================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-QSB
[X] Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934
For the Quarterly Period Ended September 30, 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
November 10, 1999 was 13,551,648 shares.
This report, including all attachments, contains 24 pages.
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<PAGE>
INDEX
<TABLE>
<CAPTION>
PAGE NO.
--------
<S> <C>
Part I. Financial information
Condensed Balance Sheets - September 30, 1999 and
December 31, 1998....................................... 3
Condensed Statements of Operations - Three Months and
Nine Months Ended September 30, 1999 and 1998........... 4
Condensed Statements of Cash Flows - Nine Months
Ended September 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......................................... 23
Signatures......................................................... 24
</TABLE>
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<PAGE>
PART I. FINANCIAL INFORMATION
SOCKET COMMUNICATIONS, INC.
CONDENSED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
September 30, December 31,
1999 1998 *
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $1,278,322 $971,157
Accounts receivable, net........................... 848,842 874,895
Inventories........................................ 718,287 479,578
Prepaid expenses................................... 67,408 41,764
------------ ------------
Total current assets............................ 2,912,859 2,367,394
Property and equipment:
Machinery and office equipment..................... 706,969 595,419
Computer equipment................................. 575,917 480,725
------------ ------------
1,282,886 1,076,144
Accumulated depreciation........................... (946,804) (850,056)
------------ ------------
336,082 226,088
Other assets........................................ 71,920 68,603
------------ ------------
Total assets.................................... $3,320,861 $2,662,085
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank lines of credit............................... $375,802 $520,727
Accounts payable and accrued expenses.............. 1,758,433 1,362,228
Accrued payroll and related expenses............... 287,176 201,952
Deferred revenue................................... 286,290 240,118
Current portion of capital leases and
equipment financing notes........................ -- 41,083
------------ ------------
Total current liabilities....................... 2,707,701 2,366,108
Commitments and contingencies
Stockholders' equity:
Preferred stock, $0.001 par value; Authorized
shares - 3,000,000
Series B Convertible Preferred Stock:
Designated shares - 37,500; Issued and
outstanding shares - 15,369 at September 30,
1999 and 30,065 at December 31, 1998;
Aggregate liquidation preference - $818,458
at September 30, 1999........................ 834,304 1,565,976
Series C Convertible Preferred Stock:
Designated shares - 175,000; Issued and
outstanding shares - 51,188 at September 30,
1999 and 163,468 at December 31, 1998;
Aggregate liquidation preference - $594,691
at September 30, 1999........................ 529,819 1,714,043
Series D Convertible Preferred Stock:
Designated shares - 175,000; Issued and
outstanding shares - 174,292 at September 30,
1999 and December 31, 1998;
Aggregate liquidation preference - $1,020,000
at September 30, 1999........................ 769,887 769,887
Common stock, $0.001 par value:
Authorized shares - 50,000,000
Issued and outstanding shares - 12,120,653 at
September 30, 1999 and 7,365,914 at
December 31, 1998............................. 12,121 7,366
Additional paid-in capital......................... 17,363,944 14,217,366
Accumulated deficit................................ (18,896,915) (17,978,661)
------------ ------------
Total stockholders' equity...................... 613,160 295,977
------------ ------------
Total liabilities and stockholders'
equity................................... $3,320,861 $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 Nine Months Ended
September 30, September 30,
----------------------- ------------------------
1999 1998 1999 1998
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Revenues....................... $1,504,213 $1,368,091 $4,767,118 $4,030,023
Cost of revenues............... 621,857 537,115 1,935,422 1,621,446
----------- ----------- ----------- ------------
Gross profit................... 882,356 830,976 2,831,696 2,408,577
----------- ----------- ----------- ------------
Operating expenses:
Research and development.... 315,352 248,141 877,740 753,853
Sales and marketing......... 568,376 499,635 1,674,825 1,457,414
General and administrative.. 286,320 251,347 957,433 840,136
----------- ----------- ----------- ------------
Total operating expenses. 1,170,048 999,123 3,509,998 3,051,403
----------- ----------- ----------- ------------
Operating loss................. (287,692) (168,147) (678,302) (642,826)
Interest income................ -- -- -- 4
Interest expense............... (12,650) (18,631) (30,201) (95,205)
----------- ----------- ----------- ------------
Net loss....................... (300,342) (186,778) (708,503) (738,027)
Preferred stock dividend....... (50,748) (64,452) (209,751) (146,641)
Accretion of preferred stock... -- -- -- (250,000)
----------- ----------- ----------- ------------
Net loss applicable to
common stockholders.......... ($351,090) ($251,230) ($918,254) ($1,134,668)
=========== =========== =========== ============
Net loss per share applicable
to common stockholders....... ($0.03) ($0.03) ($0.10) ($0.16)
=========== =========== =========== ============
Weighted average shares
outstanding.................. 10,646,072 7,316,027 8,798,925 7,015,889
=========== =========== =========== ============
</TABLE>
See accompanying notes.
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<PAGE>
SOCKET COMMUNICATIONS, INC.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-------------------------
1999 1998
------------ ------------
<S> <C> <C>
OPERATING ACTIVITIES
Net loss............................................ ($708,503) ($738,027)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization................... 96,748 151,967
Compensatory stock option grant and warrants.... 98,520 --
Changes in operating assets and liabilities:
Accounts receivable........................... 26,053 13,507
Inventories................................... (238,709) (252,746)
Prepaid expenses.............................. (25,644) (42,702)
Other assets.................................. (3,317) (2,298)
Accounts payable and accrued expenses......... 396,205 (306,355)
Accrued payroll and related expenses.......... 85,224 (78,475)
Deferred revenue.............................. 46,172 22,387
------------ ------------
Net cash used in operating activities....... (227,251) (1,232,742)
INVESTING ACTIVITIES
Purchase of equipment............................... (206,742) (37,622)
------------ ------------
Net cash used in investing activities....... (206,742) (37,622)
FINANCING ACTIVITIES
Proceeds from sale of common stock, net of
issuance costs.................................... 863,399 --
Proceeds from sale of preferred stock, net of
issuance costs.................................... -- 1,469,354
Payments on capital leases and equipment
financing notes................................... (41,083) (50,714)
Net borrowings(payments) from borrowing under bank
lines of credit................................... (144,925) 21,746
Exercise of stock options........................... 4,434 --
Exercise of warrants................................ 59,333 --
Preferred stock dividends paid...................... -- (17,073)
------------ ------------
Net cash provided by financing activities... 741,158 1,423,313
------------ ------------
Net increase in cash and cash equivalents............. 307,165 152,949
Cash and cash equivalents at beginning of period...... 971,157 276,900
------------ ------------
Cash and cash equivalents at end of period............ $1,278,322 $429,849
============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest.............................. 30,201 40,422
Dividends accrued, paid/payable in common stock..... 209,751 142,033
Series B preferred stock converted to common stock.. 731,672 --
Series C preferred stock converted to common stock.. 1,184,224 --
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
equity financing.................................. 117,937 153,378
Warrants issued to placement agent in
connection with equity financing.................. 134,165 --
</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
September 30, 1999, the Company had cumulative losses of $18,896,915,
stockholder's equity of $613,160, and working capital of $205,158. The
Company will need to raise additional capital to fund operations during
2000 and 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 nine months ended September 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.
September 30, December 31,
1999 1998
------------ ------------
Raw materials and sub-assemblies........ $699,056 $454,836
Finished goods.......................... 19,231 24,742
------------ ------------
$718,287 $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 nine months ended September 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 Nine Months Ended
September 30, September 30,
----------------------- ------------------------
1999 1998 1999 1998
----------- ----------- ----------- ------------
<S> <C> <C> <C> <C>
Numerator for basic:
Net Loss....................... ($300,342) ($186,778) ($708,503) ($738,027)
Preferred stock dividends...... (50,748) (64,452) (209,751) (146,641)
Accretion of preferred stock... -- -- -- (250,000)
----------- ----------- ----------- ------------
Net loss applicable to
common stockholders............... ($351,090) ($251,230) ($918,254) ($1,134,668)
=========== =========== =========== ============
Denominator:
Weighted average common
shares outstanding used
in computing basic net
loss per share.................... 10,646,072 7,316,027 8,798,925 7,015,889
=========== =========== =========== ============
Basic and diluted net
loss per share applicable
to common stockholders............ ($0.03) ($0.03) ($0.10) ($0.16)
=========== =========== =========== ============
</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
In October 1999, the Company entered into a credit agreement with a bank
which expires on October 14, 2000. This credit agreement replaces the
credit agreements existing at September 30, 1999. The credit facility
under the new agreement allows the Company to borrow up to $1,750,000 based
on the level of qualified domestic and international receivables
($1,000,000 and $750,000, respectively), at the lenders index rate which is
based on prime, plus 1.5% and 1.0%, respectively, on domestic and
international receivables. The rates in effect at the date of the
agreement were 9.75% and 9.25%. As of September 30, 1999 and December 31,
1998, outstanding borrowings under the Company's previous credit agreements
were $375,802 and $520,727, respectively, which were the amounts available
under the lines.
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
September 30, 1999 for the Series B convertible preferred stock were
$19,927, which were paid through the issuance of 14,669 shares of common
stock in October 1999. Accrued dividends for the quarter ended September
30, 1999 for the Series D convertible preferred stock were $20,000, which
were paid through the issuance of 14,607 shares of common stock in October
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
September 30, 1999 were $10,821 payable through the issuance of 21,262
shares of common stock at the time of conversion.
During the quarter ended September 30, 1999, 744,800 common shares were
issued on conversion of 7,448 Series B convertible preferred shares, and
19,514 common shares were issued on conversion of 822 Series C convertible
preferred shares plus accrued dividends. At September 30, 1999,
convertible preferred shares were convertible into common shares at the
option of the holder as follows:
Common Shares
---------------
Series B.......................... 1,536,900
Series C plus accrued dividends... 1,168,200
Series D.......................... 1,742,920
---------------
Total Shares...................... 4,448,020
===============
-8-
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
NOTE 7 - Common Stock Financing
On September 28, 1999, the Company sold 936,058 shares of common stock
in a private placement financing at $1.08 per share with total proceeds of
$1,010,949. Total cash issuance costs to complete the financing were
$147,550. In conjunction with the financing, the Company issued three-year
warrants to investors to acquire an additional 140,401 shares of common
stock at $1.08 per share, and issued 159,720 three-year warrants to the
placement agent to acquire common stock at the same price. Using a Black-
Scholes valuation formula, $117,937 of the proceeds were attributed to the
warrants issued to investors, and the warrants issued to the placement
agent were valued at $134,165.
NOTE 8 - 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 nine months
ended September 30, 1999 and 1998 are as follows:
<TABLE>
<CAPTION>
Quarter Ended Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Revenues:
United States............ $990,771 $1,041,165 $3,150,340 $2,612,332
Europe................... 361,753 283,799 1,250,044 1,102,390
Asia and rest of world... 151,689 43,127 366,734 315,301
------------ ------------ ------------ ------------
$1,504,213 $1,368,091 $4,767,118 $4,030,023
============ ============ ============ ============
</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 Nine Months Ended
September 30, September 30,
------------------------- -------------------------
1999 1998 1999 1998
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Ingram Micro............. 25% 33% 25% 28%
Merisel.................. 14% 3% 10% 1%
PPCP Ltd. ............... 3% 8% 6% 11%
Tech Data................ 9% 8% 8% 12%
Telrepco Inc. ........... -- 18% 1% 6%
</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 Windows notebooks and for
Windows CE computers with PC card slots. During 1998, we expanded our PC
Card connection family of products to add a family of CompactFlash ("CF+")
serial, low power Ethernet and tethered bar code scanning connection
products to support the smallest Windows CE computer, the Palm-size PC. We
expanded this family in the second half of 1999 with the development of an
integrated CF+ bar code scanner card and digital phone cards for the North
American CDMA and worldwide GSM telephone markets. Our family of low-power
serial and Ethernet plug-in card connection products, our family of low-
power plug-in cards for bar code scanning products, and, commencing with
the fourth quarter of 1999, our family of digital telephone connection
cards, are our principal sources of revenues.
Four classes of Windows CE computers are now available from a number of
computer manufacturers: the H/PC professional (mini-notebook); the H/PC
(clam shell design with keyboard); the Palm-size PC (pocket-sized computer)
and the tablet PC (ruggedized touch screen in mini-notebook size). These
computers are desktop companions designed to synchronize with a Windows
desktop computer. They also operate on double-A or triple-A size
rechargeable 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, some H/PC professionals and the tablet PCs have a CF+ slot
for input/output. The H/PC professionals were released in the second half
of 1998, the color Palm-size PCs were released in the first quarter of 1999
and the tablet PCs were released beginning in the third quarter of 1999.
All of our low power Battery FriendlyTM 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.
-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, bar code printer or mobile digital
phone, 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 identified two 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; 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 which began shipping in October
1999. The card when inserted into a Palm-size or tablet PC, converts the
handheld 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 fourth quarter of
1999.*
In the mobile digital telephone market, we have developed CF+
telephone connection cards to connect GSM and CDMA data-enabled mobile
digital telephones directly to a Windows CE or Windows mobile computer. We
support selected mobile digital phones from Qualcomm, Nokia, and Ericsson
and plan to expand telephone coverage to other phone manufacturers.* CDMA
is the digital telephone technology most widely deployed in North America.
These phones and our telephone connection cards began selling in Canada
through Bell Mobility during the third quarter of 1999 and were placed in
our U.S. distribution channels in October 1999. Several U.S. phone
carriers have launched or announced intentions to launch nationwide digital
services. We are working with Sprint to place our telephone cards CDMA
telephone connection cards in Sprint's U.S. distribution channels during
the fourth quarter of 1999 and the first quarter of 2000 and expect to do
the same with other U.S. based carriers.* We have also licensed software
from MTDS Oy, a data communications software company based in Finland, 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.*
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
_____________________
*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>
strategic development partners, and with software application developers in
providing technical assistance in the porting of their applications to the
Windows CE operating system.
The Company developed during the years 1994 through 1996 extensive
software programs and tools to send to and receive data on Windows-based
computers utilizing the paging networks. In 1998, we entered into a
development contract 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.
This program is currently on hold. We do not expect one-way paging
receiver products under this contract to be available during 1999 or the
first quarter of 2000. 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.*
We expect to continue to expand our strategic partnering relationships
and develop mobile computing connection products during the first half of
2000 that combine removable memory and input/output functions across all of
our product lines. The Company has in development combination PC and CF+
cards that combine input/output functions with removable memory functions
utilizing MultiMediaCard memory from SanDisk Corporation. Combination
memory/input-output products are expected to be commercially available
beginning in the second half of 2000.*
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 near-term revenue growth, 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 maintain our working capital balances and to obtain
additional capital to fund future 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 maintain and 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.
_____________________
*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>
As of September 30, 1999, we had a net equity balance of $613,160, a
cash balance of $1,278,322 and a working capital balance of $205,158. We
will require additional funding in 2000 to meet our future 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 and other risks that may affect our ability
to attain profitability.
Results of Operations
Revenue
Revenue for the three and nine months ended September 30, 1999 of
$1,504,213 and $4,767,118 increased 10% and 18%, respectively, over the
corresponding periods a year ago. We experienced volume growth across all
of our product families, including our low-power Ethernet card sales,
recurring sales of custom OEM serial cards, and sales of our bar code
scanner connection products. 1998 revenue included a single custom bar
code scanning card sale in the second and third quarters which accounted
for approximately $250,000 of 1998 third quarter revenue and $350,000 of
1998 nine-months revenue.
Gross Profit
Our gross profit for all periods presented are similar, reflecting small
variations in product mix between the periods. Gross profit for the third
quarter of 1999 was 59% of revenue compared to 61% for the same quarter a
year ago. Our gross profit for the nine months ended September 30, 1999 was
59% of revenue compared to 60% for the same period a year ago.
Research and Development
Research and development expenses for the three and nine months ended
September 30, 1999 were $315,352 and $877,740, respectively, a 27% and 16%
increase for the three and nine months, respectively, compared to the
corresponding periods a year ago. The increases primarily reflected
increased personnel costs and other costs associated with increased
research and development activities. We expect to moderately increase our
research and development expenses in the fourth quarter of 1999.*
Sales and Marketing
Sales and marketing expenses for the three and nine months ended
September 30, 1999 were $568,376 and $1,674,825, respectively, a 14% and
15% increase, respectively, over the corresponding periods a year ago. The
increases reflected higher personnel costs from increased staffing
_____________________
*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.
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<PAGE>
beginning in the fourth quarter of 1998, and higher levels of advertising
and product promotion. We expect to moderately increase our sales and
marketing expenses in the fourth quarter of 1999.*
General and Administrative
General and administrative expenses for the three and nine months ended
September 30, 1999 were $286,320 and $957,433, respectively, a 14% increase
for the quarter and nine months over the corresponding periods a year ago.
Increases for the quarter were primarily due to higher personnel costs.
Increases for the nine months were due to higher personnel costs, to
charges in the first quarter of 1999 relating to compensatory stock option
grants and warrants, 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 fourth quarter
of 1999.*
Interest and Other Income / Expense
Interest income primarily reflects interest on cash balances and is
negligible. Interest expense for the three and nine months ended September
30, 1999 was $12,650 and $30,201, respectively, compared to $18,631 and
$95,205 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, partially offset by lower
dividends resulting from the conversion of preferred stock into common
stock by some of the holders. 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.
_____________________
*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.
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<PAGE>
Liquidity and Capital Resources
During the nine months ended September 30, 1999 and 1998, we used
$227,251 and $1,232,742, respectively, in cash for operating activities.
Net cash used for operations in 1999 resulted primarily from the net loss
and increases in inventories, partially offset by a charge for compensatory
stock option grants and warrants and increases in accounts payable and
accrued payroll and related expenses. Net cash used for operations in 1998
resulted primarily from the net loss, increases in inventory and decreases
in accounts payable and accrued payroll and related expenses.
Cash used for investing activities was $206,742 for the nine months
ended September 30, 1999 and $37,622 for the corresponding period in 1998.
1999 amounts reflected tooling costs for new products, costs of purchased
software and new computer equipment.
Cash provided by financing activities during the nine months ended
September 30, 1999 of $741,158 reflected the issuance of $1,010,949 in
common stock from a private placement financing completed in September
1999, less issuance costs of $147,550, less reduced borrowings under our
bank lines of credit, and less payments on capital leases and equipment
financing notes. Cash provided by financing activities during the nine
months ended September 30, 1998 of $1,423,313 reflected the issuance of
$1,500,000 in Series B convertible preferred stock less issuance costs of
$30,646 and less payments on capital leases and equipment financing notes.
We will require additional funding in 2000 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 lines 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
_____________________
*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.
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<PAGE>
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
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 will 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 September 30, 1999, we had cash and cash equivalents of $1,278,322
and a working capital balance of $205,158. We believe our existing capital
resources will be sufficient to satisfy our working capital requirements
through at least the first quarter of 2000.* In this regard, we will need
to raise additional capital to fund our working capital requirements for
the balance of 2000 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 our tangible net
worth and common share price are near the minimum required for continued
listing on 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,
_____________________
*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.
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<PAGE>
- 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 completed a common stock equity financing at the end of September
1999 that brought us into compliance with the minimum listing requirements
of the Pacific Exchange. At September 30, 1999, our stockholders' equity
was $613,160 and our share bid price was $1.22. We will need to maintain a
stockholders' equity balance of at least $500,000 and a share bid price of
at least $1.00 or we will again become subject to delisting by the
Exchange. There are no assurances that we will be able to achieve
profitability or make up through future equity financings any future losses
in order to maintain our minimum stockholders' equity balances. Should we
be delisted from the 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 trade our stock.
Shares eligible for future sale may adversely affect the market price for
our common stock
As of November 10, 1999, we had outstanding securities convertible into or
exercisable for the following amounts of common stock:
- 2,384,251 shares issuable upon the exercise of options under our
1999, 1995 and 1993 Stock Plans;
- 4,450,444 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;
- 1,497,100 shares issuable upon the conversion of Series B
convertible preferred stock;
- 1,144,717 shares issuable upon conversion of Series C convertible
preferred stock, plus additional shares will accrue for dividends
through the date of conversion; and
- 435,730 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.
_____________________
*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 end 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
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
_____________________
*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.
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<PAGE>
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
- maintain superior or competitive performance in our products and bring
products to market quickly.
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<PAGE>
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.
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
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<PAGE>
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 largest distributor, Ingram Micro in
the U.S., accounted for approximately 25% of our revenue in the first nine
months of 1999. Our second largest distributor, Merisel in the U.S.,
accounted for approximately 10% of our revenue in the first nine months of
1999. Our largest OEM customer, Compaq Computer Corporation, accounted for
approximately 8% of our revenue in the first nine 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.
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<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.
_____________________
*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.
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<PAGE>
PART II. OTHER INFORMATION
Item 1. Not applicable.
Item 2. Changes in Securities and Use of Proceeds.
On July 14, 1999, we issued 44,894 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 $44,907 for the quarter ended June
30, 1999. The issuance did not constitute a sale and was not subject to
the registration requirements under the Securities Act of 1933, as amended.
On September 28, 1999, we sold 936,058 common shares at $1.08 per
share (total of $1,010,949) to four outside investors and to a director of
the Company. The issuance was deemed to be exempt from registration under
the Securities Act of 1933, as amended (the "Securities Act"), in reliance
on Section 4(2) of the Securities Act as a transaction by an issuer not
involving any public offering. In addition, the recipients of the
securities represented their intention to acquire the securities for
investment only and not with a view for sale in connection with any
distribution thereof and appropriate legends were affixed to the securities
issued in such transactions.
On various dates during the quarter, we issued a total of 123,097
common shares (proceeds of $59,333) pursuant to the exercise of common
stock warrants issued in connection with our preferred stock financings in
1998, and 1,760 common shares (proceeds of $870) pursuant to the exercise
of an employee stock option in accordance with the terms of our stock
option plans.
Items 3 - 5. Not applicable.
Item 6. Exhibits and Reports on Form 8-K.
Exhibits
10.1 Form of registration rights agreement
10.2 Form of investor warrant
10.3 Placement agent warrant
27.1 Financial Data Schedule (Edgar only)
b. Reports on Form 8-K
No reports on Form 8-K were filed with the Securities and Exchange
Commission during the quarter ended September 30, 1999
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<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: November 12, 1999 /s/ David W. Dunlap
-----------------------------
David W. Dunlap
Vice President of Finance
and Administration and
Chief Financial Officer
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<PAGE>
Exhibit 10.1
REGISTRATION RIGHTS AGREEMENT
THIS REGISTRATION RIGHTS AGREEMENT, dated as of September 28, 1999
(the "Agreement"), is made by and between Socket Communications, Inc., a
Delaware corporation (the "Company"), and the purchasers ( <NAME OF
PLACEMENT AGENT> (the "Placement Agent")) named on the signature pages
hereto (individually, a "Purchaser" and collectively, the "Purchasers").
W I T N E S S E T H :
WHEREAS, in connection with the Subscription Agreement dated
September 28, 1999 between the Purchasers and the Company (the
"Subscription Agreement"), the Company has agreed, upon the terms and
subject to the conditions of the Subscription Agreement to issue and
sell to the Purchasers up to twenty-four (24) Units, each Unit
consisting of 46,296 shares of the Company's Common Stock (the "Common
Shares") and a warrant (each, a "Warrant" and collectively the
"Warrants") to purchase additional shares of the Company's Common Stock
with the closing of such issuance and sale to occur on a date mutually
agreed upon by the Company and the Purchasers (the "Closing Date"). The
shares of Common Stock issuable upon exercise of the Warrants are
collectively referred to as the "Warrant Shares".
WHEREAS, to induce the Purchasers to execute and deliver the
Subscription Agreement, the Company has agreed to provide certain
registration rights with respect to the Common Shares and the Warrant
Shares.
NOW, THEREFORE, in consideration of the promises and the mutual
covenants contained herein and other good and valuable consideration,
the receipt and sufficiency of which are hereby acknowledged, the
Company and the Purchasers hereby agree as follows:
1. Definitions. Capitalized terms used herein and not otherwise
defined herein shall have the respective meanings set forth in the
Subscription Agreement. As used in this Agreement, the following terms
shall have the following meanings:
(a) "SEC" shall mean the Securities and Exchange Commission
or any other Federal agency at the time administering the Securities
Act.
(b) "Common Stock" shall mean all shares of Common Stock of
the Company.
(c) "1933 Act" shall mean the Securities Act of 1933, as
amended, or any similar successor federal statute and the rules and
regulations thereunder, all as the same shall be in effect from time to
time.
(d) "Holders" are stockholders of the Company who, by virtue
of agreements with the Company, are entitled to include their securities
in certain Registration Statements filed by the Company.
(e) "Investors" means the Purchasers and any transferees or
assignees of the Investors who agree to become bound by the provisions
of this Agreement in accordance with Section 8 hereof.
(f) "Registrable Securities" shall mean (i) the Common
Shares, (ii) the Warrant Shares, (iii) the shares of Common Stock
issuable upon exercise of warrants of even date herewith (the "Agent's
Warrants") issued to the Placement Agent and its selected dealers (the
"Agent's Shares") and (iv) any shares of Common Stock issued as a
dividend or other distribution with respect to or in exchange for or in
replacement of the shares referenced in (i), (ii) or (iii) above.
(g) "Registration Period" means the period between the
effective date of a Registration Statement and the earlier of (i) the
date on which all of the Registrable Securities have been sold and no
further Registrable Securities may be issued in the future, or (ii) the
date on which all the Registrable Securities held by an Investor (in the
opinion of Company counsel) may be immediately sold without registration
and without restriction as to the number of Registrable Securities to be
sold pursuant to Rule 144 as promulgated under the 1933 Act ("Rule 144")
or otherwise.
(h) "Registration Statement" means, collectively, each
registration statement filed with the Securities and Exchange Commission
(the "SEC") under the 1933 Act pursuant to the terms hereof.
(i) The terms "register," "registered," and "registration"
refer to a registration effected by preparing and filing a Registration
Statement or Statements in compliance with the 1933 Act and pursuant to
Rule 415 as promulgated under the 1933 Act or any successor rule
providing for offering securities on a continuous basis ("Rule 415") and
applicable rules and regulations thereunder, and the declaration or
ordering of effectiveness of such Registration Statement by the SEC.
2. Registration.
(a) Mandatory Registration. Subject to the limitations of
this Section 2, the Company shall file within ninety (90) days of the
Closing Date a Registration Statement on Form S-3 (or, if such form is
unavailable for such a registration, on such other form as is available
for such a registration) with the SEC registering for resale Registrable
Securities and any other securities of the Company which are held by
Holders who are entitled to include securities in such registration. To
the extent allowable under the 1933 Act and the rules promulgated
thereunder (including Rule 416), the Registration Statement shall
include the Common Shares, the Warrant Shares, the Agent's Shares and
such indeterminate number of additional shares of Common Stock as may
become issuable upon exercise of the Warrants and the Agent's Warrants
to prevent dilution resulting from stock splits, stock dividends or
similar transactions. The number of shares of Registrable Securities
initially included in such Registration Statement shall be no less than
the number of Common Shares plus the number of Warrant Shares issued and
issuable upon exercise of the Warrants plus the number of Agent's Shares
issued and issuable upon exercise of the Agent's Warrants.
The Company shall use its reasonable best efforts to cause such
Registration Statement to be declared effective by the SEC within ninety
(90) days after filing. Once declared effective by the SEC, the Company
shall cause such Registration Statement to remain effective throughout
the Registration Period, except as otherwise permitted pursuant to
Sections 3(a) and 3(e).
(b) Eligibility for Form S-3. The Company represents and
warrants that it meets the requirements for the use of Form S-3 for
registration of the sale by the Investors of the Registrable Securities.
The Company shall use its best efforts to file all reports required to
be filed by the Company with the SEC in a timely manner so as to
preserve its eligibility for the use of Form S-3. In the event that Form
S-3 is not available for sale by the Investors of the Registrable
Securities, then the Company (i) with the consent of the Investors
holding a majority of the Registrable Securities pursuant to Section
2(a), shall register the sale of the Registrable Securities on another
appropriate form and (ii) the Company shall undertake to register the
Registrable Securities on Form S-3 as soon as such form is available,
provided that the Company shall maintain the effectiveness of the
Registration Statement then in effect until such time as a Registration
Statement on Form S-3 covering the Registrable Securities has been
declared effective by the SEC.
3. Additional Obligations of the Company. In connection with the
registration of the Registrable Securities, the Company shall have the
following additional obligations:
(a) The Company shall use its best efforts to keep the
Registration Statement effective pursuant to Rule 415 under the 1933 Act
at all times during the Registration Period until the earlier of (i) the
date as of which the Investors may sell all of the Registrable
Securities without restriction pursuant to Rule 144(k) promulgated under
the 1933 Act (or successor thereto) in the opinion of Company's counsel
or (ii) the date on which the Investors shall have sold all the
Registrable Securities. Notwithstanding the foregoing, the Investors
agree that use of the prospectus under the Registration Statement may be
suspended (i) during any period following a Suspension Event (as defined
in and as provided under the terms of Section 3(f)) (each such period of
suspension is referred to herein as a "Suspension Period" ) and
(ii) during any period following receipt by Investors of any notice from
the Company (a "Deferral Notice") that, in the judgment of the Company's
Board of Directors, it is advisable to suspend use of the prospectus for
a discrete period of time due to pending corporate developments, public
filing with the SEC or similar events (each such period of suspension is
referred to herein as a "Deferral Period"). Upon receipt of a Deferral
Notice, the Investors will forthwith discontinue disposition of such
Registrable Securities covered by such Registration Statement or
prospectus until advised in writing by the Company that use of the
applicable prospectus may be resumed, and until each such Investor has
received notice from the Company of the termination of the need for a
Deferral Period. Following the delivery of any Deferral Notice, Company
shall use all reasonable efforts to ensure that the use of the
prospectus may be resumed as soon as practicable.
(b) The Registration Statement (including any amendments or
supplements thereto and prospectuses contained therein) filed by the
Company shall not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein, or
necessary to make the statements therein, in light of the circumstances
in which they were made, not misleading. Except as otherwise provided
in Sections 3(a) and 3(f) herein, the Company shall prepare and file
with the SEC such amendments (including post-effective amendments) and
supplements to the Registration Statement and the prospectus used in
connection with the Registration Statement as may be necessary to permit
sales pursuant to the Registration Statement at all times during the
Registration Period, and, during such period, shall comply with the
provisions of the 1933 Act with respect to the disposition of all
Registrable Securities of the Company covered by the Registration
Statement until the termination of the Registration Period, or if
earlier, such time as all of such Registrable Securities have been
disposed of in accordance with the intended methods of disposition by
the seller or sellers thereof as set forth in the Registration
Statement.
(c) The Company shall furnish to each Investor whose
Registrable Securities are included in the Registration Statement and
its legal counsel (i) promptly after the same is prepared and publicly
distributed, filed with the SEC or received by the Company, one copy of
the Registration Statement and any amendment thereto; and each
preliminary prospectus and final prospectus and each amendment or
supplement thereto; and (ii) such number of copies of a prospectus,
including a preliminary prospectus, and all amendments and supplements
thereto, and such other documents as such Investor may reasonably
request in order to facilitate the disposition of the Registrable
Securities owned by such Investor.
(d) The Company shall use its reasonable best efforts to
(i) register and qualify the Registrable Securities covered by the
Registration Statement under such other securities or blue sky laws of
such jurisdictions as each Investor who holds (or has the right to hold)
Registrable Securities being offered reasonably request, (ii) prepare
and file in those jurisdictions such amendments (including post-
effective amendments) and supplements to such registrations and
qualifications as may be necessary to maintain the effectiveness thereof
during the Registration Period, (iii) take such other actions as may be
necessary to maintain such registrations and qualifications in effect at
all times during the Registration Period, and (iv) take all other
actions reasonably necessary or advisable to qualify the Registrable
Securities for sale in such jurisdictions. Notwithstanding the
foregoing provision, the Company shall not be required in connection
therewith or as a condition thereto to (i) qualify to do business in any
jurisdiction where it would not otherwise be required to qualify but for
this Section 3(d), (ii) subject itself to general taxation in any such
jurisdiction, (iii) file a general consent to service of process in any
such jurisdiction, (iv) provide any undertakings that cause material
expense or burden to the Company, or (v) make any change in its charter
or bylaws, which in each case the Board of Directors of the Company
determines to be contrary to the best interests of the Company and its
stockholders.
(e) The Company shall provide notices (by telephone and also
by facsimile or overnight courier) (a "Suspension Notice") to each
Investor who holds Registrable Securities being sold pursuant to a
Registration Statement of the happening of any event of which the
Company has knowledge as a result of which the prospectus included in
the Registration Statement as then in effect includes an untrue
statement of a material fact or omits to state a material fact required
to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading (a
"Suspension Event"). Subject to the Company's right to invoke a
Deferral Period pursuant to Section 3(a) and a Grace Period (as defined
herein), the Company shall make such notification as promptly as
practicable after the Company becomes aware of such Suspension Event,
shall promptly use its reasonable best efforts to prepare a supplement
or amendment to the Registration Statement to correct such untrue
statement or omission, and shall deliver a number of copies of such
supplement or amendment to each Investor as such Investor may reasonably
request. Notwithstanding anything to the contrary in this Section 3(e),
at any time after a Registration Statement has been declared effective,
the Company may delay amending or supplementing the Registration
Statement as otherwise required by this Section 3(e) and may otherwise
delay the disclosure of material non-public information concerning the
Company the disclosure of which at the time is not, in the good faith
opinion of the Board of Directors of the Company and its counsel, in the
best interest of the Company and, in the opinion of counsel to the
Company, otherwise required (a "Grace Period"); provided, that the
Company shall promptly (i) notify the Investors in writing of the
existence of material non-public information giving rise to a Grace
Period and the date on which the Grace Period will begin (a "Blackout
Notice"), and (ii) notify the Investors in writing of the date on which
the Grace Period ends (a "Blackout Termination Notice"); and, provided
further, that (A) during any consecutive one hundred twenty (120) day
period, the Grace Period shall not exceed thirty (30) calendar days in
the aggregate, and (B) during any consecutive three hundred sixty five
(365) day period, the Grace Period shall not exceed forty-five (45)
calendar days in the aggregate. For purposes of determining the length
of a Grace Period above, the Grace Period shall begin on and include the
date the holders receive the Blackout Notice and shall end on and
include the date the holders receive the Blackout Termination Notice.
Upon expiration of the Grace Period, the Company shall again be bound by
the first sentence of this Section 3(e) with respect to the information
giving rise thereto. In the event that the use of the Registration
Statement is suspended by the Company, the Company shall promptly notify
all Investors whose securities are covered by the Registration Statement
of such suspension, and shall promptly notify each such Investor as soon
as the use of the Registration Statement may be resumed.
(f) Subject to the Company's rights under Sections 3(a) and
3(e), the Company shall use its reasonable efforts to prevent the
issuance of any stop order or other suspension of effectiveness of a
Registration Statement and, if such an order is issued, shall use its
reasonable efforts to obtain the withdrawal of such order at the
earliest possible time and to notify each Investor who holds Registrable
Securities being sold (or, in the event of an underwritten offering, the
managing underwriters) of the issuance of such order and the resolution
thereof.
(g) The Company shall permit a single firm of counsel
designated by the Investors who hold a majority in interest of the
Registrable Securities being sold pursuant to such registration to
review the Registration Statement and all amendments and supplements
thereto (as well as all requests for acceleration or effectiveness
thereof) a reasonable period of time prior to their filing with the SEC.
The sections of such Registration Statement covering information with
respect to the Investors, the Investors' beneficial ownership of
securities of the Company or the Investors' intended method of
disposition of Registrable Securities shall conform to the information
provided to the Company by each of the Investors.
(h) At the request of the Investors who hold a majority in
interest of the Registrable Securities being sold pursuant to such
registration, the Company shall furnish on the date that Registrable
Securities are delivered to an underwriter for sale in connection with
the Registration Statement (i) a letter, dated such date, from the
Company's independent certified public accountants in form and substance
as is customarily given by independent certified public accountants to
underwriters in an underwritten public offering, addressed to the
underwriters; and (ii) an opinion, dated such date, from counsel
representing the Company for purposes of such Registration Statement, in
form and substance as is customarily given in an underwritten public
offering, addressed to the underwriters and Investors.
(i) The Company shall use reasonable efforts to cause the
listing and the continuation of listing of all the Registrable
Securities covered by the Registration Statement on the Pacific Stock
Exchange or any successor national exchange or market, and use
reasonable efforts to cause the Registrable Securities to be quoted or
listed on each additional national securities exchange or quotation
system upon which the Common Stock is then listed or quoted.
(j) The Company shall provide a transfer agent and registrar,
which may be a single entity, for the Registrable Securities not later
than the effective date of the Registration Statement.
(k) At the request of any Investor, the Company shall
promptly prepare and file with the SEC such amendments (including post-
effective amendments) and supplements to a Registration Statement and
the prospectus used in connection with the Registration Statement as may
be necessary in order to change the plan of distribution set forth in
such Registration Statement.
(l) The Company shall comply with all applicable laws related
to a Registration Statement and offering and sale of securities and all
applicable rules and regulations of governmental authorities in
connection therewith (including, without limitation, the 1933 Act and
the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
and the rules and regulations promulgated by the SEC).
4. Obligations of the Investors. In connection with the
registration of the Registrable Securities, the Investors shall have the
following obligations:
(a) It shall be a condition precedent to the obligations of
the Company to complete the registration pursuant to this Agreement with
respect to the Registrable Securities of each Investor that such
Investor shall furnish to the Company such information regarding itself,
the Registrable Securities held by it and the intended method of
disposition of the Registrable Securities held by it as shall be
reasonably required to effect the registration of the Registrable
Securities. At least ten (10) business days prior to the first
anticipated filing date of the Registration Statement, the Company shall
notify each Investor of the information the Company requires from each
such Investor (the "Requested Information") if such Investor elects to
have any of such Investor's Registrable Securities included in the
Registration Statement. If within five (5) business days prior to the
filing date the Company has not received the Requested Information from
an Investor (a "Non-Responsive Investor"), then the Company may file the
Registration Statement without including Registrable Securities of such
Non-Responsive Investor.
(b) Each Investor, by such Investor's acceptance of the
Registrable Securities, agrees to cooperate with the Company as
reasonably requested by the Company in connection with the preparation
and filing of the Registration Statement hereunder, unless such Investor
has notified the Company in writing of such Investor's election to
exclude all of such Investor's Registrable Securities from the
Registration Statement.
(c) Each Investor agrees that, upon receipt of any notice
from the Company of the happening of any event of the kind described in
Sections 3(a), 3(e) and 3(f), as may applicable, such Investor will
immediately discontinue disposition of Registrable Securities pursuant
to the Registration Statement covering such Registrable Securities until
(i) the Investor has received the notice, if any, from the Company
required under Sections 3(a), 3(e) or 3(f), as may be applicable, and
(ii) such Investor's receipt of the copies of the supplemented or
amended prospectus contemplated by Sections 3(a), 3(e) and 3(f), as may
applicable, and, if so directed by the Company, such Investor shall
deliver to the Company (at the expense of the Company) or destroy (and
deliver to the Company a certificate of destruction) all copies in such
Investor's possession (other than a limited number of file copies), of
the prospectus covering such Registrable Securities current at the time
of receipt of such notice.
(d) Without limiting any Investor's rights under Section 2(a)
hereof, no Investor may participate in any underwritten distribution
hereunder unless such Investor (i) agrees to sell such Investor's
Registrable Securities on the basis provided in any underwriting
arrangements approved by the Investors entitled hereunder to approve
such arrangements, (ii) completes and executes all questionnaires,
powers of attorney, indemnities, underwriting agreements and other
documents reasonably required under the terms of such underwriting
arrangements, and (iii) agrees to pay its pro rata share of all
underwriting discounts and commissions and other fees and expenses of
investment bankers and any manager or managers of such underwriting and
legal expenses of the underwriter applicable with respect to its
Registrable Securities, in each case to the extent not payable by the
Company pursuant to the terms of this Agreement.
5. Expenses of Registration. All reasonable expenses, other than
underwriting discounts and commissions, incurred in connection with
registrations, filings or qualifications pursuant to Sections 2 and 3,
including, without limitation, all registration, listing and
qualifications fees, printers and accounting fees, the fees and
disbursements of counsel for the Company, and the reasonable fees and
disbursements of the counsel designated by the Investors in accordance
with Section 3(g) hereof, shall be borne by the Company.
Notwithstanding the foregoing, the Investors participating in any
registrations, filings or qualifications pursuant to sections 2 and 3
shall be responsible for the fees and expenses of additional counsel
representing such Investors in connection therewith.
6. Indemnification. In the event any Registrable Securities are
included in a Registration Statement under this Agreement:
(a) To the extent permitted by law, the Company will
indemnify and hold harmless each Investor who holds such Registrable
Securities, the directors, if any, of such Investor, the officers, if
any, of such Investor, each person, if any, who controls any Investor
within the meaning of the 1933 Act or the Exchange Act, any underwriter
(as defined in the 1933 Act) for the Investors, the directors, if any,
of such underwriter and the officers, if any, of such underwriter, and
each person, if any, who controls any such underwriter within the
meaning of the 1933 Act or the Exchange Act (each, an "Indemnified
Person"), against any losses, claims, damages, expenses or liabilities
(joint or several) (collectively together with actions, proceedings or
inquiries by any regulatory or self-regulatory organization, whether
commenced or threatened in respect thereof, "Claims") to which any of
them become subject under the 1933 Act, the Exchange Act or otherwise,
insofar as such Claims arise out of or are based upon any of the
following statements, omissions or violations in the Registration
Statement, or any post-effective amendment thereof, or any prospectus
included therein: (i) any untrue statement or alleged untrue statement
of a material fact contained in the Registration Statement or any post-
effective amendment thereof or the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to
make the statements therein not misleading, (ii) any untrue statement or
alleged untrue statement of a material fact contained in the prospectus
(as amended or supplemented, if the Company files any amendment thereof
or supplement thereto with the SEC) or the omission or alleged omission
to state therein any material fact necessary to make the statements made
therein, in light of the circumstances under which the statements
therein were made, not misleading, or (iii) any violation or alleged
violation by the Company of the 1933 Act, the Exchange Act or any other
law, including without limitation any state securities law or any rule
or regulation thereunder (the matters in the foregoing clauses (i)
through (iii) being, collectively, "Violations"). Subject to the
restrictions set forth in Section 6(c) with respect to the number of
legal counsel, the Company shall reimburse the Investors and each such
underwriter or controlling person and each such other Indemnified
Person, promptly as such expenses are incurred and are due and payable,
for any legal fees or other reasonable expenses incurred by them in
connection with investigating or defending any such Claim.
Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6(a): (A) shall not
apply to a Claim arising out of or based upon a Violation which occurs
in reliance upon and in conformity with information furnished in writing
to the Company by any Indemnified Person expressly for use in connection
with the preparation of the Registration Statement or any such amendment
thereof or supplement thereto, if such prospectus was timely made
available by the Company pursuant to Section 3(c) hereof; and (B) shall
not apply to amounts paid in settlement of any Claim if such settlement
is effected without the prior written consent of the Company, which
consent shall not be unreasonably withheld. Such indemnity shall remain
in full force and effect regardless of any investigation made by or on
behalf of the Indemnified Persons and shall survive the transfer of the
Registrable Securities by the Investors pursuant to Section 8.
(b) In connection with any Registration Statement in which an
Investor is participating, each such Investor agrees to indemnify and
hold harmless, to the same extent and in the same manner set forth in
Section 6(a), the Company, each of its directors, each of its officers
who signs the Registration Statement, each person, if any, who controls
the Company within the meaning of the 1933 Act or the Exchange Act, and
any other stockholder selling securities pursuant to the Registration
Statement or any of its directors or officers or any person who controls
such stockholder within the meaning of the 1933 Act or the Exchange Act
(an "Indemnified Party" and, collectively, "Indemnified Parties"),
against any Claim to which any of them may become subject, under the
1933 Act, the Exchange Act or otherwise, insofar as such Claim arises
out of or is based upon any Violation, in each case to the extent (and
only to the extent) that such Violation occurs in reliance upon and in
conformity with written information furnished to the Company by such
Investor expressly for use in connection with such Registration
Statement, and subject to Section 6(c), such Investor will promptly
reimburse any legal or other expenses (promptly as such expenses are
incurred and due and payable) reasonably incurred by all Indemnified
Parties in connection with investigating or defending any such Claim;
provided, however, that the indemnity agreement contained in this
Section 6(b) shall not apply to amounts paid in settlement of any Claim
if such settlement is effected without the prior written consent of such
Investor, which consent shall not be unreasonably withheld; provided
further, however, that the Investor shall be liable under this Agreement
(including this Section 6(b) and Section 7) for only that amount of a
Claim as does not exceed the net proceeds actually received by such
Investor as a result of the sale of Registrable Securities pursuant to
such Registration Statement. Such indemnity shall remain in full force
and effect regardless of any investigation made by or on behalf of such
Indemnified Party and shall survive the transfer of the Registrable
Securities by the Investors pursuant to Section 8.
(c) Promptly after receipt by an Indemnified Person or
Indemnified Party under this Section 6 of notice of the commencement of
any action (including any governmental action), such Indemnified Person
or Indemnified Party shall, if a Claim in respect thereof is to made
against any indemnifying party under this Section 6, deliver to the
indemnifying party a written notice of the commencement thereof and this
indemnifying party shall have the right to participate in, and, to the
extent the indemnifying party so desires, jointly with any other
indemnifying party similarly noticed, to assume control of the defense
thereof with counsel mutually satisfactory to the indemnifying parties
and the Indemnified Person or the Indemnified Party, as the case may be;
provided, however, that such Indemnified Party shall diligently pursue
such defense and that such Indemnified Party shall not be entitled to
assume such defense and an Indemnified Person or Indemnified Party shall
have the right to retain its own counsel, with the fees and expenses to
be paid by the indemnifying party, if, in the reasonable opinion of
counsel retained by the indemnifying party, the representation by such
counsel of the Indemnified Person or Indemnified Party and the
indemnifying party would be inappropriate due to actual or potential
conflicts of interest between such Indemnified Person or Indemnified
Party and any other party represented by such counsel in such proceeding
or the actual or potential defendants in, or targets of, any such action
including both the Indemnified Person or the Indemnified Party and any
such Indemnified Person or Indemnified Party reasonably determines that
there may be legal defenses available to such Indemnified Person or
Indemnified Party which are different from or in addition to those
available to such indemnifying party. The Company shall pay for only one
separate legal counsel for the Investors; such legal counsel shall be
selected by the Investors holding a majority in interest of the
Registrable Securities. The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any
such action shall not relieve such indemnifying party of any liability
to the Indemnified Person or Indemnified Party under this Section 6,
except to the extent that the indemnifying party is prejudiced in its
ability to defend such action. The indemnification required by this
Section 6 shall be made by periodic payments of the amount thereof
during the course of the investigation or defense, as such expense,
loss, damage or liability is incurred and is due and payable.
7. Contribution. To the extent any indemnification provided for
herein is prohibited or limited by law, the indemnifying party agrees to
make the maximum contribution with respect to any amounts for which it
would otherwise be liable under Section 6 to the fullest extent
permitted by law; provided, however, that (i) no contribution shall be
made under circumstances where the maker would not have been liable for
indemnification under the fault standards set forth in Section 6,
(ii) no seller of Registrable Securities guilty of fraudulent
misrepresentation (within the meaning of Section 11(f) of the 1933 Act)
shall be entitled to contribution from any seller of Registrable
Securities who was not guilty of such fraudulent misrepresentation, and
(iii) contribution (together with any indemnification or other
obligations under this Agreement) by any seller of Registrable
Securities shall be limited in amount to the net amount of proceeds
received by such seller from the sale of such Registrable Securities.
8. Assignment of Registration Rights. The rights of the
Investors hereunder, including the right to have the Company register
Registrable Securities pursuant to this Agreement shall be automatically
assigned by the Investors to transferees or assignees of all or any
portion of such securities only if (i) the Investor agrees in writing
with the transferee or assignee to assign such rights, and a copy of
such agreement is furnished to the Company within a reasonable time
after such assignment, (ii) the Company is, within a reasonable time
after such transfer or assignment, furnished with written notice of the
name and address of such transferee or assignee and the securities with
respect to which such registration rights are being transferred or
assigned, (iii) following such transfer or assignment the further
disposition of such securities by the transferee or assignee is
restricted under the 1933 Act and applicable state securities laws,
(iv) at or before the time the Company received the written notice
contemplated by clause (ii) of this sentence, the transferee or assignee
agrees in writing with the Company to be bound by all of the provisions
contained herein, (v) such transfer shall have been made in accordance
with the applicable requirements of the Subscription Agreement
including, but not limited to, the covenant of each Investor that it
will not transfer any of the Securities in violation of satisfaction of
all requirements of Federal and State securities laws, and (vi) such
transferee shall be an "Accredited Investor" as that term is defined in
Rule 501 of Regulation D promulgated under the 1933 Act.
9. Amendment of Registration Rights. Provisions of this
Agreement may be amended and the observance thereof may be waived
(either generally or in a particular instance and either retroactively
or prospectively) only with the written consent of the Company and
Investors who hold a majority interest of the Registrable Securities
(but not an Investor who no longer owns any Registrable Securities and
who is not affected by such amendment or waiver). Any amendment or
waiver effected in accordance with this Section 9 shall be binding upon
each Investor and the Company. Notwithstanding the foregoing, no
amendment or waiver shall retroactively affect any Investor without its
comment or prospectively adversely affect any Investor who no longer
owns any Registrable Securities without its consent.
10. Miscellaneous.
(a) Conflicting Instructions. A person or entity is deemed
to be a holder of Registrable Securities whenever such person or entity
owns of record such Registrable Securities. If the Company receives
conflicting instructions, notices or elections from two or more persons
or entities with respect to the same Registrable Securities, the Company
shall act upon the basis of instructions, notice or election received
from the registered owner of such Registrable Securities.
(b) Notices. Any notices required or permitted to be given
under the terms of this Agreement shall be sent by certified or
registered mail (with return receipt requested) or delivered personally
or by courier (including a nationally recognized overnight delivery
service) or by facsimile transmission. Any notice so given shall be
deemed effective three days after being deposited in the U.S. Mail, or
upon receipt if delivered personally or by courier or facsimile
transmission, in each case addressed to a party at the following address
or such other address as each such party furnishes to the other in
accordance with this Section 10(b):
If to the Company:
Socket Communications, Inc.
37400 Central Court
Newark, California 94560
Attention: Chief Financial Officer
with a copy to:
Wilson Sonsini Goodrich & Rosati, P.C.
1117 California Avenue
Palo Alto, California 94304-1050
Attn: Barry E. Taylor, Esq.
Robert G. O'Connor
Tel: (650) 493-9300
Fax: (650) 845-5000
If to an Investor: To the address set forth immediately below such
Investor's name on the signature pages hereto.
Each party shall provide written notice to the other parties of any
change in address.
(c) Waiver. Failure of any party to exercise any right or
remedy under this Agreement or otherwise, or delay by a party in
exercising such right or remedy, shall not operate as a waiver thereof.
(d) Governing Law. This Agreement shall be enforced,
governed by and construed in accordance with the laws of the State of
Delaware applicable to the agreements made and to be performed entirely
within such state, without giving effect to rules governing the conflict
of laws, and any disputes arising hereunder will be adjudicated in
federal or state court situated in Delaware. Each party hereto consents
to such venue in Delaware and to the personal and subject matter
jurisdiction of said courts and, to the extent permitted by applicable
law, agrees to waive any objection as to such jurisdiction or venue, and
agrees not to assert any defense based on lack of jurisdiction or venue.
(e) Severability. In the event that any provision of this
Agreement is invalid or unenforceable under any applicable statute or
rule of law, then such provision shall be deemed inoperative to the
extent that it may conflict therewith and shall be deemed modified to
conform with such statute or rule of law. Any provision hereof which
may prove invalid or unenforceable under any law shall not affect the
validity or enforceability of any other provision hereof.
(f) Successors and Assigns. Subject to the requirements of
Section 8 hereof, this Agreement shall inure to the benefit of and be
binding upon the successors and assigns of each of the parties hereto.
Notwithstanding anything to the contrary herein, including without
limitation, Section 8, the rights of an Investor hereunder shall be
assignable to and exercisable by a bona fide pledgee of the Registrable
Securities in connection with an Investor's margin or brokerage
accounts.
(g) Use of Pronouns. All pronouns and any variations thereof
refer to the masculine, feminine or neuter, singular or plural, as the
context may require.
(h) Headings. The headings and subheadings in the Agreement
are for convenience of reference only and shall not limit or otherwise
affect the meaning hereof.
(i) Counterparts. This Agreement may be executed in two or
more counterparts, each of which shall be deemed an original but all of
which shall constitute one and the same agreement. This Agreement, once
executed by a party, may be delivered to the other party hereto by
facsimile transmission, and facsimile signatures shall be binding on the
parties hereto.
(j) Further Acts. Each party shall do and perform, or cause
to be done and performed, all such further acts and things, and shall
execute and deliver all such other agreements, certificates, instruments
and documents, as the other party may reasonably request in order to
carry out the intent and accomplish the purposes of this Agreement and
the consummation of the transactions contemplated hereby.
(k) Consents. All consents and other determinations to be
made by the Investors pursuant to this Agreement shall be made by the
Investors holding a majority of the Registrable Securities, determined
as if all Warrants then outstanding had been exercised for Registrable
Securities.
IN WITNESS WHEREOF, the parties have caused this Agreement to be
duly executed as of the date first above written.
COMPANY:
SOCKET COMMUNICATIONS, INC.
By: /s/ David W. Dunlap
-----------------------------------
Name: Dave W. Dunlap
Title: Vice President of Finance and Chief Financial Officer
INVESTORS:
By: -----------------------------------
Name:
Its:
- --------------------------------------------
- --------------------------------------------
Address
Exhibit 10.2
THIS WARRANT AND THE SHARES OF COMMON STOCK WHICH MAY BE PURCHASED UPON THE
EXERCISE OF THIS WARRANT HAVE BEEN ACQUIRED SOLELY FOR INVESTMENT AND HAVE
NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"),
OR ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, OFFERED FOR
SALE, PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH REGISTRATION OR AN
OPINION OF COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH SALE,
OFFER, PLEDGE OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS
DELIVERY REQUIREMENTS OF THE ACT AND OF ANY APPLICABLE STATE SECURITIES LAWS
UNLESS SOLD PURSUANT TO RULE 144 OF THE ACT.
September ___, 1999
SOCKET COMMUNICATIONS, INC.
COMMON STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, <HOLDER>, a Delaware corporation
(together with any registered assignee(s), the "Holder") is entitled, upon the
terms and subject to the conditions hereinafter set forth, at such times after
the date hereof as are set forth below, to acquire from Socket Communications,
Inc., a Delaware corporation (the "Company"), in whole or from time to time in
part, up to [NUMBER] fully paid and nonassessable shares of Common Stock,
$.001 par value, of the Company ("Warrant Shares") at a purchase price per
share (the "Exercise Price") of $1.08. Such number of shares, type of
security and Exercise Price are subject to adjustment as provided herein, and
all references to "Warrant Shares" and "Exercise Price" herein shall be deemed
to include any such adjustment or series of adjustments. This Warrant is
granted by the Company to the Holder pursuant to that certain Subscription
Agreement of even date herewith by and among the Company and the Holder (the
"Subscription Agreement").
1. Term.
(a) Commencement of Exercisability. The Warrant is exercisable,
in whole or in part, at any time and from time to time from the date hereof
through the Expiration Date (as defined in Section 1(b) below), subject to
Section 4 below.
(b) Termination and Expiration. If not earlier exercised, the
Warrant shall expire on the third anniversary of the date hereof (the
"Expiration Date"), subject to Section 4 below.
2. Method of Exercise; Payment; Issuance of New Warrant. Subject to
Section 1 hereof, exercise of this Warrant shall be made, in whole or in part,
by the surrender of this Warrant (with the notice of exercise form attached
hereto as Exhibit A duly executed) at the principal office of the Company and
by the payment to the Company of an amount equal to the Exercise Price
multiplied by the number of Warrant Shares being purchased, which amount may
be paid in cash or by check. In the event of any exercise of the rights
represented by this Warrant, certificates for the Warrant Shares so purchased
shall be delivered to the Holder hereof within a reasonable time and, unless
this Warrant has been fully exercised or expired, a new Warrant representing
that portion of the Warrant Shares, if any, with respect to which this Warrant
shall not then have been exercised, shall also be issued to the Holder within
such reasonable time.
3. Stock Fully Paid; Reservation of Warrant Shares. All of the Warrant
Shares issuable upon the exercise of the rights represented by this Warrant
will, upon issuance and receipt of the Exercise Price therefor, be fully paid
and nonassessable, and free from all taxes, liens and charges with respect to
the issue thereof. During the period within which the rights represented by
this Warrant may be exercised, the Company shall at all times have authorized
and reserved for issuance a sufficient number of shares of Common Stock to
provide for the exercise of the rights represented by this Warrant.
4. Adjustment of Exercise Price and Number of Shares of Warrant Shares.
Subject to the provisions of Section 2 hereof, the number and kind of
securities purchasable upon the exercise of this Warrant and the Exercise
Price therefor shall be subject to adjustment from time to time upon the
occurrence of certain events, as follows:
(a) In the event the Company shall at any time following the date
hereof subdivide the outstanding shares of Common Stock, or shall issue a
stock dividend on its outstanding Common Stock, the number of shares of Common
Stock issuable upon exercise of this Warrant immediately prior to such
subdivision or to the issuance of such stock dividend shall be proportionately
increased, and the Exercise Price shall be proportionately decreased; and in
the event the Company shall at any time following the date hereof combine the
outstanding shares of Common Stock, the number of shares of Common Stock
issuable upon exercise of this Warrant immediately prior to such combination
shall be proportionately decreased, and the Exercise Price shall be
proportionately increased, effective at the close of business on the date
of such subdivision, stock dividend or combination, as the case may be.
(b) If the Company is, following the date hereof, recapitalized
through the subdivision or combination of its outstanding shares of Common
Stock into a larger or smaller number of shares, the number of shares of
Common Stock for which this Warrant may be exercised shall be increased or
reduced in the same proportion as the increase or decrease in the outstanding
shares of Common Stock and the then applicable Exercise Price shall be
adjusted by multiplying by a fraction with a numerator equal to the number of
shares of Common Stock purchasable upon exercise hereof immediately prior to
such subdivision or combination and the denominator of which shall be the
number of shares of Common Stock purchasable immediately following such
subdivision or combination.
(c) Subject to Section 1 hereof, in the event of any consolidation
or merger of the Company with another entity in a bona fide transaction (i.e.,
not a mere recapitalization, reincorporation for the purpose of changing
corporate domicile, or similar transaction), at any time prior to the
Expiration Date, the Holder shall have the right upon exercise of this
Warrant, to receive the same kind and number of Warrant Shares and other
securities, cash or other property as would have been distributed to the
Holder had the Holder exercised this Warrant immediately prior to such
consolidation or merger.
5. Fractional Shares. No fractional shares of Common Stock will be
issued in connection with any exercise hereunder, but in lieu thereof the
Company shall make a cash payment therefor upon the basis of the Exercise
Price then in effect.
6. Transfer, Exchange, Assignment or Loss of Warrant and Warrant Shares.
(a) This Warrant and the Warrant Shares to be issued or issuable
upon exercise of this Warrant, may not be assigned or transferred except as
provided in this Section 7 and in accordance with and subject to the
provisions of the Securities Act of 1933, as amended, and the Rules and
Regulations promulgated thereunder (said Act and such Rules and Regulations
being hereinafter collectively referred to as the "Act"). Upon exercise of
this Warrant, the holder hereof shall confirm in writing, in the form of
Exhibit B, that the shares of Series D Preferred so purchased are being
acquired for investment and not with a view toward distribution or resale.
Any purported transfer or assignment made other than in accordance with this
Section 7 shall be null and void and of no force and effect.
(b) The holder of this Warrant by acceptance hereof agrees to
comply in all respects with the provisions of Section 6.4 of that Stock
Purchase Agreement with respect to any proposed transfer of this Warrant
or any part hereof.
(c) Each certificate for Warrant Shares or for any Warrant Shares
issued or issuable upon exercise of this Warrant shall contain a legend
substantially to the effect as set forth in Section 6.3 of the Stock Purchase
Agreement.
(d) Any assignment permitted hereunder shall be made by surrender
of this Warrant to the Company at its principal office with the Assignment
Form attached hereto as Exhibit C duly executed. In such event the Company
shall, upon payment by the Holder of any issuance or transfer tax incurred or
to be incurred by the Company with respect to such transfer, execute and
deliver a new Warrant in the name of the assignee named in such instrument
of assignment and this Warrant shall promptly be canceled. This Warrant may
be divided or combined with other warrants which carry the same rights upon
presentation thereof at the principal office of the Company together with a
written notice signed by the Holder thereof, specifying the names and
denominations in which new warrants are to be issued. Upon any partial
transfer, the Company will sign, issue and deliver to the Holder a new
Warrant with respect to any portion not so transferred.
(e) Upon receipt by the Company of evidence satisfactory to it of
the loss, theft, destruction or mutilation of this Warrant (provided that an
affidavit of the Holder shall be satisfactory for such purpose), and of
indemnity satisfactory to it (provided that if the Holder is the original
Holder of this Warrant, its own indemnification agreement shall under all
circumstances be satisfactory, and no bond shall be required), and upon
surrender and cancellation of this Warrant, if mutilated, the Company will
execute and deliver a new Warrant of like tenor and date and any such lost,
stolen, or destroyed Warrant shall thereupon become void.
(f) In order to ensure compliance with the restrictions referred
to herein, the Company may issue appropriate "stop transfer" instructions to
its transfer agent.
(g) The Company shall not be required (i) to transfer on its books
the Warrant or any Warrant Shares that have been sold or otherwise transferred
in violation of any of the provisions of this Warrant or the Investor Rights
Agreement or (ii) to treat as owner of such Warrant Shares or to accord the
right to vote or pay dividends to a purchaser or other transferee to whom
such Warrant Shares shall have been so transferred.
7. Representations and Covenants of the Holder. The Holder represents
that this Warrant and any Warrant Shares issued or issuable upon exercise of
this Warrant, to be received will be acquired for investment for its own
account, not as a nominee or agent, and not with a view to the sale or
distribution of any part thereof, and that it has no present intention of
selling, granting any participation in or otherwise distributing the same.
Such Holder understands and acknowledges that the offering of this Warrant,
and any issuance of Common Stock on conversion thereof , will not be
registered under the Securities Act on the ground that the sale provided for
in this Agreement and the issuance of securities hereunder is exempt from
registration pursuant to Section 4(2) of the Act, and that the Company's
reliance on such exemption is predicated on the Holder's representations set
forth herein. Such Holder represents that it is experienced in evaluating
companies such as the Company, is able to fend for itself in investments such
as this one, and has such knowledge and experience in financial and business
matters that it is capable of evaluating the merits and risks of its
prospective investment in the Company.
8. Rights of Stockholders. No holder of this Warrant shall be entitled,
as a Warrant holder, to vote or receive dividends or be deemed the holder of
Common Stock or any other securities of the Company which may at any time be
issuable on the exercise hereof for any purpose, nor shall anything contained
herein be construed to confer upon the holder of this Warrant, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action
(whether upon any recapitalization, issuance of stock, reclassification of
stock, change of par value or change of stock to no par value, consolidation,
merger, conveyance, or otherwise) or to receive notice of meetings, or to
receive dividends or subscription rights or otherwise until the Warrant shall
have been exercised and the Warrant Shares purchasable upon the exercise
hereof shall have become deliverable, as provided herein.
9. Registration and Other Rights. The shares of Common Stock obtained
upon exercise of this Warrant shall have the registration and other rights
set forth in the Subscription Agreement and the Registration Rights Agreement
of even date herewith and the term "Registrable Securities" as defined in
such Registration Rights Agreement shall include the Common Stock obtained
upon exercise of this Warrant.
10. Notices, Etc. All notices and other communications from the Company
to the Holder shall be mailed by first class registered or certified mail,
postage prepaid, at such address as may have been furnished to the Company in
writing by the Holder.
11. Governing Law, Headings. This Warrant is being delivered in the
State of Delaware and shall be construed and enforced in accordance with and
governed by the laws of such State. The headings in this Warrant are for
purposes of reference only, and shall not limit or otherwise affect any of the
terms hereof.
"COMPANY" "HOLDER"
SOCKET COMMUNICATIONS, INC.
By: _/s/__David_W._Dunlap______ By: ___________________________
Name: David W. Dunlap Name: ___________________________
Title: Vice President, Finance and Title: ___________________________
Administration, and
Chief Financial Officer
[Signature Page to Investor Warrant]
EXHIBIT A
NOTICE OF EXERCISE
TO: Socket Communications, Inc.
(i) The undersigned hereby elects to purchase ___________
shares of Common Stock pursuant to the terms of the attached Warrant, and
tenders herewith payment of the purchase price of such Common Stock in full.
(ii) Please issue a certificate or certificates representing
said Common Stock in the name of the undersigned or in such other name as is
specified
below:
Name:
Address:
(iii) The undersigned hereby represents and warrants that the
aforesaid shares of Common Stock are being acquired for the account of the
undersigned for investment and not with a view to, or, for resale in
connection with the distribution thereof, and that the undersigned has no
present intention of distributing or reselling such shares.
By: ________________________________________
Name: ________________________________________
Title: ________________________________________
Date: ________________________________________
EXHIBIT B
INVESTMENT REPRESENTATION STATEMENT
PURCHASER:
COMPANY: SOCKET COMMUNICATIONS, INC.
SECURITY: COMMON STOCK
AMOUNT:
DATE:
In connection with the purchase of the above-listed securities (the
"Securities"), I, the Purchaser, represent to the Company the following:
(a) I am aware of the Company's business affairs and financial condition,
and have acquired sufficient information about the Company to reach an informed
and knowledgeable decision to acquire the Securities. I am purchasing these
Securities for my own account for investment purposes only and not with a view
to, or for the resale in connection with, any "distribution" thereof for
purposes of the Securities Act of 1933 ("Securities Act").
(b) I understand that the Securities have not been registered under the
Securities Act in reliance upon a specific exemption therefrom, which
exemption depends upon, among other things, the bona fide nature of my
investment intent as expressed herein. In this connection, I understand that,
in the view of the Securities and Exchange Commission ("SEC"), the statutory
basis for such exemption may be unavailable if my representation was
predicated solely upon a present intention to hold these Securities for the
minimum capital gains period specified under tax statutes, for a deferred sale,
for or until an increase or decrease in the market price of the Securities, or
for a period of one year or any other fixed period in the future.
(c) I further understand that the Securities must be held for at least
one (1) year under Rule 144 promulgated under the Securities Act, unless
subsequently registered under the Securities Act or unless an exemption from
registration is otherwise available. Moreover, I understand that the Company
is under no obligation to register the Securities except as set forth in the
Investor Rights Agreement. In addition, I understand that the certificate
evidencing the Securities will be imprinted with a legend which prohibits the
transfer of the Securities unless they are registered or such registration is
not required in the opinion of counsel for the Company.
(d) I am aware of the provisions of Rule 144, promulgated under the
Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering
subject to the satisfaction of certain conditions.
(e) I am aware that the Securities involve a high degree of risk and
that I may suffer a total loss of my investment. I have been provided with
the Company's periodic reports filed with the Securities and Exchange
Commission under the Securities Exchange Act of 1934, as amended, including
the Company's most recently filed Annual Report on Form 10-K and Quarterly
Report on Form 10-Q. I have read the information in such reports, including
the information under the caption "Risk Factors" included in the "Management's
Discussion and Analysis of Financial Condition and Results of Operations"
section. I am further aware that the Company may need to raise additional
capital to maintain continued listing of its Common Stock on the Pacific
Exchange. Should the Company's Common Stock be delisted from the Pacific
Exchange, I understand that I would find it more difficult to dispose of,
or obtain accurate quotations as to the price of, the Company's securities,
and that the ability or willingness of broker-dealers to sell or make a market
in the Company's Common Stock, and therefore my ability to sell the Securities
in the secondary market would be materially and adversely affected.
(f) I further understand that in the event all of the requirements of
Rule 144 are not satisfied, registration under the Securities Act, compliance
with Regulation A, or some other registration exemption will be required; and
that, notwithstanding the fact that Rule 144 is not exclusive, the Staff of
the SEC has expressed its opinion that persons proposing to sell private
placement securities other than in a registered offering and otherwise than
pursuant to Rule 144 will have a substantial burden of proof in establishing
that an exemption from registration is available for such offers or sales,
and that such persons and their respective brokers who participate in such
transactions do so at their own risk.
___________________________________
Name of Purchaser
___________________________________
Signature of Authorized Signatory
___________________________________
Print Name and Title
___________________________________
Date
EXHIBIT C
ASSIGNMENT FORM
FOR VALUE RECEIVED, _______________________________ hereby sells,
assigns and transfers unto ______________________________________ (Name and
Address) the right to purchase Warrant Shares represented by this Warrant to
the extent of ___________ shares and does hereby irrevocably constitute and
appoint ____________________________ __________________, attorney, to transfer
the same on the books of the Company with full power of substitution in the
premises.
Dated: _______________ , ____
By: ________________________
Name: ________________________
Title: ________________________
Exhibit 10.3
THIS WARRANT AND THE SHARES OF COMMON STOCK WHICH MAY BE PURCHASED UPON THE
EXERCISE OF THIS WARRANT HAVE BEEN ACQUIRED SOLELY FOR INVESTMENT AND HAVE NOT
BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "ACT"), OR
ANY STATE SECURITIES LAWS. SUCH SECURITIES MAY NOT BE SOLD, OFFERED FOR SALE,
PLEDGED OR HYPOTHECATED IN THE ABSENCE OF SUCH REGISTRATION OR AN OPINION OF
COUNSEL SATISFACTORY TO THE COMPANY AND ITS COUNSEL THAT SUCH SALE, OFFER,
PLEDGE OR HYPOTHECATION IS EXEMPT FROM THE REGISTRATION AND PROSPECTUS
DELIVERY REQUIREMENTS OF THE ACT AND OF ANY APPLICABLE STATE SECURITIES LAWS
UNLESS SOLD PURSUANT TO RULE 144 OF THE ACT.
September ___, 1999
SOCKET COMMUNICATIONS, INC.
COMMON STOCK PURCHASE WARRANT
THIS CERTIFIES THAT, for value received, <PLACEMENT AGENT> (together with
any registered assignee(s), the "Holder") is entitled, upon the terms and
subject to the conditions hereinafter set forth, at such times after the date
hereof as are set forth below, to acquire from Socket Communications, Inc., a
Delaware corporation (the "Company"), in whole or from time to time in part,
up to 159,720 fully paid and nonassessable shares of Common Stock, $.001 par
value, of the Company ("Warrant Shares") at a purchase price per share (the
"Exercise Price") of $1.08. Such number of shares, type of security and
Exercise Price are subject to adjustment as provided herein, and all references
to "Warrant Shares" and "Exercise Price" herein shall be deemed to include any
such adjustment or series of adjustments. This Warrant is granted by the
Company to the Holder pursuant to that certain Placement Agency Agreement of
even date herewith by and among the Company and the Holder (the "Placement
Agreement").
1. Term.
(a) Commencement of Exercisability. The Warrant is exercisable, in
whole or in part, at any time and from time to time from the date hereof
through the Expiration Date (as defined in Section 1(b) below), subject to
Section 4 below.
(b) Termination and Expiration. If not earlier exercised, the
Warrant shall expire on the third anniversary of the date hereof (the
"Expiration Date"), subject to Section 4 below.
2. Method of Exercise; Payment; Issuance of New Warrant. Subject to
Section 1 hereof, exercise of this Warrant shall be made, in whole or in part,
by the surrender of this Warrant (with the notice of exercise form attached
hereto as Exhibit A duly executed) at the principal office of the Company and
by the payment to the Company of an amount equal to the Exercise Price
multiplied by the number of Warrant Shares being purchased, which amount may be
paid in cash or by check. In the event of any exercise of the rights
represented by this Warrant, certificates for the Warrant Shares so purchased
shall be delivered to the Holder hereof within a reasonable time and, unless
this Warrant has been fully exercised or expired, a new Warrant representing
that portion of the Warrant Shares, if any, with respect to which this Warrant
shall not then have been exercised, shall also be issued to the Holder within
such reasonable time.
3. Stock Fully Paid; Reservation of Warrant Shares. All of the Warrant
Shares issuable upon the exercise of the rights represented by this Warrant
will, upon issuance and receipt of the Exercise Price therefor, be fully paid
and nonassessable, and free from all taxes, liens and charges with respect to
the issue thereof. During the period within which the rights represented by
this Warrant may be exercised, the Company shall at all times have authorized
and reserved for issuance a sufficient number of shares of Common Stock to
provide for the exercise of the rights represented by this Warrant.
4. Adjustment of Exercise Price and Number of Shares of Warrant Shares.
Subject to the provisions of Section 2 hereof, the number and kind of
securities purchasable upon the exercise of this Warrant and the Exercise
Price therefor shall be subject to adjustment from time to time upon the
occurrence of certain events, as follows:
(a) In the event the Company shall at any time following the date
hereof subdivide the outstanding shares of Common Stock, or shall issue a
stock dividend on its outstanding Common Stock, the number of shares of
Common Stock issuable upon exercise of this Warrant immediately prior to such
subdivision or to the issuance of such stock dividend shall be proportionately
increased, and the Exercise Price shall be proportionately decreased; and in
the event the Company shall at any time following the date hereof combine the
outstanding shares of Common Stock, the number of shares of Common Stock
issuable upon exercise of this Warrant immediately prior to such combination
shall be proportionately decreased, and the Exercise Price shall be
proportionately increased, effective at the close of business on the date of
such subdivision, stock dividend or combination, as the case may be.
(b) If the Company is, following the date hereof, recapitalized
through the subdivision or combination of its outstanding shares of Common
Stock into a larger or smaller number of shares, the number of shares of
Common Stock for which this Warrant may be exercised shall be increased or
reduced in the same proportion as the increase or decrease in the outstanding
shares of Common Stock and the then applicable Exercise Price shall be adjusted
by multiplying by a fraction with a numerator equal to the number of shares of
Common Stock purchasable upon exercise hereof immediately prior to such
subdivision or combination and the denominator of which shall be the number of
shares of Common Stock purchasable immediately following such subdivision or
combination.
(c) Subject to Section 1 hereof, in the event of any consolidation
or merger of the Company with another entity in a bona fide transaction (i.e.,
not a mere recapitalization, reincorporation for the purpose of changing
corporate domicile, or similar transaction), at any time prior to the
Expiration Date, the Holder shall have the right upon exercise of this Warrant,
to receive the same kind and number of Warrant Shares and other securities,
cash or other property as would have been distributed to the Holder had the
Holder exercised this Warrant immediately prior to such consolidation or
merger.
5. Fractional Shares. No fractional shares of Common Stock will be issued
in connection with any exercise hereunder, but in lieu thereof the Company
shall make a cash payment therefor upon the basis of the Exercise Price then
in effect.
6. Transfer, Exchange, Assignment or Loss of Warrant and Warrant Shares.
(a) This Warrant and the Warrant Shares to be issued or issuable upon
exercise of this Warrant, may not be assigned or transferred except as provided
in this Section 7 and in accordance with and subject to the provisions of the
Securities Act of 1933, as amended, and the Rules and Regulations promulgated
thereunder (said Act and such Rules and Regulations being hereinafter
collectively referred to as the "Act"). Upon exercise of this Warrant, the
holder hereof shall confirm in writing, in the form of Exhibit B, that the
shares of Series D Preferred so purchased are being acquired for investment and
not with a view toward distribution or resale. Any purported transfer or
assignment made other than in accordance with this Section 7 shall be null and
void and of no force and effect.
(b) The holder of this Warrant by acceptance hereof agrees to comply
in all respects with the provisions of Section 6.4 of that Stock Purchase
Agreement with respect to any proposed transfer of this Warrant or any part
hereof.
(c) Each certificate for Warrant Shares or for any Warrant Shares
issued or issuable upon exercise of this Warrant shall contain a legend
substantially to the effect as set forth in Section 6.3 of the Stock Purchase
Agreement.
(d) Any assignment permitted hereunder shall be made by surrender of
this Warrant to the Company at its principal office with the Assignment Form
attached hereto as Exhibit C duly executed. In such event the Company shall,
upon payment by the Holder of any issuance or transfer tax incurred or to be
incurred by the Company with respect to such transfer, execute and deliver a
new Warrant in the name of the assignee named in such instrument of assignment
and this Warrant shall promptly be canceled. This Warrant may be divided or
combined with other warrants which carry the same rights upon presentation
thereof at the principal office of the Company together with a written notice
signed by the Holder thereof, specifying the names and denominations in which
new warrants are to be issued. Upon any partial transfer, the Company will
sign, issue and deliver to the Holder a new Warrant with respect to any
portion not so transferred.
(e) Upon receipt by the Company of evidence satisfactory to it of the
loss, theft, destruction or mutilation of this Warrant (provided that an
affidavit of the Holder shall be satisfactory for such purpose), and of
indemnity satisfactory to it (provided that if the Holder is the original
Holder of this Warrant, its own indemnification agreement shall under all
circumstances be satisfactory, and no bond shall be required), and upon
surrender and cancellation of this Warrant, if mutilated, the Company will
execute and deliver a new Warrant of like tenor and date and any such lost,
stolen, or destroyed Warrant shall thereupon become void.
(f) In order to ensure compliance with the restrictions referred to
herein, the Company may issue appropriate "stop transfer" instructions to its
transfer agent.
(g) The Company shall not be required (i) to transfer on its books
the Warrant or any Warrant Shares that have been sold or otherwise transferred
in violation of any of the provisions of this Warrant or the Investor Rights
Agreement or (ii) to treat as owner of such Warrant Shares or to accord the
right to vote or pay dividends to a purchaser or other transferee to whom such
Warrant Shares shall have been so transferred.
7. Representations and Covenants of the Holder. The Holder represents
that this Warrant and any Warrant Shares issued or issuable upon exercise of
this Warrant, to be received will be acquired for investment for its own
account, not as a nominee or agent, and not with a view to the sale or
distribution of any part thereof, and that it has no present intention of
selling, granting any participation in or otherwise distributing the same.
Such Holder understands and acknowledges that the offering of this Warrant,
and any issuance of Common Stock on conversion thereof , will not be registered
under the Securities Act on the ground that the sale provided for in this
Agreement and the issuance of securities hereunder is exempt from
registration pursuant to Section 4(2) of the Act, and that the Company's
reliance on such exemption is predicated on the Holder's representations
set forth herein. Such Holder represents that it is experienced in
evaluating companies such as the Company, is able to fend for itself
in investments such as this one, and has such knowledge and experience
in financial and business matters that it is capable of evaluating the
merits and risks of its prospective investment in the Company.
8. Rights of Stockholders. No holder of this Warrant shall be entitled,
as a Warrant holder, to vote or receive dividends or be deemed the holder of
Common Stock or any other securities of the Company which may at any time be
issuable on the exercise hereof for any purpose, nor shall anything contained
herein be construed to confer upon the holder of this Warrant, as such, any
of the rights of a stockholder of the Company or any right to vote for the
election of directors or upon any matter submitted to stockholders at any
meeting thereof, or to give or withhold consent to any corporate action
(whether upon any recapitalization, issuance of stock, reclassification of
stock, change of par value or change of stock to no par value, consolidation,
merger, conveyance, or otherwise) or to receive notice of meetings, or to
receive dividends or subscription rights or otherwise until the Warrant shall
have been exercised and the Warrant Shares purchasable upon the exercise hereof
shall have become deliverable, as provided herein.
9. Registration and Other Rights. The shares of Common Stock obtained
upon exercise of this Warrant shall have the registration and other rights set
forth in the Subscription Agreement entered into by the Company in connection
with the sale of securities placed by the Holder and the Registration Rights
Agreement of even date herewith and the term "Registrable Securities" as
defined in such Registration Rights Agreement shall include the Common Stock
obtained upon exercise of this Warrant.
10. Notices, Etc. All notices and other communications from the Company to
the Holder shall be mailed by first class registered or certified mail, postage
prepaid, at such address as may have been furnished to the Company in writing
by the Holder.
11. Governing Law, Headings. This Warrant is being delivered in the
State of Delaware and shall be construed and enforced in accordance with and
governed by the laws of such State. The headings in this Warrant are for
purposes of reference only, and shall not limit or otherwise affect any of
the terms hereof.
"COMPANY"
SOCKET COMMUNICATIONS, INC.
By: /s/ David W. Dunlap
------------------------------
Name: David W. Dunlap
Title: Vice President, Finance and Administration,
and Chief Financial Officer
[Signature Page to Investor Warrant]
EXHIBIT A
NOTICE OF EXERCISE
TO: Socket Communications, Inc.
(i) The undersigned hereby elects to purchase ___________
shares of Common Stock pursuant to the terms of the attached Warrant, and
tenders herewith payment of the purchase price of such Common Stock in full.
(ii) Please issue a certificate or certificates representing
said Common Stock in the name of the undersigned or in such other name as is
specified below:
Name:
Address:
(iii) The undersigned hereby represents and warrants that the
aforesaid shares of Common Stock are being acquired for the account of the
undersigned for investment and not with a view to, or, for resale in connection
with the distribution thereof, and that the undersigned has no present
intention of distributing or reselling such shares.
By: __________________________________
Name: __________________________________
Title: __________________________________
Date: __________________________________
EXHIBIT B
INVESTMENT REPRESENTATION STATEMENT
PURCHASER:
COMPANY: SOCKET COMMUNICATIONS, INC.
SECURITY: COMMON STOCK
AMOUNT:
DATE:
In connection with the purchase of the above-listed securities (the
"Securities"), I, the Purchaser, represent to the Company the following:
(a) I am aware of the Company's business affairs and financial condition,
and have acquired sufficient information about the Company to reach an informed
and knowledgeable decision to acquire the Securities. I am purchasing these
Securities for my own account for investment purposes only and not with a view
to, or for the resale in connection with, any "distribution" thereof for
purposes of the Securities Act of 1933 ("Securities Act").
(b) I understand that the Securities have not been registered under the
Securities Act in reliance upon a specific exemption therefrom, which exemption
depends upon, among other things, the bona fide nature of my investment intent
as expressed herein. In this connection, I understand that, in the view of the
Securities and Exchange Commission ("SEC"), the statutory basis for such
exemption may be unavailable if my representation was predicated solely upon a
present intention to hold these Securities for the minimum capital gains period
specified under tax statutes, for a deferred sale, for or until an increase or
decrease in the market price of the Securities, or for a period of one year or
any other fixed period in the future.
(c) I further understand that the Securities must be held for at least
one (1) year under Rule 144 promulgated under the Securities Act, unless
subsequently registered under the Securities Act or unless an exemption from
registration is otherwise available. Moreover, I understand that the Company
is under no obligation to register the Securities except as set forth in the
Investor Rights Agreement. In addition, I understand that the certificate
evidencing the Securities will be imprinted with a legend which prohibits the
transfer of the Securities unless they are registered or such registration is
not required in the opinion of counsel for the Company.
(d) I am aware of the provisions of Rule 144, promulgated under the
Securities Act, which, in substance, permits limited public resale of
"restricted securities" acquired, directly or indirectly, from the issuer
thereof (or from an affiliate of such issuer), in a non-public offering subject
to the satisfaction of certain conditions.
(e) I am aware that the Securities involve a high degree of risk and that
I may suffer a total loss of my investment. I have been provided with the
Company's periodic reports filed with the Securities and Exchange Commission
under the Securities Exchange Act of 1934, as amended, including the Company's
most recently filed Annual Report on Form 10-K and Quarterly Report on Form
10-Q. I have read the information in such reports, including the information
under the caption "Risk Factors" included in the "Management's Discussion and
Analysis of Financial Condition and Results of Operations" section. I am
further aware that the Company may need to raise additional capital to
maintain continued listing of its Common Stock on the Pacific Exchange. Should
the Company's Common Stock be delisted from the Pacific Exchange, I understand
that I would find it more difficult to dispose of, or obtain accurate
quotations as to the price of, the Company's securities, and that the ability
or willingness of broker-dealers to sell or make a market in the Company's
Common Stock, and therefore my ability to sell the Securities in the secondary
market would be materially and adversely affected.
(f) I further understand that in the event all of the requirements of
Rule 144 are not satisfied, registration under the Securities Act, compliance
with Regulation A, or some other registration exemption will be required; and
that, notwithstanding the fact that Rule 144 is not exclusive, the Staff of
the SEC has expressed its opinion that persons proposing to sell private
placement securities other than in a registered offering and otherwise than
pursuant to Rule 144 will have a substantial burden of proof in establishing
that an exemption from registration is available for such offers or sales,
and that such persons and their respective brokers who participate in such
transactions do so at their own risk.
__________________________________
Name of Purchaser
__________________________________
Signature of Authorized Signatory
__________________________________
Print Name and Title
__________________________________
Date
EXHIBIT C
ASSIGNMENT FORM
FOR VALUE RECEIVED, _______________________________ hereby sells, assigns
and transfers unto ______________________________________________________ (Name
and Address) the right to purchase Warrant Shares represented by this Warrant
to the extent of ___________ shares and does hereby irrevocably constitute and
appoint ____________________________ __________________, attorney, to transfer
the same on the books of the Company with full power of substitution in the
premises.
Dated: _______________ , ____
By: ______________________________
Name: ______________________________
Title: ______________________________
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE SOCKET
COMMUNICATIONS, INC. CONDENSED FINANCIAL STATEMENTS FOR THE INTERIM PERIOD ENDED
SEPTEMBER 30, 1999 INCLUDED IN FORM 10-QSB AND IS QUALIFIED IN ITS ENTIRETY
BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-START> JAN-01-1999
<PERIOD-END> SEP-30-1999
<CASH> 1,278,322
<SECURITIES> 0
<RECEIVABLES> 848,842
<ALLOWANCES> 0
<INVENTORY> 718,287
<CURRENT-ASSETS> 2,912,859
<PP&E> 1,282,886
<DEPRECIATION> 946,804
<TOTAL-ASSETS> 3,320,861
<CURRENT-LIABILITIES> 2,707,701
<BONDS> 0
0
2,134,010
<COMMON> 12,121
<OTHER-SE> (1,532,971)
<TOTAL-LIABILITY-AND-EQUITY> 3,320,861
<SALES> 4,767,118
<TOTAL-REVENUES> 4,767,118
<CGS> 1,935,422
<TOTAL-COSTS> 1,935,422
<OTHER-EXPENSES> 3,509,998
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 30,201
<INCOME-PRETAX> (708,503)
<INCOME-TAX> 0
<INCOME-CONTINUING> (708,503)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (918,254)
<EPS-BASIC> (0.10)
<EPS-DILUTED> (0.10)
</TABLE>
