
otherwise) or to receive notice of meetings, or to receive dividends or
subscription rights or otherwise until the Warrant shall have been
exercised and the Warrant Shares purchasable upon the exercise hereof
shall have become deliverable, as provided herein.
9. Registration Rights. The shares of Common Stock obtained upon
exercise of this Warrant shall have the registration rights set forth in
the Stock Purchase Agreement and the term "Registrable Securities" as
defined in the Stock Purchase Agreement shall include the Common Stock
obtained upon exercise of this Warrant.
10. Notices, Etc. All notices and other communications from the
Company to the Holder shall be mailed by first class registered or
certified mail, postage prepaid, at such address as may have been
furnished to the Company in writing by the Holder.
11. Governing Law, Headings. This Warrant is being delivered in
the State of Delaware and shall be construed and enforced in accordance
with and governed by the laws of such State. The headings in this Warrant
are for purposes of reference only, and shall not limit or otherwise
affect any of the terms hereof.
"COMPANY" "HOLDER"
SOCKET COMMUNICATIONS, INC. GLOBAL HOLDINGS, L.P.
By: /s/ David Dunlap By: /s/ Matthew Schilowitz
Name: David Dunlap Name: Matthew Schilowitz
Title: Vice President, Finance and Administration, Title: Manager
and Chief Financial Officer
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SOCKET
COMMUNICATIONS, INC. CONDENSED FINANCIAL STATEMENTS FOR THE INTERIM PERIOD ENDED
SEPTEMBER 30, 1998 INCLUDED IN FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 591,641
<SECURITIES> 0
<RECEIVABLES> 1,268,526
<ALLOWANCES> 0
<INVENTORY> 315,943
<CURRENT-ASSETS> 2,183,593
<PP&E> 1,128,620
<DEPRECIATION> 901,301
<TOTAL-ASSETS> 2,477,790
<CURRENT-LIABILITIES> 2,681,610
<BONDS> 0
0
3,280,019
<COMMON> 7,272
<OTHER-SE> (3,503,990)
<TOTAL-LIABILITY-AND-EQUITY> 2,477,790
<SALES> 4,461,932
<TOTAL-REVENUES> 4,461,932
<CGS> 1,709,331
<TOTAL-COSTS> 1,709,331
<OTHER-EXPENSES> 3,098,280
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 86,574
<INCOME-PRETAX> (432,249)
<INCOME-TAX> 0
<INCOME-CONTINUING> (432,249)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (832,618)
<EPS-PRIMARY> (0.12)
<EPS-DILUTED> (0.12)
</TABLE>
