================================================================================
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 June 30, 1999
Commission file number 1-13810
SOCKET COMMUNICATIONS, INC.
(Name of small business issuer as specified in its charter)
Delaware 94-3155066
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
37400 Central Court, Newark, CA 94560
(Address of principal executive offices including zip code)
(510) 744-2700
(Registrant's telephone number, including area code)
Check whether the issuer (1) has filed all reports required to be filed by
Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding
12 months (or for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements for the past
90 days. YES X NO
--- ---
Number of shares of Common Stock ($0.001 par value) outstanding as of
August 10, 1999 was 10,642,724 shares.
This report, including all attachments, contains 24 pages.
-1-
<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Part I. Financial information
Condensed Balance Sheets - June 30, 1999 and
December 31, 1998....................................... 3
Condensed Statements of Operations - Three Months and
Six Months Ended June 30, 1999 and 1998................. 4
Condensed Statements of Cash Flows - Six Months
Ended June 30, 1999 and 1998............................ 5
Notes to Condensed Financial Statements................... 6-9
Management's Discussion and Analysis of Financial
Condition and Results of Operations..................... 10-22
Part II. Other information......................................... 22-23
Signatures......................................................... 24
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
SOCKET COMMUNICATIONS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
June 30, December 31
1999 1998 *
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $418,652 $971,157
Accounts receivable, net........................... 1,222,760 874,895
Inventories........................................ 587,921 479,578
Prepaid expenses................................... 24,483 41,764
------------ ------------
Total current assets............................ 2,253,816 2,367,394
Property and equipment:
Machinery and office equipment..................... 655,334 595,419
Computer equipment................................. 521,575 480,725
------------ ------------
1,176,909 1,076,144
Accumulated depreciation........................... (909,400) (850,056)
------------ ------------
267,509 226,088
Other assets........................................ 70,520 68,603
------------ ------------
Total assets.................................... $2,591,845 $2,662,085
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank lines of credit............................... $691,181 $520,727
Accounts payable and accrued expenses.............. 1,372,320 1,362,228
Accrued payroll and related expenses............... 228,968 201,952
Deferred revenue................................... 320,615 240,118
Current portion of capital leases and
equipment financing notes........................ 12,879 41,083
------------ ------------
Total current liabilities....................... 2,625,963 2,366,108
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $0.001 par value; Authorized
shares - 3,000,000
Series B Convertible Preferred Stock:
Designated shares - 37,500; Issued and
outstanding shares - 22,817 at June 30,
1999 and 30,065 at December 31, 1998;
Aggregate liquidation preference - $1,157,500
at June 30, 1999............................. 1,182,374 1,565,976
Series C Convertible Preferred Stock:
Designated shares - 175,000; Issued and
outstanding shares - 52,010 at June 30,
1999 and 163,468 at December 31, 1998;
Aggregate liquidation preference - $593,626
at June 30, 1999............................. 538,489 1,714,043
Series D Convertible Preferred Stock:
Designated shares - 175,000; Issued and
outstanding shares - 174,292 at June 30,
1999 and December 31, 1998;
Aggregate liquidation preference - $1,020,000
at June 30, 1999............................. 769,887 769,887
Common stock, $0.001 par value:
Authorized shares - 50,000,000
Issued and outstanding shares - 10,250,530 at
June 30, 1999 and 7,365,914 at
December 31, 1998............................. 10,251 7,366
Additional paid-in capital......................... 16,010,706 14,217,366
Accumulated deficit................................ (18,545,825) (17,978,661)
------------ ------------
Total stockholders' equity (deficit)............ (34,118) 295,977
------------ ------------
Total liabilities and stockholders'
equity (deficit)......................... $2,591,845 $2,662,085
============ ============
</TABLE>
* Derived from audited financial statements.
See accompanying notes.
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<PAGE>
SOCKET COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
<TABLE>
<CAPTION>
Three Months Ended Six Months Ended
June 30, June 30,
----------------------- ------------------------
1999 1998 1999 1998
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues....................... $1,802,298 $1,486,262 $3,262,905 $2,661,932
Cost of revenue................ 702,575 564,248 1,313,565 1,084,331
----------- ----------- ----------- ------------
Gross profit................... 1,099,723 922,014 1,949,340 1,577,601
----------- ----------- ----------- ------------
Operating expenses:
Research and development.... 294,607 253,915 562,388 505,712
Sales and marketing......... 550,062 500,671 1,106,449 957,779
General and administrative.. 279,375 290,189 671,113 588,789
----------- ----------- ----------- ------------
Total operating expenses. 1,124,044 1,044,775 2,339,950 2,052,280
----------- ----------- ----------- ------------
Operating loss................. (24,321) (122,761) (390,610) (474,679)
Interest income................ -- -- -- 4
Interest expense............... (10,863) (13,874) (17,551) (76,574)
----------- ----------- ----------- ------------
Net loss....................... (35,184) (136,635) (408,161) (551,249)
Preferred stock dividend....... (75,143) (67,395) (159,003) (82,189)
Accretion of preferred stock... -- -- -- (250,000)
----------- ----------- ----------- ------------
Net loss applicable to
common stockholders.......... ($110,327) ($204,030) ($567,164) ($883,438)
=========== =========== =========== ============
Net loss per share applicable
to common stockholders....... ($0.01) ($0.03) ($0.07) ($0.13)
=========== =========== =========== ============
Weighted average shares
outstanding.................. 8,258,994 7,230,364 7,875,352 6,865,820
=========== =========== =========== ============
</TABLE>
See accompanying notes.
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<PAGE>
SOCKET COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Six Months Ended
June 30,
-------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss............................................ ($408,161) ($551,249)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................... 59,344 105,260
Compensatory stock option grant and warrants.... 74,502 --
Changes in operating assets and liabilities:
Accounts receivable........................... (347,865) (369,230)
Inventories................................... (108,343) (120,816)
Prepaid expenses.............................. 17,281 1,565
Other assets.................................. (1,917) (573)
Accounts payable and accrued expenses......... 10,092 (356,541)
Accrued payroll and related expenses.......... 27,016 (65,226)
Deferred revenue.............................. 80,497 9,320
------------ ------------
Net cash used in operating activities....... (597,554) (1,347,490)
INVESTING ACTIVITIES
Purchase of equipment............................... (100,765) (8,991)
------------ ------------
Net cash used in investing activities....... (100,765) (8,991)
FINANCING ACTIVITIES
Proceeds from sale of preferred stock, net of
issuance costs.................................... -- 1,469,354
Payments on capital leases and equipment
financing notes................................... (28,204) (32,942)
Net proceeds (repayment) from borrowing under bank
lines of credit................................... 170,454 234,810
Exercise of stock options........................... 3,564 --
------------ ------------
Net cash provided by financing activities... 145,814 1,671,222
------------ ------------
Net increase(decrease) in cash and cash equivalents... (552,505) 314,741
Cash and cash equivalents at beginning of period...... 971,157 276,900
------------ ------------
Cash and cash equivalents at end of period............ $418,652 $591,641
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest.............................. 17,551 25,070
Dividends accrued, paid/payable in common stock..... 159,003 77,581
Series B preferred stock converted to common stock.. 383,602 --
Series C preferred stock converted to common stock.. 1,175,554 --
Dividends accrued but unpaid........................ -- 4,608
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.
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<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, 1998 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, accumulated deficit, and working capital balances. As of
June 30, 1999, the Company had cumulative losses of $18,545,825, a net
capital deficiency of $34,118, and a working capital deficit of $372,147.
The Company believes its existing capital resources will be insufficient to
satisfy its working capital requirements through the end of 1999. The
Company will need to raise additional capital to fund operations during
1999 and beyond. The Company intends to raise capital through the issuance
of additional equity securities, through increased borrowings on the
Company's bank lines as the levels of receivables permit, and through
development funding from development partners. Such additional investments
may be on terms that are dilutive to existing stockholders. The Company's
inability to secure the necessary funding would have a material adverse
effect on the Company's financial condition and results of operations. The
Company's actual working capital needs will depend upon numerous factors,
however, including the extent and timing of acceptance of the Company's
products in the market, the Company's operating results, the progress of
the Company's research and development activities, the cost of increasing
the Company's sales and marketing activities and the status of competitive
products, none of which can be predicted with certainty. The financial
statements do not include any adjustments to reflect the possible future
effects on the recoverability and classification of assets or the amounts
and classification of assets and liabilities that may result from the
outcome of this uncertainty.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
Operating results for the three months and six months ended June 30, 1999
are not necessarily indicative of the results that may be expected for the
year ending December 31, 1999.
-6-
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 2 - Inventories
Inventories consist principally of raw materials and sub-assemblies,
which are stated at the lower of cost (first-in, first-out) or market.
June 30, December 31,
1999 1998
------------ ------------
Raw materials and sub-assemblies..... $ 568,184 $ 454,836
Finished goods....................... 19,737 24,742
------------ ------------
$ 587,921 $ 479,578
============ ============
NOTE 3 - Income Taxes
Due to the Company's loss position, there was no provision for income
taxes for the three months and six months ended June 30, 1999 and 1998.
NOTE 4 - Net Loss Per Share and Net Loss Per Share Applicable to Common
Stockholders
The Company calculates earnings per share in accordance with Financial
Accounting Standards Board Statement No. 128, Earnings per Share.
The following table sets forth the computation of basic net loss per
share:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
----------------------- -----------------------
1999 1998 1999 1998
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
Numerator for basic:
Net Loss....................... ($35,184) ($136,635) ($408,161) ($551,249)
Preferred stock dividends...... (75,143) (67,395) (159,003) (82,189)
Accretion of preferred stock... -- -- -- (250,000)
----------- ----------- ----------- -----------
Net loss applicable to
common stockholders............... ($110,327) ($204,030) ($567,164) ($883,438)
=========== =========== =========== ===========
Denominator:
Weighted average common
shares outstanding used
in computing basic net
loss per share.................... 8,258,994 7,230,364 7,875,352 6,865,820
=========== =========== =========== ===========
Basic and diluted net
loss per share applicable
to common stockholders............ ($0.01) ($0.03) ($0.07) ($0.13)
=========== =========== =========== ===========
</TABLE>
The diluted net loss per share is equivalent to the basic net loss per
share because the Company has experienced losses since inception and thus
no potential common shares from the exercise of stock options, conversion
of convertible preferred stock, or exercise of warrants have been included
in the net loss per share calculation.
-7-
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 5 - Bank Financing Arrangements
The Company entered into a credit agreement with a bank ("Agreement"),
which commenced in July 1995 and originally expired on April 15, 1999. The
Agreement was extended to August 31, 1999. The Agreement is secured by the
Company's current and future assets. The credit facility under the
Agreement allows the Company to borrow up to $500,000 based on the level of
qualified receivables at the lenders index rate, which is based on prime,
plus 1.5% (9.50% at June 30, 1999). The Agreement contains covenants that
require the Company to maintain certain financial ratios including the
Company's current ratio and tangible net worth. As of June 30, 1999 the
Company was not in compliance with the covenants and had obtained a waiver
from the bank through the expiration date of the extension of the
Agreement. As of June 30, 1999 and December 31, 1998, outstanding
borrowings under the Agreement were $499,908 and $419,727, respectively,
which were the amounts available under the line.
In 1998, the Company entered into an international credit agreement (the
International Agreement) with a commercial lending institution which
expires on August 31, 1999. The International Agreement is secured by the
Company's international receivables and by the Company's current and future
assets. The credit facility under the International Agreement allows the
Company to borrow up to $500,000 based on the level of qualified
international receivables. As of June 30, 1999 and December 31, 1998,
outstanding borrowings under the International Agreement were $191,273 and
$101,000, respectively, which were the amounts available under the line.
NOTE 6 - Convertible Preferred Stock
The Company is required to pay quarterly dividends on its Series B and
Series D convertible preferred stock. Dividends accrue at the rate of 8%
per annum and are payable in cash or in common stock at the option of the
board of directors of the Company. Accrued dividends for the quarter ended
June 30, 1999 for the Series B convertible preferred stock were $24,905,
which were paid through the issuance of 24,763 shares of common stock in
July 1999. Accrued dividends for the quarter ended June 30, 1999 for the
Series D convertible preferred stock were $20,000, which were paid through
the issuance of 20,131 shares of common stock in July 1999.
Dividends on the Company's Series C convertible preferred stock accrue
at the rate of 8% per annum and are payable through the issuance of common
stock at the time of conversion. Accrued dividends for the quarter ended
June 30, 1999 were $30,238 payable through the issuance of 51,682 shares of
common stock at the time of conversion.
During the quarter ended June 30, 1999, 449,400 common shares were
issued on conversion of 4,494 Series B convertible preferred shares, and
1,991,942 common shares were issued on conversion of 111,458 Series C
convertible preferred shares plus accrued dividends. At June 30, 1999,
convertible preferred shares were convertible into common shares at the
option of the holder as follows:
-8-
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Common Shares
---------------
Series B.......................... 2,281,700
Series C plus accrued dividends... 1,166,452
Series D.......................... 1,742,920
---------------
Total shares 5,191,072
===============
NOTE 7 - Segment Information
The Company operates in one segment, connection solutions for mobile
computers. The Company markets its products in the United States and
foreign countries through its sales personnel and distributors.
Information regarding geographic areas for the quarter and six months ended
June 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
United States............ $1,188,544 $930,944 $2,159,569 $1,571,167
Europe................... 480,682 398,248 888,291 818,591
Asia and rest of world... 133,072 157,070 215,045 272,174
------------ ------------ ------------ ------------
$1,802,298 $1,486,262 $3,262,905 $2,661,932
============ ============ ============ ============
</TABLE>
Export revenues are attributable to countries based on the location of the
customers. The Company does not hold long lived assets in foreign
locations.
Major customers who accounted for at least 10% of total revenues were as
follows:
<TABLE>
<CAPTION>
Quarter Ended Six Months Ended
June 30, June 30,
------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Igram Micro.............. 21% 26% 25% 26%
Merisel.................. 10% -- 8% --
PPCP Ltd. ............... 7% 12% 8% 13%
Tech Data................ 8% 13% 7% 14%
</TABLE>
-9-
<PAGE>
SOCKET COMMUNICATIONS, INC.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Management's Discussion and Analysis of Financial Condition and
Results of Operations contains forward-looking statements (identified with
an asterisk "*") that involve risks and uncertainties. Our actual results
may differ significantly from the results discussed in the forward-looking
statements. Factors that might cause such a difference include, but are not
limited to, those discussed under "-Risk Factors" below.
Overview
We are a leading supplier of connectivity products to the emerging
Windows CE handheld computing market. We believe that we are the world's
leading supplier of serial plug-in cards for notebooks and for Windows
computers with PC card slots. Our family of low-power serial and Ethernet
plug-in card connection products and our family of low-power plug-in card
data collection products are our principal sources of revenues. During
1998, we expanded our PC Card connection family of products to add a family
of CompactFlash ("CF+") serial, low power Ethernet and bar code scanning
products to support the smallest Windows CE computer, the Palm-size PC.
By the end of the first quarter of 1999, three classes of Windows CE
computers were available from a number of computer manufacturers: the H/PC
professional (mini-notebook); the H/PC (clam shell design with keyboard);
and the Palm-size PC (pocket-sized computer) and a fourth class, tablet
PCs, were being readied for market introduction. These computers are
desktop companions designed to synchronize with a Windows desktop computer.
They also operate on double-A or triple-A size batteries, and so low power
consumption is an important feature for products that plug into and are
powered by the computer. The H/PC professional and the H/PC have a PC Card
slot for input/output. The Palm-size PC and some H/PC professionals have a
CF+ slot for input/output. The H/PC professionals were released in the
second half of 1998 and the color Palm-size PCs were released in the first
quarter of 1999. All of our low power Battery Friendly (TM) products are
designed to work with these Windows CE computers and also with Windows
notebook computers.
We distribute our products primarily through worldwide distribution
channels. In the U.S., our products are distributed by Ingram Micro,
Merisel and Tech Data who resell to computer retail stores, electronic
products catalog companies and value added resellers. We also sell our
products internationally through 35 distributors in 27 countries in Europe,
Asia and the Pacific Rim. In addition, we sell direct to selected large
customers, particularly for custom products sold to other equipment
manufacturers. During 1998, we entered into a contract with Compaq
Computer Corporation to incorporate our serial PC card into Compaq's remote
server management product, and volume shipments commenced in the fourth
quarter of 1998.
-10-
<PAGE>
Our core technologies are in transferring data into and out of Windows CE
and Windows mobile computing devices through the PC Card or CF+ slot,
achieving high data transfer speeds and low power consumption. Our serial
connection products are designed to connect one or more peripheral devices,
such as a bar code wand, scanning gun or bar code printer, to a mobile
computer or to connect two devices together. Our Ethernet connection
products are designed to connect a mobile computer to an Ethernet network.
Our connection product strategy has been to create a broad family of low-
power connection products in PC card and in CF+ form factor, with standard
(removable cable) or ruggedized (fixed cable) designs that work with
Windows CE and Windows notebook computers.
We have also identified three specific product areas where we have
aligned ourselves with industry leaders to create products for Windows CE
and Windows mobile computers: the data collection market; the paging
market; and the cellular telephone market.
In the data collection market, we have aligned with Welch Allyn to
create bar code scanning wand plug-in cards and have aligned with Symbol
Technologies to attach two of Symbol's laser scanning guns through plug-in
cards, which began shipping at the end of 1998, and to develop an
integrated CF+ laser bar code scanning card for shipment beginning in the
third quarter of 1999. The card when inserted into a Palm-size PC,
converts the Palm-size PC into an integrated bar code laser scanner. These
products sell with bar code scanning software that we created. We have
also aligned with Zebra Technologies to connect their bar code label
printers to Windows CE computers which are expected to begin shipping in
the second half of 1999.*
In the paging market, we entered into a development contract in 1998
with Motorola Corporation to interface our paging receiver software with a
CF+ receiver module being developed by Motorola for the Palm-size PC. The
software transfers paged information of any length to either an inbox
(email) or to the application the paged information is intended to update
such as Internet pages and user files. We do not expect one-way paging
receiver products under this contract to be available during 1999, and with
recent announcements by several paging carriers to promote the growth of
two-way paging, such one-way products may not ever become commercially
available.*
In the cellular telephone market, we entered into a Memorandum of
Understanding with Bell Mobility to connect new CDMA mobile digital
telephones with a built-in serial port directly to a mobile computer. CDMA
is the digital telephone technology most widely deployed in North America.
These phones and our telephone connection cards are expected to begin
selling in Canada during the third quarter of 1999.* We also expect
nationwide digital services to be available in the United States during the
fall of 1999, and we plan to offer our CDMA telephone connection cards in
the U.S. market commencing in the fourth quarter of 1999.* We have also
licensed software from MTDS to allow telephone connection cards to work
with cellular telephones on the GSM networks which are prevalent in Europe
and parts of Asia and to a lesser extent in the U.S. We plan to offer our
GSM telephone connection cards commencing in the fourth quarter of 1999.*
_____________________
*This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations due to factors described in this Management's
Discussion and Analysis Of Financial Condition and Results Of Operations and in
the Form 10-KSB Sections.
-11-
<PAGE>
We expect to continue to expand our relationships and develop
additional mobile computing products in the areas of data communications,
data collection, paging and digital cellular telephones during the second
half of 1999.* We believe that we have developed strong working
relationships with Microsoft and with Windows CE handheld computer
manufacturers for integrating connection solutions into Windows CE devices,
with our strategic development partners, and with software application
developers in providing technical assistance in the porting of their
applications to the Windows CE operating system.
Although we believe that our focus on the Windows CE operating system for
handheld computers and our new products and strategic relationships
position us for revenue growth in 1999, we have incurred significant
quarterly and annual operating losses in every fiscal period since our
inception, and we may continue to incur quarterly operating losses at least
through the end of 1999 and possibly longer.* Our ability to achieve
profitability will be highly dependent upon:
- increased market acceptance of products;
- 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 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;
- our ability to expand our distribution capability;
- our ability to perform on development contracts; and
- our ability to manage our operating expenses.
There can be no assurances that we will meet any of these objectives or
ever achieve profitability.
As of June 30, 1999, we had a net capital deficiency of $34,118 and a
working capital deficit of $372,147. We will require additional funding in
1999 to meet our working capital needs.* The inability to obtain such
funding could require us to significantly reduce or suspend operations,
sell additional securities on terms that are highly dilutive to investors
or otherwise have a material adverse effect on our financial condition or
operating results. See "-Liquidity and Capital Resources" and "-Risk
Factors" for a discussion of our need for additional capital, the
uncertainty regarding our continued listing on the Pacific Exchange and
other risks that may affect our ability to attain profitability.
_____________________
*This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations due to factors described in this Management's
Discussion and Analysis Of Financial Condition and Results Of Operations and in
the Form 10-KSB Sections.
-12-
<PAGE>
Results of Operations
Revenue
Revenue for the three and six months ended June 30, 1999 of $1,802,298
and $3,262,905 increased 21% and 23%, respectively, over the corresponding
periods a year ago. We experienced volume growth across all of our product
families, particularly in our low-power Ethernet card sales, recurring
sales of custom OEM serial cards to Compaq Computer Corporation which
commenced in the fourth quarter of 1998, and sales of our bar code wand
scanners.
Gross Profit
Our gross profit for all periods presented are similar, reflecting small
variations in product mix between the periods. Gross profit for the second
quarter of 1999 was 61% of revenue compared to 62% for the same quarter a
year ago. Our gross profit for the six months in 1999 was 60% of revenue
compared to 59% for the same period a year ago.
Research and Development
Research and development expenses for the three and six months ended
June 30, 1999 were $294,607 and $562,388, respectively, a 16% and 11%
increase for the three and six months, respectively, compared to the
corresponding periods a year ago. The increases reflected increased
personnel costs and higher travel costs, partially offset by lower costs of
outside engineering services. We expect to moderately increase our research
and development expenses in the second half of 1999.*
Sales and Marketing
Sales and marketing expenses for the three and six months ended June 30,
1999 were $550,062 and $1,106,449, respectively, a 10% and 16% increase,
respectively, over the corresponding periods a year ago. The increases
reflected higher personnel costs from increased staffing beginning in the
fourth quarter of 1998, and higher levels of advertising and product
promotion. We expect to increase our sales and marketing expenses in the
second half of 1999.*
General and Administrative
General and administrative expenses for the three and six months ended
June 30, 1999 were $279,375 and $671,113, respectively, a 4% decrease for
the quarter and a 14% increase for the six months over the corresponding
periods a year ago. Decreases for the quarter were primarily due to lower
costs of outside professional services, partially offset by higher
personnel and occupancy costs. Increases for the six months were primarily
due to charges in the first quarter of 1999 relating to compensatory stock
option grants and warrants (including $42,000 associated with a warrant
_____________________
*This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations due to factors described in this Management's
Discussion and Analysis Of Financial Condition and Results Of Operations and in
the Form 10-KSB Sections.
-13-
<PAGE>
issued for services during the quarter) and higher occupancy costs,
partially offset by lower costs of outside professional services. We expect
to incur moderate increases in our general and administrative expenses in
the second half of 1999.*
Interest and Other Income / Expense
Interest income primarily reflects interest on cash balances and is
negligible. Interest expense for the three and six months ended June 30,
1999 was $10,863 and $17,551, respectively, compared to $13,874 and $76,574
for the same periods in 1998, representing interest on equipment lease
financing obligations and bank credit line balances outstanding. In
addition, interest expense in 1998 included interest on convertible
subordinated notes that converted into Series C preferred stock in March
and May 1998.
Preferred Stock Dividend; Accretion of Preferred Stock
Convertible preferred stock dividends reflect dividends earned at 8% per
annum on Series B and Series C convertible preferred stock issued during
the first and second quarters of 1998 and on Series D convertible preferred
stock issued during the fourth quarter of 1998. Accretion of preferred
stock in 1998 reflected a purchase price discount of 20% from market for
$1.0 million of Series B convertible preferred stock issued during the
first quarter. The accounting effect of accretion is to increase by 20%
the amount of the Series B convertible preferred stock and to charge
accumulated deficit by the same amount as if the Series B convertible
preferred stock had been issued at market price.
Income Taxes
There was no provision for federal or state income taxes as we incurred
net operating losses in all periods presented.
Liquidity and Capital Resources
During the six months ended June 30, 1999 and 1998, we used $597,554 and
$1,347,490, respectively, in cash for operating activities. Net cash used
for operations in 1999 resulted primarily from the net loss and increases
in accounts receivable and inventories, partially offset by a charge for a
compensatory stock option grant and warrants and increases in deferred
revenue. Net cash used for operations in 1998 resulted primarily from the
net loss, increases in accounts receivables and inventory and decreases in
accounts payable and accrued payroll and related expenses.
Cash used for investing activities was $100,765 for the six months ended
June 30, 1999 and $8,991 for the corresponding period in 1998. 1999
amounts reflected tooling costs for new products, costs of purchased
software and new computer equipment.
_____________________
*This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations due to factors described in this Management's
Discussion and Analysis Of Financial Condition and Results Of Operations and in
the Form 10-KSB Sections.
-14-
<PAGE>
Cash provided by financing activities during the six months ended June
30, 1999 of $145,814 reflected increased borrowings under our revolving
lines of credit, partially offset by payments on equipment financing notes.
Cash provided by financing activities during the six months ended June 30,
1998 of $1,671,222 reflected the issuance of $1,500,000 in Series B
convertible preferred stock net of issuance costs of $30,646 and from
increases in outstanding borrowings under our revolving lines of credit
partially offset by payments on capital leases and equipment financing
notes.
We will require additional funding in 1999 to fund our operations and to
strengthen our working capital balances, which we intend to accomplish
through the issuance of additional equity securities, through increased
borrowings on our bank line as the levels of receivables permit, and
through development funding from development partners. 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.*
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. We have evaluated our products and, with
the assistance of third party specialists, our internal systems. We have
communicated with our key suppliers and distributors relating to the
existence of Year 2000 issues that could adversely affect the supplier's
ability to deliver product to us or the distributor's ability to deliver
product to the customer. This project did not impact other information
technology projects. Our products do not use or rely on computer date
information and are therefore not affected by the Year 2000 date change.
We have made the necessary upgrades to our internal systems to make our
systems Year 2000 compliant at an approximate cost of $15,000, paid from
operating funds. We believe that all of our internal systems are Year 2000
compliant. We have also communicated with our major suppliers and
distributors, and are not aware of any compliance issues. We have not
assessed our non-information technology systems to determine whether there
are any Year 2000 issues. We believe that the most reasonably likely worst
case Year 2000 scenarios would relate to problems with the systems of third
parties rather than with our internal systems or products. It is clear we
have the least ability to assess and remedy the Year 2000 problems of third
parties and we believe the risks are greatest with infrastructure (e.g.
electricity supply, water and sewer service), telecommunications,
transportation supply chains and critical suppliers of materials. We are
of the belief that disruption of services, if any, are likely to be of
limited duration (less than 30 days), and that inventory balances of our
products in our distribution channels should be sufficient to cover any
limited duration interruptions. In addition, should such disruptions affect
a supplier or a distributor for a longer time period, we believe that we
have or can develop alternative sources of supply and alternative
distribution channels, ship our products directly from our suppliers or
_____________________
*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.
-15-
<PAGE>
directly to our customers, or employ other contingency steps to minimize
any disruption affecting our business, results of operations, or financial
condition. *
Risk Factors
We need to raise additional capital to fund our operations. Our independent
auditors have expressed doubt about our ability to continue as a going
concern.
As of June 30, 1999, we had cash and cash equivalents of $418,652 and a
working capital deficit of $372,147. We believe our existing capital
resources will be insufficient to satisfy our working capital requirements
through the end of 1999.* In this regard, we will need to raise additional
capital to fund our working capital requirements for the second half of
1999 and beyond. The Report of Independent Auditors on our financial
statements for the year ended December 31, 1998 contains an explanatory
paragraph regarding our need for additional financing and indicating
substantial doubt about our ability to continue as a going concern. 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.
The trading market for our common stock is illiquid, and we may be delisted
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:
- at least 300,000 publicly held shares of common stock with a market
value of at least $500,000,
- at least 250 public beneficial holders of our common stock,
- total net tangible assets (the same as stockholders' equity for
Socket) of at least $500,000 or net worth of at least $2,000,000, and
- a share bid price of at least $1.00 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. Except for
brief periods of time, we also have not been in compliance with the share
bid price requirements of the Pacific Exchange. Therefore, we have been
subject to possible delisting procedures since December 31, 1996. In April
1999, 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 October 1999.
As of June 30, 1999, we had a stockholders' deficit of $34,118. We will
need to increase our stockholders' equity to at least $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.
_____________________
*This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations due to factors described in this Management's
Discussion and Analysis Of Financial Condition and Results Of Operations and in
the Form 10-KSB Sections.
-16-
<PAGE>
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 practices and market
making requirements on broker-dealers who sell and/or make a market in such
securities 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 common stock.
Shares eligible for future sale may adversely affect the market price for
our common stock
As of July 31, 1999, we had outstanding securities convertible into or
exercisable for the following amounts of common stock:
- 2,379,782 shares issuable upon the exercise of options under our
1999, 1995 and 1993 Stock Plans;
- 4,191,264 shares issuable upon exercise of warrants, certain of
which include dilution adjustments whenever we issue common stock or
securities converting into common stock at prices below $6.00 per
share;
- 1,999,400 shares issuable upon the conversion of Series B
convertible preferred stock;
- 1,166,452 shares issuable upon conversion of Series C convertible
preferred stock, plus additional shares will accrue for dividends
through the date of conversion; and
- 1,742,920 shares issuable upon the conversion of Series D
convertible preferred stock.
All of the common stock underlying the Series B, Series C and Series D
convertible preferred stock, the common stock dividends on that preferred
stock, and certain other shares of common stock have been registered under
the Securities Act of 1933. Accordingly, that common stock may be sold
into the market without restriction under the Securities Act of 1933. The
sale of these shares of common stock 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 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
$1,000,000 of Series D convertible preferred stock.
_____________________
*This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations due to factors described in this Management's
Discussion and Analysis Of Financial Condition and Results Of Operations and in
the Form 10-KSB Sections.
-17-
<PAGE>
We have a history of operating losses and we cannot assure you that we will
ever achieve profitability
We were incorporated in March 1992 and we have incurred significant
operating losses in every fiscal period since inception. We may continue
to incur quarterly operating losses at least through the second half of
1999 and possibly longer.* Profitability, if any, will depend upon:
- increased market acceptance of products;
- 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 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;
- our ability to expand our distribution capability;
- our ability to perform on development contracts; and
- our ability to manage our operating expenses.
We depend significantly on the market for mobile computers, particularly
those that use the Windows CE operating system
Substantially all of our products are designed for use in mobile
computers, including notebooks, handheld PCs, Palm-size PCs, tablet PCs,
and H/PC Professionals (Windows-CE based mini notebooks). The market for
mobile computers is characterized by rapidly changing technology, evolving
industry standards, frequent new product introductions and significant
price competition. These characteristics result in short product life
cycles and regular reductions of average selling prices over the life of a
specific product. Accordingly, growth in demand for mobile computers is
uncertain. If such growth does not occur, demand for our products would be
reduced.
Our ability to generate increased revenues depends significantly on the
commercial success of handheld PCs (H/PCs, Palm-size PCs, tablet PCs, and
H/PC Professionals) and other devices that operate on the Windows CE
operating system. As a result, 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.
Our ability to comply with industry standards is critical to our business
We must continue to identify and ensure compliance with evolving
industry standards to remain competitive. Unanticipated changes in
industry standards could render our products incompatible with products
_____________________
*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.
-18-
<PAGE>
developed by major hardware manufacturers and software developers. 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.
We depend on alliances and other business relationships with a small number
of third parties
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 Bell
Mobility, Compaq Computer Corporation, Microsoft, Motorola, Symbol
Technologies, Unisys Corporation, Welch Allyn and Zebra Technologies. 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, our strategic relationships may not result
in sustained business alliances, successful product or service offerings or
the generation of significant revenues. 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.
We have 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.
The market for our products changes rapidly, and our success depends upon
our ability to develop new and enhanced products
The market for our products is characterized by rapidly changing
technology, evolving industry standards and short product life cycles.
Accordingly, to remain competitive we must be able 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; and
_____________________
*This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations due to factors described in this Management's
Discussion and Analysis Of Financial Condition and Results Of Operations and in
the Form 10-KSB Sections.
-19-
<PAGE>
- maintain superior or competitive performance in our products and bring
products to market quickly.
Given the emerging nature of the mobile computing products market, our
products or technology may 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 fail to develop or obtain access to advanced mobile communications
technologies as they become available, or if we fail to develop and
introduce competitive new products on a timely basis, our future operating
results will be adversely affected.
Our products may contain undetected flaws and 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.
Our quarterly operating results may fluctuate in future periods and our
future results are difficult to predict because we have little order
backlog
We expect to experience quarterly fluctuations in operating results 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;
- 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.
_____________________
*This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations due to factors described in this Management's
Discussion and Analysis Of Financial Condition and Results Of Operations and in
the Form 10-KSB Sections.
-20-
<PAGE>
Because we base our staffing and other operating expenses on
anticipated revenue, 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.
We depend on key employees and we 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.
We depend on distributors, resellers and OEMs to sell our products
We sell our products primarily through distributors, resellers and other
equipment manufacturers ("OEMs"). Our OEM sales to Compaq Computer
Corporation accounted for approximately 9% of our revenues during the first
six months of 1999. Our largest distributor, Ingram Micro in the U.S.,
accounted for approximately 25% of our revenue in the first six months of
1999. 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 or OEMs could
adversely affect our operating results.
_____________________
*This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations due to factors described in this Management's
Discussion and Analysis Of Financial Condition and Results Of Operations and in
the Form 10-KSB Sections.
-21-
<PAGE>
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.*
A significant portion of our revenues are derived from export sales
Export sales (sales to customers outside the United States) accounted
for approximately 34% of our revenue in the first six months of 1999.
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.
PART II. OTHER INFORMATION
Item 1. Not applicable.
Item 2. Changes in Securities and Use of Proceeds.
On April 14, 1999, The Company issued 75,588 common shares to holders
of Series B and Series D convertible preferred stock for payment of Series
B and Series D preferred stock dividends of $49,407 for the quarter ended
March 31, 1999. The issuance did not constitute a sale and was not subject
to the registration requirements under the Securities Act of 1933, as
amended.
Item 3. Not applicable.
Item 4. Submission of matters to a vote of Security Holders.
At the Annual Meeting of Stockholders of the Company, held at the
Company's Newark facilities on June 16, 1999, the stockholders elected six
directors to serve until the next annual meeting of stockholders, approved
an amendment to the 1995 Stock Plan to reserve an additional 1,200,000
_____________________
*This statement is a forward-looking statement reflecting current expectations.
There can be no assurance that the Company's actual future performance will meet
the Company's current expectations due to factors described in this Management's
Discussion and Analysis Of Financial Condition and Results Of Operations and in
the Form 10-KSB Sections.
-22-
<PAGE>
PART II. OTHER INFORMATION (continued)
shares of common stock for issuance thereunder, approved an increase in the
authorized common stock of the Company to 50,000,000 shares, and ratified
the appointment of Ernst & Young LLP as independent public accountants of
the Company for the fiscal year ending December 31, 1999. Total voting
shares on the record date of April 26,1999 consisted of 7,847,572 common
shares issued and outstanding, 2,688,800 common shares assuming conversion
of Series B convertible preferred stock, and 1,742,920 common shares
assuming conversion of Series D convertible preferred stock for a total of
12,279,292 shares.
Results of the stockholder vote:
- ---------------------------------------- ------------ ------------
AGAINST/
ITEM FOR WITHHOLD
- ---------------------------------------- ------------ ------------
Election of Directors:
Charlie Bass 10,289,265 446,150
Micheal Gifford 10,289,265 446,150
Jack Carsten 10,289,265 446,150
Edward Esber, Jr. 10,289,265 446,150
Gianlucca Rattazzi 10,289,265 446,150
Lars Lindgren 10,289,265 446,150
Amend 1995 Stock Plan 6,211,480 477,614
Increase in Authorized Common Shares 9,968,268 767,147
Appoint Ernst & Young LLP 10,370,005 365,410
- ---------------------------------------- ------------ ------------
Item 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
a. Exhibits
10.1 1999 Nonstatutory Stock Option Plan
27.1 Financial Data Schedule (Edgar only)
b. Reports on Form 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended June 30, 1999
-23-
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Exchange Act of 1934,
the registrant has caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
SOCKET COMMUNICATIONS, INC.
---------------------------
Registrant
Date: August 10, 1999 /s/ David W. Dunlap
------------------------------
David W. Dunlap
Vice President of Finance
and Administration and
Chief Financial Officer
-24-
<PAGE>
SOCKET COMMUNICATIONS, INC.
1999 NONSTATUTORY STOCK OPTION PLAN
1. Purposes of the Plan. The purposes of this Nonstatutory Stock
Option Plan are:
- to attract and retain the best available personnel for
positions of substantial responsibility,
- to provide additional incentive to Employees, Directors and
Consultants, and
- to promote the success of the Company's business.
Options granted under the Plan will be Nonstatutory Stock
Options.
2. Definitions. As used herein, the following definitions shall
apply:
(a) "Administrator" means the Board or any of its Committees as
shall be administering the Plan, in accordance with Section 4 of the Plan.
(b) "Applicable Laws" means the requirements relating to the
administration of stock option plans under U.S. state corporate laws, U.S.
federal and state securities laws, the Code, any stock exchange or
quotation system on which the Common Stock is listed or quoted and the
applicable laws of any foreign country or jurisdiction where Options are,
or will be, granted under the Plan.
(c) "Board" means the Board of Directors of the Company.
(d) "Code" means the Internal Revenue Code of 1986, as amended.
(e) "Committee" means a committee of Directors appointed by the
Board in accordance with Section 4 of the Plan.
(f) "Common Stock" means the Common Stock of the Company.
(g) "Company" means Socket Communications, Inc., a California
corporation.
(h) "Consultant" means any person, including an advisor, engaged
by the Company or a Parent or Subsidiary to render services to such entity.
(i) "Director" means a member of the Board.
(j) "Disability" means total and permanent disability as defined
in Section 22(e)(3) of the Code.
(k) "Employee" means any person, including Officers, employed by
the Company or any Parent or Subsidiary of the Company. A Service Provider
shall not cease to be an Employee in the case of (i) any leave of absence
approved by the Company or (ii) transfers between locations of the Company
or between the Company, its Parent, any Subsidiary, or any successor.
Neither service as a Director nor payment of a director's fee by the
Company shall be sufficient to constitute "employment" by the Company.
(l) "Exchange Act" means the Securities Exchange Act of 1934, as
amended.
(m) "Fair Market Value" means, as of any date, the value of
Common Stock determined as follows:
(i) If the Common Stock is listed on any established stock
exchange or a national market system, including without limitation the
Nasdaq National Market or The Nasdaq SmallCap Market of The Nasdaq Stock
Market, its Fair Market Value shall be the closing sales price for such
stock (or the closing bid, if no sales were reported) as quoted on such
exchange or system for the last market trading day prior to the time of
determination, as reported in The Wall Street Journal or such other source
as the Administrator deems reliable;
(ii) If the Common Stock is regularly quoted by a recognized
securities dealer but selling prices are not reported, the Fair Market
Value of a Share of Common Stock shall be the mean between the high bid and
low asked prices for the Common Stock on the last market trading day prior
to the day of determination, as reported in The Wall Street Journal or such
other source as the Administrator deems reliable;
(iii) In the absence of an established market for the Common
Stock, the Fair Market Value shall be determined in good faith by the
Administrator.
(n) "Notice of Grant" means a written or electronic notice
evidencing certain terms and conditions of an individual Option grant. The
Notice of Grant is part of the Option Agreement.
(o) "Officer" means a person who is an officer of the Company
within the meaning of Section 16 of the Exchange Act and the rules and
regulations promulgated thereunder.
(p) "Option" means a nonstatutory stock option granted pursuant
to the Plan, that is not intended to qualify as an incentive stock option
within the meaning of Section 422 of the Code and the regulations
promulgated thereunder.
(q) "Option Agreement" means an agreement between the Company
and an Optionee evidencing the terms and conditions of an individual Option
grant. The Option Agreement is subject to the terms and conditions of the
Plan.
(r) "Option Exchange Program" means a program whereby
outstanding options are surrendered in exchange for options with a lower
exercise price.
(s) "Optioned Stock" means the Common Stock subject to an
Option.
(t) "Optionee" means the holder of an outstanding Option granted
under the Plan.
(u) "Parent" means a "parent corporation," whether now or
hereafter existing, as defined in Section 424(e) of the Code.
(v) "Plan" means this 1999 Nonstatutory Stock Option Plan.
(w) "Service Provider" means an Employee including an Officer,
Consultant or Director.
(x) "Share" means a share of the Common Stock, as adjusted in
accordance with Section 12 of the Plan.
(y) "Subsidiary" means a "subsidiary corporation," whether now
or hereafter existing, as defined in Section 424(f) of the Code.
3. Stock Subject to the Plan. Subject to the provisions of Section
12 of the Plan, the maximum aggregate number of Shares which may be
optioned and sold under the Plan is one million (1,000,000) Shares. The
Shares may be authorized, but unissued, or reacquired Common Stock.
If an Option expires or becomes unexercisable without having been
exercised in full, or is surrendered pursuant to an Option Exchange
Program, the unpurchased Shares which were subject thereto shall become
available for future grant or sale under the Plan (unless the Plan has
terminated).
4. Administration of the Plan.
(a) Administration. The Plan shall be administered by (i) the
Board or (ii) a Committee, which committee shall be constituted to satisfy
Applicable Laws.
(b) Powers of the Administrator. Subject to the provisions of
the Plan, and in the case of a Committee, subject to the specific duties
delegated by the Board to such Committee, the Administrator shall have the
authority, in its discretion:
(i) to determine the Fair Market Value of the Common Stock;
(ii) to select the Service Providers to whom Options may be
granted hereunder;
(iii) to determine whether and to what extent Options are
granted hereunder;
(iv) to determine the number of shares of Common Stock to be
covered by each Option granted hereunder;
(v) to approve forms of agreement for use under the Plan;
(vi) to determine the terms and conditions, not inconsistent
with the terms of the Plan, of any award granted hereunder. Such terms and
conditions include, but are not limited to, the exercise price, the time or
times when Options may be exercised (which may be based on performance
criteria), any vesting acceleration or waiver of forfeiture restrictions,
and any restriction or limitation regarding any Option or the shares of
Common Stock relating thereto, based in each case on such factors as the
Administrator, in its sole discretion, shall determine;
(vii) to reduce the exercise price of any Option to the then
current Fair Market Value if the Fair Market Value of the Common Stock
covered by such Option shall have declined since the date the Option was
granted;
(viii) to institute an Option Exchange Program;
(ix) to construe and interpret the terms of the Plan and
awards granted pursuant to the Plan;
(x) to prescribe, amend and rescind rules and regulations
relating to the Plan, including rules and regulations relating to sub-plans
established for the purpose of qualifying for preferred tax treatment under
foreign tax laws;
(xi) to modify or amend each Option (subject to Section
14(b) of the Plan), including the discretionary authority to extend the
post-termination exercisability period of Options longer than is otherwise
provided for in the Plan;
(xii) to authorize any person to execute on behalf of the
Company any instrument required to effect the grant of an Option previously
granted by the Administrator;
(xiii) to determine the terms and restrictions applicable to
Options;
(xiv) to allow Optionees to satisfy withholding tax
obligations by electing to have the Company withhold from the Shares to be
issued upon exercise of an Option that number of Shares having a Fair
Market Value equal to the amount required to be withheld. The Fair Market
Value of the Shares to be withheld shall be determined on the date that the
amount of tax to be withheld is to be determined. All elections by an
Optionee to have Shares withheld for this purpose shall be made in such
form and under such conditions as the Administrator may deem necessary or
advisable; and
(xv) to make all other determinations deemed necessary or
advisable for administering the Plan.
(c) Effect of Administrator's Decision. The Administrator's
decisions, determinations and interpretations shall be final and binding on
all Optionees and any other holders of Options.
5. Eligibility. Options may be granted to Service Providers.
6. Limitation. Neither the Plan nor any Option shall confer upon an
Optionee any right with respect to continuing the Optionee's relationship
as a Service Provider with the Company, nor shall they interfere in any way
with the Optionee's right or the Company's right to terminate such
relationship at any time, with or without cause.
7. Term of Plan. The Plan shall become effective upon its adoption
by the Board. It shall continue in effect for ten (10) years, unless
sooner terminated under Section 14 of the Plan.
8. Term of Option. The term of each Option shall be stated in the
Option Agreement.
9. Option Exercise Price and Consideration.
(a) Exercise Price. The per share exercise price for the Shares
to be issued pursuant to exercise of an Option shall be determined by the
Administrator.
(b) Waiting Period and Exercise Dates. At the time an Option is
granted, the Administrator shall fix the period within which the Option may
be exercised and shall determine any conditions which must be satisfied
before the Option may be exercised.
(c) Form of Consideration. The Administrator shall determine
the acceptable form of consideration for exercising an Option, including
the method of payment. Such consideration may consist entirely of:
(i) cash;
(ii) check;
(iii) promissory note;
(iv) other Shares which (A) in the case of Shares acquired
upon exercise of an option, have been owned by the Optionee for more than
six months on the date of surrender, and (B) have a Fair Market Value on
the date of surrender equal to the aggregate exercise price of the Shares
as to which said Option shall be exercised;
(v) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan;
(vi) a reduction in the amount of any Company liability to
the Optionee, including any liability attributable to the Optionee's
participation in any Company-sponsored deferred compensation program or
arrangement;
(vii) such other consideration and method of payment for the
issuance of Shares to the extent permitted by Applicable Laws; or
(viii) any combination of the foregoing methods of payment.
10. Exercise of Option.
(a) Procedure for Exercise; Rights as a Shareholder. Any Option
granted hereunder shall be exercisable according to the terms of the Plan
and at such times and under such conditions as determined by the
Administrator and set forth in the Option Agreement. An Option may not be
exercised for a fraction of a Share.
An Option shall be deemed exercised when the Company
receives: (i) written or electronic notice of exercise (in accordance with
the Option Agreement) from the person entitled to exercise the Option, and
(ii) full payment for the Shares with respect to which the Option is
exercised. Full payment may consist of any consideration and method of
payment authorized by the Administrator and permitted by the Option
Agreement and the Plan. Shares issued upon exercise of an Option shall be
issued in the name of the Optionee or, if requested by the Optionee, in the
name of the Optionee and his or her spouse. Until the Shares are issued
(as evidenced by the appropriate entry on the books of the Company or of a
duly authorized transfer agent of the Company), no right to vote or receive
dividends or any other rights as a shareholder shall exist with respect to
the Optioned Stock, notwithstanding the exercise of the Option. The
Company shall issue (or cause to be issued) such Shares promptly after the
Option is exercised. No adjustment will be made for a dividend or other
right for which the record date is prior to the date the Shares are issued,
except as provided in Section 12 of the Plan.
Exercising an Option in any manner shall decrease the number
of Shares thereafter available, both for purposes of the Plan and for sale
under the Option, by the number of Shares as to which the Option is
exercised.
(b) Termination of Relationship as a Service Provider. If an
Optionee ceases to be a Service Provider, other than upon the Optionee's
death or Disability, the Optionee may exercise his or her Option, but only
within such period of time as is specified in the Option Agreement, and
only to the extent that the Option is vested on the date of termination
(but in no event later than the expiration of the term of such Option as
set forth in the Option Agreement). In the absence of a specified time in
the Option Agreement, the Option shall remain exercisable for three (3)
months following the Optionee's termination. If, on the date of
termination, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall revert to the
Plan. If, after termination, the Optionee does not exercise his or her
Option within the time specified by the Administrator, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(c) Disability of Optionee. If an Optionee ceases to be a
Service Provider as a result of the Optionee's Disability, the Optionee may
exercise his or her Option within such period of time as is specified in
the Option Agreement, to the extent the Option is vested on the date of
termination (but in no event later than the expiration of the term of such
Option as set forth in the Option Agreement). In the absence of a
specified time in the Option Agreement, the Option shall remain exercisable
for twelve (12) months following the Optionee's termination. If, on the
date of termination, the Optionee is not vested as to his or her entire
Option, the Shares covered by the unvested portion of the Option shall
revert to the Plan. If, after termination, the Optionee does not exercise
his or her Option within the time specified herein, the Option shall
terminate, and the Shares covered by such Option shall revert to the Plan.
(d) Death of Optionee. If an Optionee dies while a Service
Provider, the Option may be exercised within such period of time as is
specified in the Option Agreement (but in no event later than the
expiration of the term of such Option as set forth in the Notice of Grant),
by the Optionee's estate or by a person who acquires the right to exercise
the Option by bequest or inheritance, but only to the extent that the
Option is vested on the date of death. In the absence of a specified time
in the Option Agreement, the Option shall remain exercisable for twelve
(12) months following the Optionee's termination. If, at the time of
death, the Optionee is not vested as to his or her entire Option, the
Shares covered by the unvested portion of the Option shall immediately
revert to the Plan. The Option may be exercised by the executor or
administrator of the Optionee's estate or, if none, by the person(s)
entitled to exercise the Option under the Optionee's will or the laws of
descent or distribution. If the Option is not so exercised within the time
specified herein, the Option shall terminate, and the Shares covered by
such Option shall revert to the Plan.
(e) Buyout Provisions. The Administrator may at any time offer
to buy out for a payment in cash or Shares, an Option previously granted
based on such terms and conditions as the Administrator shall establish and
communicate to the Optionee at the time that such offer is made.
11. Non-Transferability of Options. Unless determined otherwise by
the Administrator, an Option may not be sold, pledged, assigned,
hypothecated, transferred, or disposed of in any manner other than by will
or by the laws of descent or distribution and may be exercised, during the
lifetime of the Optionee, only by the Optionee. If the Administrator makes
an Option transferable, such Option shall contain such additional terms and
conditions as the Administrator deems appropriate.
12. Adjustments Upon Changes in Capitalization, Dissolution, Merger
or Asset Sale.
(a) Changes in Capitalization. Subject to any required action
by the shareholders of the Company, the number of shares of Common Stock
covered by each outstanding Option, and the number of shares of Common
Stock which have been authorized for issuance under the Plan but as to
which no Options have yet been granted or which have been returned to the
Plan upon cancellation or expiration of an Option, as well as the price per
share of Common Stock covered by each such outstanding Option, shall be
proportionately adjusted for any increase or decrease in the number of
issued shares of Common Stock resulting from a stock split, reverse stock
split, stock dividend, combination or reclassification of the Common Stock,
or any other increase or decrease in the number of issued shares of Common
Stock effected without receipt of consideration by the Company; provided,
however, that conversion of any convertible securities of the Company shall
not be deemed to have been "effected without receipt of consideration."
Such adjustment shall be made by the Board, whose determination in that
respect shall be final, binding and conclusive. Except as expressly
provided herein, no issuance by the Company of shares of stock of any
class, or securities convertible into shares of stock of any class, shall
affect, and no adjustment by reason thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
(b) Dissolution or Liquidation. In the event of the proposed
dissolution or liquidation of the Company, the Administrator shall notify
each Optionee as soon as practicable prior to the effective date of such
proposed transaction. The Administrator in its discretion may provide for
an Optionee to have the right to exercise his or her Option until ten (10)
days prior to such transaction as to all of the Optioned Stock covered
thereby, including Shares as to which the Option would not otherwise be
exercisable. In addition, the Administrator may provide that any Company
repurchase option applicable to any Shares purchased upon exercise of an
Option shall lapse as to all such Shares, provided the proposed dissolution
or liquidation takes place at the time and in the manner contemplated. To
the extent it has not been previously exercised, an Option will terminate
immediately prior to the consummation of such proposed action.
(c) Merger or Asset Sale. In the event of a merger of the
Company with or into another corporation, or the sale of substantially all
of the assets of the Company, each outstanding Option shall be assumed or
an equivalent option or right substituted by the successor corporation or a
Parent or Subsidiary of the successor corporation. In the event that the
successor corporation refuses to assume or substitute for the Option, the
Optionee shall fully vest in and have the right to exercise the Option as
to all of the Optioned Stock, including Shares as to which it would not
otherwise be vested or exercisable. If an Option becomes fully vested and
exercisable in lieu of assumption or substitution in the event of a merger
or sale of assets, the Administrator shall notify the Optionee in writing
or electronically that the Option shall be fully vested and exercisable for
a period of fifteen (15) days from the date of such notice, and the Option
shall terminate upon the expiration of such period. For the purposes of
this paragraph, the Option shall be considered assumed if, following the
merger or sale of assets, the option or right confers the right to purchase
or receive, for each Share of Optioned Stock, immediately prior to the
merger or sale of assets, the consideration (whether stock, cash, or other
securities or property) received in the merger or sale of assets by holders
of Common Stock for each Share held on the effective date of the
transaction (and if holders were offered a choice of consideration, the
type of consideration chosen by the holders of a majority of the
outstanding Shares); provided, however, that if such consideration received
in the merger or sale of assets is not solely common stock of the successor
corporation or its Parent, the Administrator may, with the consent of the
successor corporation, provide for the consideration to be received upon
the exercise of the Option, for each Share of Optioned Stock to be solely
common stock of the successor corporation or its Parent equal in fair
market value to the per share consideration received by holders of Common
Stock in the merger or sale of assets.
13. Date of Grant. The date of grant of an Option shall be, for all
purposes, the date on which the Administrator makes the determination
granting such Option, or such other later date as is determined by the
Administrator. Notice of the determination shall be provided to each
Optionee within a reasonable time after the date of such grant.
14. Amendment and Termination of the Plan.
(a) Amendment and Termination. The Board may at any time amend,
alter, suspend or terminate the Plan.
(b) Effect of Amendment or Termination. No amendment,
alteration, suspension or termination of the Plan shall impair the rights
of any Optionee, unless mutually agreed otherwise between the Optionee and
the Administrator, which agreement must be in writing and signed by the
Optionee and the Company. Termination of the Plan shall not affect the
Administrator's ability to exercise the powers granted to it hereunder with
respect to options granted under the Plan prior to the date of such
termination.
15. Conditions Upon Issuance of Shares.
(a) Legal Compliance. Shares shall not be issued pursuant to
the exercise of an Option unless the exercise of such Option and the
issuance and delivery of such Shares shall comply with Applicable Laws and
shall be further subject to the approval of counsel for the Company with
respect to such compliance.
(b) Investment Representations. As a condition to the exercise
of an Option the Company may require the person exercising such Option to
represent and warrant at the time of any such exercise that the Shares are
being purchased only for investment and without any present intention to
sell or distribute such Shares if, in the opinion of counsel for the
Company, such a representation is required.
16. Inability to Obtain Authority. The inability of the Company to
obtain authority from any regulatory body having jurisdiction, which
authority is deemed by the Company's counsel to be necessary to the lawful
issuance and sale of any Shares hereunder, shall relieve the Company of any
liability in respect of the failure to issue or sell such Shares as to
which such requisite authority shall not have been obtained.
17. Reservation of Shares. The Company, during the term of this
Plan, will at all times reserve and keep available such number of Shares as
shall be sufficient to satisfy the requirements of the Plan.
<PAGE>
SOCKET COMMUNICATIONS, INC.
1999 NONSTATUTORY STOCK OPTION PLAN
STOCK OPTION AGREEMENT
Unless otherwise defined herein, the terms defined in the Plan shall
have the same defined meanings in this Option Agreement.
I. NOTICE OF STOCK OPTION GRANT
Optionee's Name and Address:
You have been granted an option to purchase Common Stock of the
Company, subject to the terms and conditions of the Plan and this Option
Agreement, as follows:
Grant Number ___________________________
Date of Grant ___________________________
Vesting Commencement Date ___________________________
Exercise Price per Share $__________________________
Total Number of Shares Granted ___________________________
Total Exercise Price $__________________________
Type of Option: Nonstatutory Stock Option
Term/Expiration Date: ___________________________
Vesting Schedule:
Subject to the Optionee continuing to be a Service Provider on such
dates, this Option shall vest and become exercisable in accordance with the
following schedule:
Termination Period:
This Option may be exercised for _____ [days/months] after Optionee
ceases to be a Service Provider. Upon the death or Disability of the
Optionee, this Option may be exercised for such longer period as provided
in the Plan. In no event shall this Option be exercised later than the
Term/Expiration Date as provided above.
II. AGREEMENT
1. Grant of Option. The Plan Administrator of the Company hereby
grants to the Optionee named in the Notice of Grant attached as Part I of
this Agreement (the "Optionee") an option (the "Option") to purchase the
number of Shares, as set forth in the Notice of Grant, at the exercise
price per share set forth in the Notice of Grant (the "Exercise Price"),
subject to the terms and conditions of the Plan, which is incorporated
herein by reference. In the event of a conflict between the terms and
conditions of the Plan and the terms and conditions of this Option
Agreement, the terms and conditions of the Plan shall prevail.
2. Exercise of Option.
(a) Right to Exercise. This Option is exercisable during its
term in accordance with the Vesting Schedule set out in the Notice of Grant
and the applicable provisions of the Plan and this Option Agreement.
(b) Method of Exercise. This Option is exercisable by delivery
of an exercise notice, in the form attached as Exhibit A (the "Exercise
Notice"), which shall state the election to exercise the Option, the number
of Shares in respect of which the Option is being exercised (the "Exercised
Shares"), and such other representations and agreements as may be required
by the Company pursuant to the provisions of the Plan. The Exercise Notice
shall be completed by the Optionee and delivered to [Title]. The Exercise
Notice shall be accompanied by payment of the aggregate Exercise Price as
to all Exercised Shares. This Option shall be deemed to be exercised upon
receipt by the Company of such fully executed Exercise Notice accompanied
by such aggregate Exercise Price.
No Shares shall be issued pursuant to the exercise of this Option
unless such issuance and exercise complies with Applicable Laws. Assuming
such compliance, for income tax purposes the Exercised Shares shall be
considered transferred to the Optionee on the date the Option is exercised
with respect to such Exercised Shares.
3. Method of Payment. Payment of the aggregate Exercise Price shall
be by any of the following, or a combination thereof, at the election of
the Optionee:
(a) cash;
(b) check;
(c) consideration received by the Company under a cashless
exercise program implemented by the Company in connection with the Plan; or
(d) surrender of other Shares which (i) in the case of Shares
acquired upon exercise of an option, have been owned by the Optionee for
more than six (6) months on the date of surrender, and (ii) have a Fair
Market Value on the date of surrender equal to the aggregate Exercise Price
of the Exercised Shares.
4. Non-Transferability of Option. This Option may not be transferred
in any manner otherwise than by will or by the laws of descent or
distribution and may be exercised during the lifetime of Optionee only by
the Optionee. The terms of the Plan and this Option Agreement shall be
binding upon the executors, administrators, heirs, successors and assigns
of the Optionee.
5. Term of Option. This Option may be exercised only within the term
set out in the Notice of Grant, and may be exercised during such term only
in accordance with the Plan and the terms of this Option Agreement.
6. Vesting Acceleration on Change of Control.
(a) Vesting Acceleration. In the event of a "Change of
Control," all of the Optionee's rights to purchase stock under this
Agreement with the Company shall be automatically vested in their entirety
on an accelerated basis and be fully exercisable:
(i) as of the date immediately preceding such "Change of
Control" in the event this stock option agreement is or will be terminated
or canceled (except by mutual consent) or any successor to the Company
fails to assume and agree to perform such stock option agreement at or
prior to such time as any such person becomes a successor to the Company;
or
(ii) as of the date immediately preceding such "Change of
Control" in the event the Optionee does not or will not receive upon
exercise of the Optionee's stock purchase rights under such stock option
agreement the same identical securities and/or other consideration as is
received by all other shareholders in any merger, consolidation, sale,
exchange or similar transaction occurring upon or after such "Change of
Control"; or
(iii) as of the date immediately preceding any "Involuntary
Termination" of the Optionee occurring upon or after any such "Change of
Control"; or
(iv) as of the date one (1) year following the first such
"Change of Control," provided that the Optionee shall have remained an
employee of the Company continuously throughout such one-year period, other
than a termination as a result of death or disability;
whichever shall first occur (all quoted terms as defined below); provided,
however, that if it is determined by the Company's independent public
accountants that the accelerated vesting and exercisability provided in
this Section 6(a) would preclude accounting for the "Change of Control" as
a pooling of interests for financial accounting purposes, and it is a
condition to the closing of the "Change of Control" that the transaction be
accounted for as a pooling of interests, then the vesting and
exercisability shall not be accelerated pursuant to this Section 6(a).
(b) Change of Control. "Change of Control" means the occurrence
of any of the following events:
(i) Any "person" (as such term is used in Sections 13(d)
and 14(d) of the Securities Exchange Act of 1934, as amended) is or becomes
the "beneficial owner" (as defined in Rule 13d-3 under said Act), directly
or indirectly, of securities of the Company representing fifty percent
(50%) or more of the total voting power represented by the Company's then
outstanding voting securities; or
(ii) A change in the composition of the Board of Directors
of the Company occurring within a two-year period as a result of which
fewer than a majority of the directors are "Incumbent Directors."
"Incumbent Directors" shall mean directors who either (A) are directors of
the Company as of the date hereof, or (B) are elected, or nominated for
election, to the Board of Directors with the affirmative votes (either by a
specific vote or by approval of the proxy statement of the Company in which
such person is named as a nominee for election as a director without
objection to such nomination) of at least a majority of the Incumbent
Directors at the time of such election or nomination; or
(iii) The consummation of (A) a merger or consolidation of
the Company with any other entity, other than a merger or consolidation
which would result in the voting securities of the Company outstanding
immediately prior thereto continuing to represent (either by remaining out-
standing or by being converted into voting securities of the surviving
entity or the entity that controls the Company or such surviving entity) at
least fifty percent (50%) of the total voting power represented by the
voting securities of the Company or such surviving entity or the entity
that controls the Company or such surviving entity outstanding immediately
after such merger or consolidation, or (B) the sale or disposition by the
Company of all or substantially all the Company's assets; or
(iv) The shareholders approve a plan of complete liquidation
of the Company.
(c) Involuntary Termination. "Involuntary Termination" shall
mean without the Optionee's written consent: (i) a termination by the
Company of the Optionee's employment with the Company other than for Cause;
(ii) a material reduction of or variation in the Optionee's duties,
authority or responsibilities, relative to the Optionee's duties, authority
or responsibilities as in effect immediately prior to such reduction or
variation; (iii) a reduction by the Company in the base salary of the
Optionee as in effect immediately prior to such reduction; (iv) a material
reduction by the Company in the kind or level of employee benefits,
including bonuses, to which the Optionee was entitled immediately prior to
such reduction, with the result that the Optionee's overall benefits
package is materially reduced; (v) the relocation of the Optionee to a
facility or a location more than thirty (30) miles from the Optionee's then
present location; (vi) the failure of the Company to obtain the assumption
of this Agreement by any successor, or (vii) any act or set of facts that
would under applicable law constitute a constructive termination of
Optionee.
(d) Cause. "Cause" shall mean (i) any willful act of personal
dishonesty, fraud or misrepresentation taken by the Optionee in connection
with his or her responsibilities as an employee which was intended to
result in substantial gain or personal enrichment of the Optionee at the
expense of the Company and was materially and demonstrably injurious to the
Company; (ii) the Optionee's conviction of a felony on account of any act
which was materially and demonstrably injurious to the Company; or
(iii) the Optionee's willful and continued failure to substantially perform
his or her principal duties and obligations of employment including under
any written agreements (other than any such failure resulting from
incapacity due to physical or mental illness), which failure is not
remedied in a reasonable period of time after receipt of written notice
from the Company. For the purposes of this Section 6(d), no act or failure
to act shall be considered "willful" unless done or omitted to be done in
bad faith and without reasonable belief that the act or omission was in or
not opposed to the best interests of the Company. Any act or failure to
act based upon authority given pursuant to a resolution duly adopted by the
Board of Directors of the Company or based upon the advice of counsel for
the Company shall be conclusively presumed to be done or omitted to be done
in good faith and in the best interests of the Company.
(e) Voluntary Resignation; Termination For Cause. If the
Optionee terminates employment as a result of an Involuntary Termination,
the Optionee shall be entitled to receive accelerated vesting under
Section 6(a) hereof. If the Optionee's continuous status as an employee of
the Company terminates by reason of the Optionee's voluntary resignation
(and not Involuntary Termination) or if the Optionee's continuous status as
an employee of the Company is terminated for Cause, in either case prior to
such time as accelerated vesting occurs as provided in Section 6(a) hereof,
then the Optionee shall not be entitled to receive accelerated vesting
under Section 6(a) hereof.
7. Successors. Any successor to the Company (whether direct or
indirect and whether by purchase, merger or consolidation) shall assume the
obligations under this Agreement and agree expressly to perform the
obligations under this Agreement in the same manner and to the same extent
as the Company would be required to perform such obligations in the absence
of a succession. The terms of this Agreement and all rights of the
Optionee hereunder shall inure to the benefit of, and be enforceable by,
the Optionee's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees.
8. Tax Consequences. Some of the federal tax consequences relating to
this Option, as of the date of this Option, are set forth below. THIS
SUMMARY IS NECESSARILY INCOMPLETE, AND THE TAX LAWS AND REGULATIONS ARE
SUBJECT TO CHANGE. THE OPTIONEE SHOULD CONSULT A TAX ADVISER BEFORE
EXERCISING THIS OPTION OR DISPOSING OF THE SHARES.
(a) Exercising the Option. The Optionee may incur regular
federal income tax liability upon exercise of an NSO. The Optionee will be
treated as having received compensation income (taxable at ordinary income
tax rates) equal to the excess, if any, of the Fair Market Value of the
Exercised Shares on the date of exercise over their aggregate Exercise
Price. If the Optionee is an Employee or a former Employee, the Company
will be required to withhold from his or her compensation or collect from
Optionee and pay to the applicable taxing authorities an amount in cash
equal to a percentage of this compensation income at the time of exercise,
and may refuse to honor the exercise and refuse to deliver Shares if such
withholding amounts are not delivered at the time of exercise.
(b) Disposition of Shares. If the Optionee holds NSO Shares for
at least one year, any gain realized on disposition of the Shares will be
treated as long-term capital gain for federal income tax purposes.
9. Entire Agreement; Governing Law. The Plan is incorporated herein
by reference. The Plan and this Option Agreement constitute the entire
agreement of the parties with respect to the subject matter hereof and
supersede in their entirety all prior undertakings and agreements of the
Company and Optionee with respect to the subject matter hereof, and may not
be modified adversely to the Optionee's interest except by means of a
writing signed by the Company and Optionee. This agreement is governed by
the internal substantive laws, but not the choice of law rules, of
California.
10. NO GUARANTEE OF CONTINUED SERVICE. OPTIONEE ACKNOWLEDGES AND
AGREES THAT THE VESTING OF SHARES PURSUANT TO THE VESTING SCHEDULE HEREOF
IS EARNED ONLY BY CONTINUING AS A SERVICE PROVIDER AT THE WILL OF THE
COMPANY (AND NOT THROUGH THE ACT OF BEING HIRED, BEING GRANTED AN OPTION OR
PURCHASING SHARES HEREUNDER). OPTIONEE FURTHER ACKNOWLEDGES AND AGREES
THAT THIS AGREEMENT, THE TRANSACTIONS CONTEMPLATED HEREUNDER AND THE
VESTING SCHEDULE SET FORTH HEREIN DO NOT CONSTITUTE AN EXPRESS OR IMPLIED
PROMISE OF CONTINUED ENGAGEMENT AS A SERVICE PROVIDER FOR THE VESTING
PERIOD, FOR ANY PERIOD, OR AT ALL, AND SHALL NOT INTERFERE WITH OPTIONEE'S
RIGHT OR THE COMPANY'S RIGHT TO TERMINATE OPTIONEE'S RELATIONSHIP AS A
SERVICE PROVIDER AT ANY TIME, WITH OR WITHOUT CAUSE.
By your signature and the signature of the Company's representative
below, you and the Company agree that this Option is granted under and
governed by the terms and conditions of the Plan and this Option Agreement.
Optionee has reviewed the Plan and this Option Agreement in their entirety,
has had an opportunity to obtain the advice of counsel prior to executing
this Option Agreement and fully understands all provisions of the Plan and
Option Agreement. Optionee hereby agrees to accept as binding, conclusive
and final all decisions or interpretations of the Administrator upon any
questions relating to the Plan and Option Agreement. Optionee further
agrees to notify the Company upon any change in the residence address
indicated below.
OPTIONEE SOCKET COMMUNICATIONS, INC.
________________________________ ________________________________
Signature By
________________________________ ________________________________
Print Name Title
________________________________ ________________________________
Residence Address
________________________________
<PAGE>
EXHIBIT A
SOCKET COMMUNICATIONS, INC.
1999 NONSTATUTORY STOCK OPTION PLAN
EXERCISE NOTICE
Socket Communications, Inc.
37400 Central Court
Newark, California 94560
Attention: [Title]
1. Exercise of Option. Effective as of today, ________________,
_____, the undersigned ("Purchaser") hereby elects to purchase
______________ shares (the "Shares") of the Common Stock of Socket
Communications, Inc. (the "Company") under and pursuant to the 1999
Nonstatutory Stock Option Plan (the "Plan") and the Stock Option Agreement
dated ______, ___ (the "Option Agreement"). The purchase price for the
Shares shall be $_______, as required by the Option Agreement.
2. Delivery of Payment. Purchaser herewith delivers to the Company
the full purchase price for the Shares.
3. Representations of Purchaser. Purchaser acknowledges that
Purchaser has received, read and understood the Plan and the Option
Agreement and agrees to abide by and be bound by their terms and
conditions.
4. Rights as Shareholder. Until the issuance (as evidenced by the
appropriate entry on the books of the Company or of a duly authorized
transfer agent of the Company) of the Shares, no right to vote or receive
dividends or any other rights as a shareholder shall exist with respect to
the Optioned Stock, notwithstanding the exercise of the Option. The Shares
so acquired shall be issued to the Optionee as soon as practicable after
exercise of the Option. No adjustment will be made for a dividend or other
right for which the record date is prior to the date of issuance, except as
provided in Section 12 of the Plan.
5. Tax Consultation. Purchaser understands that Purchaser may
suffer adverse tax consequences as a result of Purchaser's purchase or
disposition of the Shares. Purchaser represents that Purchaser has
consulted with any tax consultants Purchaser deems advisable in connection
with the purchase or disposition of the Shares and that Purchaser is not
relying on the Company for any tax advice.
6. Entire Agreement; Governing Law. The Plan and Option Agreement
are incorporated herein by reference. This Agreement, the Plan and the
Option Agreement constitute the entire agreement of the parties with
respect to the subject matter hereof and supersede in their entirety all
prior undertakings and agreements of the Company and Purchaser with respect
to the subject matter hereof, and may not be modified adversely to the
Purchaser's interest except by means of a writing signed by the Company and
Purchaser. This agreement is governed by the internal substantive laws,
but not the choice of law rules, of California.
Submitted by: Accepted by:
PURCHASER SOCKET COMMUNICATIONS, INC.
________________________________ ________________________________
Signature By
________________________________ ________________________________
Print Name Title
________________________________
Date Received
Address:_________________________ Address:
37400 Central Court
_________________________ Newark, California 94560
_________________________
<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
JUNE 30, 1999 INCLUDED IN FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> JUN-30-1999
<CASH> 418,652
<SECURITIES> 0
<RECEIVABLES> 1,222,760
<ALLOWANCES> 0
<INVENTORY> 587,921
<CURRENT-ASSETS> 2,253,816
<PP&E> 1,176,909
<DEPRECIATION> 909,400
<TOTAL-ASSETS> 2,591,845
<CURRENT-LIABILITIES> 2,625,963
<BONDS> 0
0
2,490,750
<COMMON> 10,251
<OTHER-SE> (2,535,119)
<TOTAL-LIABILITY-AND-EQUITY> 2,591,845
<SALES> 3,262,905
<TOTAL-REVENUES> 3,262,905
<CGS> 1,313,565
<TOTAL-COSTS> 1,313,565
<OTHER-EXPENSES> 2,339,950
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 17,551
<INCOME-PRETAX> (408,161)
<INCOME-TAX> 0
<INCOME-CONTINUING> (408,161)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (567,164)
<EPS-BASIC> (0.07)
<EPS-DILUTED> (0.07)
</TABLE>
