FILED PURSUANT TO RULE 424(b)(3)
FILE NUMBER 033-91210-LA
Socket Communications, Inc.
50,000 redeemable warrants and
2,651,168 shares of common stock
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This is a public offering, which is not being underwritten, of
- up to 50,000 redeemable warrants issuable upon exercise of
outstanding underwriters' warrants, and
- up to 2,651,168 shares of common stock issuable upon
exercise of redeemable warrants and underwriters' warrants.
Each redeemable warrant converts into 4.25 common shares at
an exercise price of $8.40 per warrant.
An indeterminate number of additional shares of our common stock
may become issuable pursuant to the exercise of the redeemable warrants
as a result of the operation of antidilution provisions.
Our common stock is quoted on the OTC Bulletin Board under the
symbol "SCKT" and is listed on the Pacific Exchange under the symbol
"SOK". On January 12, 2000, the last sale price for our common stock as
reported on the OTC Bulletin Board was $12.00 per share.
Our redeemable warrants are quoted on the OTC Bulletin Board under
the symbol "SCKTW" and are listed on the Pacific Exchange under the
symbol "SOKWS". On January 12, 2000, the last sale price for our
redeemable warrants as reported on the OTC Bulletin Board was $40.00 per
warrant.
Investing in our common stock and redeemable warrants involves
risks. See "Risk Factors" beginning on page 1.
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Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or determined
if this prospectus is truthful or complete. Any representation to the
contrary is a criminal offense.
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The date of this prospectus is January 14, 2000.
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TABLE OF CONTENTS
Page
RISK FACTORS..............................................................1
USE OF PROCEEDS...........................................................7
DESCRIPTION OF OUR COMMON STOCK...........................................7
DESCRIPTION OF OUR WARRANTS COVERED BY THIS REGISTRATION STATEMENT........7
DIVIDEND POLICY...........................................................9
MARKET FOR OUR COMMON STOCK AND WARRANTS.................................10
BUSINESS.................................................................12
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS...............................................23
INFORMATION REGARDING FORWARD-LOOKING STATEMENTS.........................30
OUR BOARD OF DIRECTORS...................................................31
OUR MANAGEMENT...........................................................33
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...........................34
PRINCIPAL STOCKHOLDERS...................................................34
EXECUTIVE COMPENSATION...................................................37
PLAN OF DISTRIBUTION.....................................................40
LEGAL MATTERS............................................................40
EXPERTS..................................................................40
INDEMNIFICATION..........................................................40
WHERE YOU CAN FIND MORE INFORMATION......................................41
You should rely only on the information contained in this prospectus.
We have not authorized anyone to provide you with information different
from that contained in this prospectus. The shares of common stock of
Socket Communications, Inc. covered under this prospectus are being offered
only in jurisdictions where offers and sales are permitted. The
information contained in this prospectus is accurate only as of the date of
this prospectus, regardless of the time of delivery of this prospectus or
of any sale of our common stock. Our principal executive offices are
located at Socket Communications, Inc., 37400 Central Court, Newark, CA
94560, and our telephone number is (510) 744-2700.
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RISK FACTORS
An investment in the units or common stock offered by this prospectus
involves a high degree of risk. You should carefully consider the risks
described below before deciding to purchase the shares of common stock.
The risks described below are not the only ones that we face. Additional
risks that generally apply to publicly traded companies, that are not yet
identified or that we currently think are immaterial, may also adversely
affect our company.
Any of the following factors could adversely affect our business,
financial condition or results of operations. The trading price of our
units or common stock could, in turn, decline and you could lose all or
part of your investment.
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 have incurred significant
operating losses in every fiscal period since inception. We may continue
to incur quarterly operating losses at least through the first quarter of
2000 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.
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. On December 9, 1999
we completed a common stock equity financing which increased our cash and
working capital, after costs and expenses of the financing, by
approximately $4,500,000. Although we believe our existing capital
resources will be sufficient to satisfy our working capital requirements
through the year 2000, unforeseen circumstances may arise which make it
necessary to obtain additional capital. In that event, 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 on acceptable
terms would significantly impair our ability to operate and would adversely
affect our financial condition.
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 because of our recurring losses,
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stockholders' equity and working capital balances at that time. Although
we believe that the financings we completed in September and December 1999
address the concerns raised by our independent auditors, we cannot
guarantee that business conditions or outlook at the time our auditors
complete their audit of the financial statements for the year ended
December 31, 1999 will alleviate substantial doubt about our ability to
continue as a going concern. Accordingly, our auditors opinion may
continue to include an explanatory paragraph in the future.
Shares eligible for future sale may adversely affect the market price for
our common stock
As of December 20, 1999, we had outstanding securities convertible
into or exercisable for the following amounts of common stock:
- 2,373,105 shares issuable upon the exercise of stock options under
our 1999, 1995 and 1993 stock plans;
- 4,265,479 shares issuable upon exercise of warrants (including
2,651,168 shares being registered pursuant to this registration
statement), some of which include dilution adjustments whenever we
issue common stock or securities convertible into common stock at
prices below the effective per share exercise price;
- 1,305,000 shares issuable upon the conversion of outstanding shares
of Series B convertible preferred stock;
- 1,069,875 shares issuable upon conversion of outstanding shares of
Series C convertible preferred stock, plus additional shares
representing accrued dividends through the date of conversion; and
- 435,730 shares issuable upon the conversion of outstanding shares
of Series D convertible preferred stock.
All of the shares of common stock issuable upon conversion of the
outstanding shares of Series B, C and D convertible preferred stock, the
common stock dividends on the Series C convertible preferred stock, and
other shares of common stock have been registered for resale 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, as well as the perception
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 make it
more difficult to sell our common stock in the future.
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 notebooks that operate on the Windows operating
system and 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 and Windows CE generally
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and other factors affecting the commercial success of Windows and 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 or Windows CE to achieve or maintain 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
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, Hewlett-Packard Corporation,
Hitachi, Microsoft, SanDisk Corporation, Symbol Technologies, 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:
- identify emerging standards in the field of mobile computing
products,
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- 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.
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.
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Because we base our staffing and other operating expenses on
anticipated revenue, delays in the receipt of orders can cause significant
variations in operating results from quarter to quarter. As a result of
any of the foregoing factors, our results of operations in any given
quarter may be below the expectations of public market analysts or
investors, in which case the market price of our common stock would be
adversely affected.
We depend on key employees and we need to hire additional sales and
marketing and product development personnel
Our future success will depend upon the continued service of certain
key technical and senior management personnel. Competition for such
personnel is intense, and there can be no assurance that we will be able to
retain our existing key managerial, technical or sales and marketing
personnel. The loss of key personnel 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
original equipment manufacturers, or OEMs. Our largest distributor, Ingram
Micro in the United States, accounted for approximately 25% of our revenue
in the first nine months of 1999. Our second largest distributor, Merisel
in the United States, 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.
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 nine months of 1999.
Accordingly, our operating results are subject to the risks inherent in
export sales, including
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- 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.
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USE OF PROCEEDS
Assuming that the outstanding underwriters' warrants and redeemable
warrants are exercised in full and for cash, we will receive the following
proceeds:
- $4,622,310 from the issuance of common stock upon exercise of
the currently outstanding redeemable warrants,
- $720,000 from the issuance of units (described below) upon
exercise of the underwriters' warrants, and
- $420,000 from the issuance of common stock upon exercise of the
redeemable warrants issuable upon exercise of the underwriters'
warrants.
We intend to use substantially all of the proceeds for working capital
purposes. Pending such use, we intend to invest the proceeds in
investment-grade obligations, including short-term, interest-bearing money
market funds.
DESCRIPTION OF OUR COMMON STOCK
As of December 20, 1999, there were 14,991,583 shares of our common
stock outstanding and held by approximately 1,700 record holders. Holders
of our common stock are entitled to one vote per share in all matters to be
voted on by our stockholders, except that, upon giving notice as required
by law, holders of our common stock may cumulate their votes in the
election of directors. Subject to preferences that may be applicable to
any preferred stock outstanding at the time, holders of our common stock
are entitled to receive ratably dividends, if any, as may be declared from
time to time by our board of directors out of funds legally available for
such use. In the event of a liquidation, dissolution or winding up of
Socket Communications, holders of our common stock are entitled to share
ratably in all assets remaining after payment of our liabilities and the
liquidation preference of outstanding shares of preferred stock. Holders
of our common stock have no preemptive rights and no rights to convert
their common stock into any other securities, and there are no redemption
or sinking fund provisions with respect to any common stock. The rights,
preferences and privileges of holders of our common stock are subject to,
and may be materially adversely affected by, the rights of the holders of
shares of any additional series of preferred stock we designate and issue
in the future.
DESCRIPTION OF OUR WARRANTS COVERED BY THIS REGISTRATION STATEMENT
Underwriters' Warrants
In 1995, we issued warrants to the representatives of the underwriters
involved in our initial public offering. The underwriters' warrants are
exercisable for an aggregate of 50,000 units at an exercise price of $14.40
per unit. Each unit consists of two shares of our common stock and one
redeemable warrant. The redeemable warrants are described below and the
common stock is described above. The common stock and redeemable warrant
comprising each unit will be immediately detachable and separately
transferable upon issuance. The underwriters' warrants may be exercised by
cash exercise or net exercise, at the holder's option. The exercise price
of the underwriters' warrants bears no relation to any objective criteria
of value and should in no event be regarded as an indication of any future
market price of the securities offered by this prospectus.
Redeemable Warrants
As of December 20, 1999, there were 550,275 redeemable warrants
outstanding and held by approximately 300 record holders. The following is
a brief summary of the provisions of the redeemable warrants. The summary
does not purport to be complete and is qualified in all respects by
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reference to the actual text of the warrant agreement between us and
American Stock Transfer and Trust Company, our warrant agent. A copy of
the warrant agreement was filed as an exhibit to the original registration
statement filed with the SEC on June 2, 1995. See "Where You Can Find More
Information" on page 41.
Exercise Price and Terms. Each redeemable warrant entitles its holder
to purchase shares of our common stock for an aggregate purchase price of
$8.40 at any time before the expiration of the warrants on June 5, 2000.
Each redeemable warrant is currently exercisable for 4.25 shares of common
stock. The number of shares of common stock purchasable upon exercise of a
redeemable warrant is based on the operation of anti-dilution and other
provisions referred to below. The holder of any redeemable warrant may
exercise the warrant by surrendering the warrant certificate to our warrant
agent, with the subscription form on the reverse side of the certificate
properly completed and executed, together with payment of the exercise
price. The redeemable warrants may be exercised at any time in whole or in
part at the applicable exercise price until their expiration. No
fractional shares will be issued upon the exercise of the redeemable
warrants.
The exercise price of the redeemable warrants bears no relation to any
objective criteria of value and should in no event be regarded as an
indication of any future market price of the securities offered by this
prospectus.
Adjustments. The number of shares of our common stock purchasable
upon the exercise of the redeemable warrants is subject to adjustment upon
the occurrence of certain events, including stock dividends, stock splits,
combinations or reclassifications of our common stock, or our sale of
common stock or other securities convertible into common stock at a price
below the exercise price of the redeemable warrants. As of the date of
this prospectus, several adjustments of the latter kind have been made.
Based on these adjustments, each redeemable warrant currently represents
the right to purchase 4.25 shares of common stock for an aggregate exercise
price of $8.40.
In the event of a reclassification or exchange of our common stock, a
consolidation or merger of our company with or into another corporation
(other than a consolidation or merger in which our company is the surviving
corporation) or sale of all or substantially all our assets, an adjustment
would be made to enable holders of the redeemable warrants to acquire the
kind and number of shares of stock or other securities or property
receivable in such event by a holder of the number of shares of our common
stock that might otherwise have been purchased upon the exercise of the
redeemable warrant. No adjustment to the number of shares and exercise
price of the shares subject to the redeemable warrants is made for
dividends (other than stock dividends), if any, paid on our common stock or
for securities issued pursuant to employee benefit plans, or upon exercise
of the redeemable warrants or any other options or warrants outstanding as
of the date of this prospectus.
Redemption Provisions. The redeemable warrants are subject to
redemption at $0.05 per warrant on 30 days' written notice to the holders,
if the closing bid price of our common stock averages more than 150% of the
per share exercise price of the redeemable warrants over a period of 20
consecutive trading days ending within 15 days of the notice of redemption.
In the event we exercise our redemption right, the redeemable warrants will
be exercisable until the close of business on the date for redemption fixed
in the notice. If any redeemable warrant called for redemption is not
exercised by that time, it will cease to be exercisable and its holder will
be entitled only to the redemption price.
Transfer, Exchange and Exercise. The redeemable warrants are in
registered form and may be presented to our warrant agent for transfer,
exchange or exercise at any time on or prior to June 5, 2000, assuming we
do not exercise our redemption right prior to that time. If a market for
our warrants exists, a holder may sell the redeemable warrants instead of
exercising them. The redeemable warrants are currently quoted on the OTC
Bulletin Board under the symbol "SCKTW" and are listed on the Pacific
Exchange under the symbol "SOKWS".
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Warrantholder Not a Stockholder. The redeemable warrants do not
confer upon holders any voting, dividend or other rights of our
stockholders.
Modification of Warrant. We and our warrant agent may make
modifications to the redeemable warrants that are deemed necessary and
desirable that do not materially adversely affect the interests of those
who hold the redeemable warrants. No other modifications may be made to
the redeemable warrants without the consent of the holders of a majority of
the redeemable warrants. Modification of the number of securities
underlying a redeemable warrant or of its exercise price or expiration date
requires the consent of the holder.
Federal Income Tax Considerations.
The basis of the redeemable warrant and our common stock purchased by
the holder as part of a unit or upon exercise of a redeemable warrant will
be determined by allocating the cost of each unit between the common stock
and the redeemable warrant in accordance with the relative fair market
values of those elements at the time of acquisition.
No gain or loss will be recognized by a holder upon the exercise of a
redeemable warrant. The sale of a redeemable warrant by a holder or the
redemption of a redeemable warrant by a holder will result in the
recognition of gain or loss in an amount equal to the difference between
the amount realized by the holder and the redeemable warrant's adjusted
basis in the hands of the holder. Provided that the holder is not a dealer
in the redeemable warrant and that the common stock would have been a
capital asset in the hands of the holder had the redeemable warrant been
exercised, gain or loss from the sale or redemption of redeemable warrant
will be long-term or short-term capital gain or loss to the holder. Loss
on the expiration of a redeemable warrant, equal to the redeemable
warrant's adjusted basis in the hands of the holder, will be a long-term or
short-term capital loss, depending on whether the redeemable warrant had
been held for more than one year.
The above discussion does not address all of the tax considerations that
may be relevant to a particular purchaser. Accordingly, all prospective
purchasers are advised to consult their own tax advisors regarding the
federal, state, local and foreign tax consequences of the purchase,
ownership and disposition of the redeemable warrants and our common stock.
DIVIDEND POLICY
We have not paid cash dividends on our common stock and currently
anticipate that we will retain all future earnings for the expansion and
operation of our business. We therefore do not anticipate paying cash
dividends in the foreseeable future.
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MARKET FOR OUR COMMON STOCK AND WARRANTS
Common Stock
Our common stock is traded on the OTC Bulletin Board under the symbol
"SCKT" and on the Pacific Stock Exchange under the symbol "SOK". Our
common stock is currently held by approximately 1,700 investors of record.
The quarterly high and low sales prices of our common stock, as
reported on the OTC Bulletin Board for 1999 and the last two complete
fiscal years are as shown below. Over-the-counter market quotations may
reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
Common Stock
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QUARTER ENDED High Low
- ---------------------------------------------------- --------- ---------
1997
March 31, 1997.................................. $ 1.13 $ 0.63
June 30, 1997................................... $ 1.16 $ 0.50
September 30, 1997.............................. $ 0.78 $ 0.50
December 31, 1997............................... $ 0.75 $ 0.34
1998
March 31, 1998.................................. $ 1.13 $ 0.36
June 30, 1998................................... $ 1.31 $ 0.44
September 30, 1998.............................. $ 1.03 $ 0.44
December 31, 1998............................... $ 0.88 $ 0.27
1999
March 31, 1999.................................. $ 0.81 $ 0.47
June 30, 1999................................... $ 2.13 $ 0.50
September 30, 1999.............................. $ 1.66 $ 0.69
December 31, 1999(through December 20, 1999).... $10.06 $ 1.03
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On December 20, 1999, the closing sale price for our common stock as
reported on the OTC Bulletin Board was $8.06.
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Redeemable Warrants
Our redeemable warrants are traded on the OTC Bulletin Board under the
symbol "SCKTW" and on the Pacific Stock Exchange under the symbol "SOKWS".
The redeemable warrants are currently held by approximately 300 record
holders.
The quarterly high and low sales prices of our redeemable warrants, as
reported on the OTC Bulletin Board for 1999 and the last two complete
fiscal years are as shown below. Over-the-counter market quotations may
reflect inter-dealer prices, without retail mark-up, mark-down or
commission and may not represent actual transactions.
Redeemable Warrants
-------------------
QUARTER ENDED High Low
- ---------------------------------------------------- --------- ---------
1997
March 31, 1997.................................. $ 0.38 $ 0.13
June 30, 1997................................... $ 0.44 $ 0.13
September 30, 1997.............................. $ 0.44 $ 0.13
December 31, 1997............................... $ 0.25 $ 0.06
1998
March 31, 1998.................................. $ 0.25 $ 0.06
June 30, 1998................................... $ 0.16 $ 0.13
September 30, 1998.............................. $ 0.25 $ 0.03
December 31, 1998............................... $ 0.13 $ 0.03
1999
March 31, 1999.................................. $ 0.11 $ 0.03
June 30, 1999................................... $ 1.01 $ 0.03
September 30, 1999.............................. $ 0.63 $ 0.19
December 31, 1999(through December 20, 1999).... $33.00 $ 0.19
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On December 20, 1999, the closing sale price for our redeemable warrants as
reported on the OTC Bulletin Board was $21.00.
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BUSINESS
This Business section contains forward-looking statements that involve
risks and uncertainties. Our actual results may differ materially from the
results discussed in the forward-looking statements. Factors that might
cause such a difference include, but are not limited to, those discussed in
this Business section and in "Risk Factors" and "Management's Discussion
and Analysis of Financial Condition and Results of Operations." We assume
no obligation to update such forward-looking statements or to update the
reasons why actual results could differ materially from those anticipated
in such forward-looking statements.
General
We develop and sell connection solutions for handheld computers that
use the Windows CE operating system from Microsoft Corporation and for
mobile computers, or notebooks, that use Microsoft's Windows 9x and NT
operating systems. These connection solutions include a family of low
power "Battery Friendly"(TM) PC and CompactFlash Card adapters for digital
mobile phones, serial communications, Ethernet connectivity, mobile data
collection, and, commencing in the second half of 2000, Bluetooth wireless
communications. Our connection products utilize industry standard PC Card
and CompactFlash form factors. We are a leading supplier of connectivity
products to the emerging Windows CE handheld computing market and believe
that we are the world's leading supplier of serial plug-in cards for
notebooks and for Windows computers with PC card slots. During 1998 and
1999, we completed a number of steps to strengthen our leadership position
and to improve our financial condition and operating results.
First, we expanded our PC Card connection family of products to add a
family of CompactFlash (CF+) serial, low power Ethernet, bar code scanning
and digital phone products to support the smallest Windows CE computer, the
Palm-size PC.
Second, we sought recurring OEM business for our products. Our serial
PC Card was selected by Compaq Computer Corporation for use with its Remote
Insight Board for remote management of Compaq servers. Shipments began in
the fourth quarter of 1998. Our Low Power Ethernet PC Card was selected by
Unisys Corporation for use with a Windows CE check reader. Shipments began
in the third quarter of 1999.
Third, we established several key strategic relationships with
industry leaders for developing new products for use with Windows CE and
Windows notebook computers including Symbol Technologies (attaching laser
scanners to notebooks and to Windows CE computers by cable, and an
integrated laser scanner in a CompactFlash form factor for insertion in a
Palm-size PC or tablet PC) and Zebra Technologies (connecting barcode
printers). The Company also began working closely with several North
American digital telephone service providers to develop digital mobile
telephone connection products for new digital telephones designed to
transfer voice and data over digital cellular networks which began shipping
in the second half of 1999.
Fourth, we improved our products. We completed the development of a
follow-on proprietary, low power Application Specific Integrated Circuit
(ASIC) with advanced features for usage in a number of existing and future
products. This proprietary ASIC will allow us to increase our date
transfer speeds and reduce our manufacturing costs. Product improvements
also included creating enhanced Ethernet drivers and a cross-over connector
to improve Ethernet performance, and the extension of our ruggedized form
factor to more of our products.
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Fifth, we expanded our distribution channels and more closely aligned
them with those used by the Windows CE manufacturers, and we increased our
co-marketing activities on the web. In addition, on-site representation
was added in Europe and Asia in the fourth quarter of 1998 to more closely
support our international distributors.
Sixth, we increased our capital, raising $2.4 million in new equity
financings and converting approximately $2.1 million of convertible debt
and accrued interest into equity in 1998 and raising $5.6 million in new
equity financings in 1999. We have improved our operating results by
increasing our revenues 15% in 1998 over 1997 and 18% for the nine month
period ended September 30, 1999 over the corresponding period in 1998,
improved our gross margins from 42% in 1997 to 59% in 1998 and for the nine
months ended September 30, 1999, and reduced our operating expenses 22%
from $5.4 million in 1997 to $4.2 million in 1998, partially offset by
increases of 15% for the nine month period ended September 30, 1999 of over
the corresponding nine-month period in 1998.
Seventh, we have commenced development of two new categories of
connection products to enhance our current product lines. We are working
with SanDisk Corporation to create, during the first half of 2000,
combination input/output and memory cards by adding removable flash memory
to our current connection products. We are also developing cordless
connection products for shipment by the end of 2000 that will utilize
Bluetooth technology to replace connection cables with close proximity
cordless communications.
Although we believe that our focus on the Windows CE operating system
for handheld computers, our expanding family of connection products and our
relationships with key industry strategic partners position us for future
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 first quarter of 2000
and possibly longer.
As of September 30, 1999, we had a cash balance of $1,278,322,
stockholders' equity of $613,160 and working capital of $205,158. In
December 1999, we completed a common stock equity financing of $4,660,000
resulting in an increase in cash, stockholders' equity and working capital
of approximately $4,500,000. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations-Liquidity and Capital
Resources," and "Risk Factors" for a discussion of our history of operating
losses and other risks that may affect our ability to attain profitability.
Products
Low Power Consumption. Since our inception, we have developed low
power connection products for use with mobile computing devices. Our
products consume less power than the products of our traditional
competitors. Low power consumption is an attractive feature for connection
products for mobile computing devices because it allows handheld computers
and notebooks to operate for longer periods on internal power without
requiring the user to change batteries. Changing handheld computer
batteries frequently is inconvenient and expensive and reduces the user's
productivity. Since the introduction of handheld computers using the
Windows CE operating system at the end of 1996, we have focused on further
reducing the power consumption of our products, since Windows CE computers
operate on two AA sized or small rechargeable batteries.
Connections and Form Factors. Today, we are producing most of our
products with a choice of two connectors, standard or ruggedized, and two
form factors, PC Card or CompactFlash. Standard connectors are detachable.
The ruggedized Card has an integrated fixed cable that maintains solid
contact in high vibration environments such as moving vehicles. It also
has a molded strain relief to protect against lateral stress and seal out
dust and moisture, and a rigid, sonic welded frame to resist torque that
could otherwise crack circuit board traces. PC Card form factors are
credit card size cards that conform to the standards created for PC Cards
by the PCMCIA Association. CompactFlash cards are the size of a large
postage stamp and conform to standards established by the CompactFlash
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Association. Almost all major notebooks and Windows CE computers except
for the Palm-size PC have a PC Card slot. The Palm-size PC uses a
CompactFlash slot for input/output connections. In 1997, we worked with
Microsoft Corporation and the Windows CE device manufacturers to adapt the
CompactFlash form factor as a 3.3 and 5.0 volt input/output connector for
the Palm-size PC. Previously, the CompactFlash form factor had been used
primarily for add-on memory cards. The CompactFlash form factors designed
by us were subsequently adopted by all of the Windows CE manufacturers and
were certified in 1998 as standards by the CompactFlash Association, which
is the recognized standards-setting body for CompactFlash devices. We are
a member of that Association, and our vice president of engineering served
as a director during 1999. We expect that the CompactFlash I/O form factor
will be adopted for use with future smaller computing and data collection
devices, and that the market for these products will grow. We have also
announced that we are developing combination I/O and memory cards using
removable MultiMediaCards(TM) from SanDisk Corporation and close proximity
cordless connection products incorporating Bluetooth technology. We expect
to commercially release products incorporating removable memory in the
second half of 2000 and we expect to commercially release Bluetooth
cordless connection products by the end of 2000.
Wireless Products. We have begun shipping digital telephone
connection products and have announced that we will begin developing
cordless connection products during 2000.
Mobile digital telephone connection products have been designed to
transfer data between a new generation of digital mobile CDMA (Code
Division Multiple Access) telephones or GSM digital mobile telephones and
Windows or Windows CE mobile computers. CDMA is the most widely used
digital cellular telephone technology in North America and GSM is the most
widely used digital cellular telephone technology in Europe. The Digital
Phone Cards support data-enabled mobile phones from most of the major
telephone manufacturers. The Digital Phone Card directly connects the
telephone and the mobile computer through either the PC Card or
CompactFlash Card slot, and allows the user to use telephone connection
software installed on the mobile computer to dial and connect wirelessly to
the Internet for browsing the web, retrieve or send e-mail, or connect to
corporate in the same manner that a user would use a modem to connect
through a land telephone line. We believe that our Digital Phone Card
offers several advantages over a direct serial cable, including less power
drain on the mobile telephone, interchangeability between mobile computers
and higher data transfer speeds.
Bluetooth cordless products will allow close proximity wireless
connections between a handheld computer or notebook and a peripheral device
such as a scanner or mobile telephone. We have announced that we plan to
develop cordless connections for our existing products during 2000
utilizing Bluetooth technology, which are cordless communications standards
being developed to facilitate close proximity communications between
Bluetooth enabled devices. We do not expect cordless products to be
available until near the end of 2000.
Serial connection products. We believe that we produce the world's
leading family of serial PC and CF+ Cards. In December 1996 and during
1997, we expanded our serial card line by adding ruggedized connections,
dual standard and ruggedized serial cards, and an Ethernet/serial
multifunction PC card. In 1998 we added CompactFlash standard and
ruggedized connection serial cards. During the first quarter of 2000, we
expect to complete a Quad (4 port) serial PC card. Our serial cards operate
as a standard communication port and can work with conventional serial
communications programs. Peripheral devices that can attach to our Serial
I/O Cards include stenography machines for court reporting, medical
instruments for monitoring or data collection, label printers for inventory
control, high speed fax/modems for web browsing, and global positioning
systems for tracking location and time. Adding one or more serial ports to
a computer through either the PC Card or CompactFlash slot provides higher
data transfer rates than a built-in serial port because of the buffered
16550 UART built into our serial card products. Our cards can also
transfer power from the computer to a peripheral device, which cannot be
accomplished through the built-in serial port. Our Serial I/O Card was the
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first PC Card to receive certification from Microsoft for operation with
Windows CE handheld computers. All of our serial products use a proprietary
high integration serial chip that was first developed in 1993. During 1999
we completed development of a new high integration serial chip which will
be used in all of our serial product lines commencing in early 2000. The
new chip has been designed to lower power consumption, improve
functionality including higher data transfer speeds, and cost less to
manufacture.
Low Power Ethernet Products. Ethernet cards enable a mobile computer
to communicate with an Ethernet network and are used for higher speed
desktop synchronization, large file transfers, network connections to the
Internet for web browsing and E-mail. We released the first commercially
available PC Card Ethernet adapter in 1992 which was compatible with the
popular NE2000 network controller, allowing us to utilize the certified
network drivers included with the major PC-based network operating systems.
In December 1997, we introduced our Low Power Ethernet PC Card product
designed for use with Windows CE-based computers and Windows notebooks and
in 1998, introduced a CompactFlash version of the product. Also introduced
in 1997 was an Ethernet/serial multifunction PC Card. We believe that our
Low-Power Ethernet Card products consume less power than any other Ethernet
adapter on the market and allow data transfers to occur at up to 200 times
faster than through the RS232 port on the notebook or Windows CE computer.
The Low-Power Ethernet card is recognized by Version 2.0 and higher of the
Windows CE operating system. During 1998, we also enhanced our software
drivers to add features such as automatic synchronization and soft status
lights which display key network information on the host computer's screen.
Mobile Data Collection Products. Mobile data collection cards are used
in conjunction with data collection devices such as bar code scanners. In
October 1997, we introduced the first of our mobile data collection
products, an LED bar code scanning wand manufactured by Welch Allyn, which
can be attached to a Windows CE handheld computer or Windows notebook
computer through a serial PC Card ("Data Collection Card"). In 1998, we
released a CompactFlash version of our Data Collection Card. The Data
Collection Cards can be configured to deliver power to the scanning device
from the computer, which is an advantage over most built-in serial ports
which generally cannot provide power from the computer, and eliminates the
need to carry a separate scanner power source. We also developed keyboard
emulation scanning software that can be configured to route scanned data to
third party data collection programs. During 1998, we connected a Data
Collection Card with a laser scanning gun as a special customer order. In
January 1999, we released the first of our standard laser scanning
products, connecting two mobile laser scanning guns from Symbol
Technologies to a Data Collection PC card for use with Windows notebooks
and Windows CE handheld devices. In October 1999, we began shipping an
integrated laser scanner card which attaches a laser scanning engine to a
CompactFlash card for insertion in a Palm-size PC or tablet PC. We have
also developed a connection card to bar code printers from Zebra
Technologies which are expected to begin shipping in the first half of
2000. In November 1999 we released our Windows CE Scanner Software
Developers Kit (SDK), which includes our SocketScan(TM) keyboard wedge. The
SDK simplifies scanner application development on Palm-size PCs, Handheld
PCs and Pen Tablet PCs.
Industry and Market Overview
Windows CE Operating System. Microsoft Corporation introduced the
Windows CE operating system in November 1996. Windows CE was designed as a
small, real-time, scalable operating system that works in a broad selection
of products, including mobile computers, terminals, and industrial
controllers. The operating system was designed to connect easily to the
Internet and corporate networks as well as to Windows desktops and other
Windows CE-based devices. The system was built in customizable components
to allow its use in embedded system platforms using the minimum set of
software modules and components needed to support the platform's system
requirements, which minimizes memory use and maximizes performance.
Windows CE is built around the Win32 application programming interface that
is consistent with other Windows-based operating systems, which means that
existing third party programming resources consisting of tools, software
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examples and documentation are immediately available to developers. Key
features of the Windows CE operating system are:
- its ability to synchronize data with desktop or other companion
devices;
- its support of light versions of many of the popular Microsoft
Office programs including Excel for spreadsheets, Word for
documents, PowerPoint for presentations and Outlook (personal
information management including tasks, calendar, contacts and
electronic mail);
- low power consumption with extended periods between battery
changes relative to Windows devices; and
- instant-on features where the computer screen turns on at the
same place where it was previously turned off.
Microsoft has defined its operating system strategy for the next decade as:
- promoting widespread adoption of the Windows CE operating system
for mobile computers, terminals, and industrial controllers;
- evolving the Windows NT operating system currently used primarily
for servers as the primary operating system for desktop systems;
and
- gradually phasing out the current Windows 9x series in favor of
the CE and NT operating systems.
Our focus on low power PC Card and CompactFlash products for Windows
CE devices are based on the belief that the Windows CE operating system
will attain strong market acceptance for use with mobile computing devices
and embedded control systems devices and will achieve significant growth
over time. We believe that early indicators of success include Microsoft's
announced long term commitment to the Windows CE operating system, early
marketing successes of other companion synchronization devices such as the
Palm Pilot from 3Com, the numbers and strengths of committed device
manufacturers, the availability of familiar development tools and extensive
connectivity to corporate information systems, and attractive price points
and features.
Windows CE Handheld Computers - H/PCs. H/PC's were introduced in
November 1996 as black-and-white units. In December 1997, Microsoft
released Version 2.0 of the Windows CE operating system which supported
color, Ethernet connections and the international character set. The units
are designed as the middle size of three handheld computers. It has a
clamshell design with the screen in the upper section and a small keyboard
and PC Card slot for connecting input/output devices in the lower section.
The unit is designed for users who want a small handheld computer with a
keyboard. The device may be connected to a network using our Ethernet PC
Card. Windows CE Version 2.0 operating system units have color, 8, 16 or
32 MB of memory, a microphone and speaker, optional docking cradle, and run
on two AA or small built-in rechargeable batteries. Major H/PC computer
manufacturers include Hewlett Packard, Hitachi, NEC and Sharp.
Windows CE Handheld Computers - Palm-size PCs. Palm-size PCs are
pocket-sized computers and were introduced in June 1998 as black-and-white
units. During the first quarter of 1999, Microsoft released a Windows CE
operating system software upgrade to support color and CompactFlash paging
receivers, and the first color units began shipping in the first quarter of
1999. Major Palm-size PC computer manufacturers include Casio, Compaq, and
Hewlett-Packard. The Palm-size PC units have a CompactFlash slot for
input/output connections, use a pen and handwriting recognition or a
software keyboard for data entry, and have the same desktop data
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synchronization and instant-on features as the H/PC. The unit is designed
to fit in a pocket or purse. The "wearability" and instant-on capabilities
of the Palm-size PC are designed to make information more readily
accessible to the user.
Windows CE Handheld Computers - H/PC Professionals. H/PC Professionals
are tablet or small notebook-sized computers, and were introduced in the
fourth quarter of 1998. Designed as desktop companions, the computers have
many notebook characteristics including an 8" to 11" color screen and a
full size keyboard. H/PC Professionals have both PC Card slots and CF+
slots. Many of the units also have built-in modems. The units typically
weigh from two to three pounds (about five pounds lighter than a notebook)
and have the Windows CE features of instant on, long battery life (10 to 15
hours) and file synchronization. Major H/PC Professionals computer
manufacturers include Compaq, Hewlett Packard, NEC, and Sharp.
Windows CE Handheld Computers - Tablets. During 1999, several
manufacturers including Fujitsu and Hitachi introduced a tablet-sized
Windows CE computer as a large pen-based computer with a hardened color
screen. The computer is designed for use with electronic forms where data
capture or signatures are needed and has a CompactFlash slot for connecting
input/output devices.
Other developing Windows CE devices and embedded connection solutions.
Windows CE as a real-time, scalable modularized operating system has been
designed to work with a variety of devices. Areas of significant current
market development include automobile control systems, point-of-sale
devices, web-TV set top boxes, real-time industrial controllers, and home
automation and entertainment devices. We have designed an embedded module
connection solution prototype and are seeking opportunities to embed our
Windows CE connection, data collection and wireless solutions in such
future devices.
Notebook market support. Our products are also designed to work with
Windows notebooks which today is a significantly larger and more
established market than the emerging market for Windows CE computers. Most
notebooks today are designed with PC Card slots and use the Windows 9X and
2000 operating systems. We intend to continue to support the Windows
notebook market with our products.
Expansion of bar code scanning to Windows and Windows CE computers.
Bar code scanning is a well established industry used in a wide variety of
industrial/manufacturing, commercial services, retail services and
government applications worldwide including asset management and control,
shipping and receiving, route accounting, warehousing, order processing,
document control and quality assurance. Significant industry trends
identified by Venture Development Corporation, an industry research and
consulting group, include:
- annual industry sales growth of approximately 20%;
- upgrading of scanning systems from older DOS-based operating
systems to Windows operating systems, with approximately 50% of
the scanning market using Windows operating systems today,
expected to increase substantially over the next several years;
- the development of wireless scanning applications, with
approximately 40% of scanning systems incorporating the wireless
transmission of scanning data on local networks;
- the increasing use of real-time processing applications so that
scanned data is transmitted and processed when scanned; and
- the expanding use of scanning by the mobile professional
workforce.
Laser scanning guns are the most widely used scanners, followed by CCD
scanning guns and LED bar code wands. We believe that our family of
scanning products offer several advantages over existing connection
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solutions for mobile computers and stationary scanning devices with built
in PC card slots, including the use of a standard connector form factor so
that scanning devices become easily removable and interchangeable, and the
ability to power the scanner from the mobile computer or data collection
device. In addition, we believe that the Windows CE computers are
excellent platforms for use by mobile professionals for route accounting
and service applications, and this area is expected to get increasing
attention from third party software application vendors in areas such as
order processing, package tracking and pharmaceutical delivery tracking .
Convergence of digital telephones and mobile computing. The two most
widely deployed digital cellular telephone networks are the CDMA networks
in North America and the GSM networks covering Europe and other
international countries. Mobile digital telephones are rapidly replacing
earlier analog telephones, with clearer and more reliable phone
connections, longer battery life and lower costs of operation.
Historically, mobile computer users have connected back to their corporate
networks to check electronic mail or through their corporate networks to
access the Internet over telephone land lines connected by modem to the
computer. Often those connections are made at the beginning or end of the
day when the traveling professional returns to his or her room where a land
line phone is available. Several major telephone manufacturers including
Qualcomm and Nokia have recently designed CDMA mobile digital telephones
with a data port on the mobile telephone. The port is designed to
facilitate direct connections between the telephone and data collection and
computing devices. We believe that with the improved clarity and lower
cost of operations of digital telephones and with the new built-in data
port, that mobile computer users will now be encouraged to connect their
mobile digital telephone to their computer and to access their corporate
networks and the Internet wirelessly over the digital cellular networks.
In addition, GSM mobile telephone networks in Europe support transfer of
data to and from mobile phones and these phones may be connected to a
notebook or handheld computer to transfer data and to connect to the
Internet or to corporate e-mail through the mobile phone. Accordingly, we
have designed Digital Phone Cards for both the CDMA and GSM telephone
markets that will allow the user to directly connect one of these new
mobile digital telephones to either a notebook or to a Windows CE computer.
Our digital phone cards began shipping in the second half of 1999 for the
CDMA market and for Windows CE computers in the GSM markets. Connection
software for notebooks in the GSM market is expected to ship during the
first half of 2000.
Strategic Alliances and Business Relationships
We have developed a number of strategic relationships that are
important to our product development and marketing programs. We work
closely with Microsoft and with Windows CE handheld computer manufacturers
in co-marketing and in developing connection solutions for Windows CE
devices. We also support third party software application developers by
providing technical assistance in the porting of their applications to the
Windows CE operating system.
Our strategy is to establish strategic alliances in business
relationships with leading participants in various segments of the
communications and mobile computer markets. We believe these alliances
enable us to take advantage of the superior financial resources,
technological capabilities, proprietary positions and market presences of
these companies in creating products that utilize these technologies that
are familiar to the marketplace. We have established strategic alliances
and business relationships with the following companies:
- Bell Mobility, a leading mobile telephone service provider in
Canada, has signed a Memorandum of Understanding and established
supply arrangements for us to distribute Digital Phone Cards for
use with their CDMA system. The telephones are designed to connect
directly to a handheld or notebook mobile computer for transferring
data to and from the computer over the digital telephone networks.
- Compaq Computer Corporation, a leading manufacturer of personal
computers, has selected our serial PC card to be offered as an
optional part of Compaq's remote server management product that
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began shipping in the fourth quarter of 1998. Our products are also
recommended by Compaq for Windows CE use.
- Hewlett-Packard Corporation, a leading manufacturer of personal
computers, has agreed to support development of our planned
Bluetooth cordless connection products. Our products are also
recommended by Hewlett-Packard for Windows CE use.
- Hitachi Corporation, a leading manufacturer of consumer electronics
and Windows CE tablet devices has executed a co-marketing agreement
with us. Our products are recommended by Hitachi for use on
Hitachi's ePlate tablets.
- Metricom, a leading wireless network operator recently selected us
as a connectivity supplier for their high speed modems. Metricom
has announced their plans for supplying a high speed wireless
network throughout the United States.
- Microsoft Corporation, the developer of the Windows CE operating
system, has worked closely with us in insuring that our connection
products for Windows CE computers work with the Windows CE
operating system. Microsoft recently announced the development and
availability of the Microsoft Connection Kit for use with our
digital phone cards. We also jointly developed with Microsoft in
1997 the CompactFlash(TM) form factor for use with smaller Windows CE
handheld computers.
- PacketVideo, a leading developer in the emerging wireless video
streaming market, has executed a Memorandum of Understanding with
us for co-marketing and market development for wireless video
streaming.
- SanDisk Corporation, a leading supplier of flash memory products,
has agreed to support development of our planned combination
memory/input-output connection products.
- Symbol Technologies, Inc., the leading manufacturer of laser
scanner systems and devices, has signed a Memorandum of
Understanding and related supply contracts to allow us to create
laser scanning products for Windows and Windows CE mobile and
handheld computers. These products include attaching two of
Symbol's laser scanning guns to Windows CE or notebook computers
and an integrated scanner card in CompactFlash form factor for use
with Palm-size or tablet PCs.
- Welch Allyn, a leading manufacturer of bar code scanning devices,
has signed an Agreement whereby we can create bar code scanning
products for Windows and Windows CE mobile and handheld computers.
- Zebra Technologies, a leading manufacturer of bar code printers, is
working with us to attach bar code printers to Windows CE handheld
computers or notebooks. Shipments are expected to commence during
the first half of 2000.
Proprietary Technology
We have developed a number of technology building blocks to enhance
our ability to develop new hardware and software products, to offer
products which run on multiple host platforms and to manufacture and
package products efficiently.
Our most important hardware building block is the universal bus
interface, a highly flexible implementation of the PC/CF Card interface
whose features include programmable bus steering, dual mapping of control
and data registers into both memory and I/O space, an extensive Card
information structure which includes function ID and function extension
tuples, shared-memory arbitration circuitry, support for "execute-in-
place," the ability to support both level and edge triggered interrupts
from multiple sources, host synchronization during initialization and
complete polarity and masking control of interrupts. Our universal bus
interface enables our products to work with all major PC/CF Card hosts.
Our universal bus interface has been incorporated into several
application specific integrated circuits, including our current and new HIS
chips, low-power, highly integrated general purpose interface chips used in
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our family of Serial Connection Plug-in Cards, Data Collection Plug-in
Cards, and Digital Phone Plug-in Cards to control signal transmission
between these products and the mobile or handheld computer's PC/CF Card
slot.
We have also developed a library of software drivers and control
applets that allow our products to operate in handheld computers running
Windows CE and in notebooks running Windows 9x and Windows 2000.
We rely on a combination of patent, copyright, trademark and trade
secret laws and confidentiality procedures to protect our proprietary
rights. We have applied for patents covering technology we developed
relating to our combination input/output plus memory connection products.
As part of our confidentiality procedures, we generally enter into non-
disclosure agreements with our employees, distributors and strategic
partners, and limit access to and distribution of our software,
documentation and other proprietary information. Despite these precautions,
it may be possible for a third party to copy or otherwise to obtain and use
our products or technology without authorization, or to develop similar
technology independently. In addition, effective protection of intellectual
property rights may be unavailable or limited in certain foreign countries.
We have received correspondence from General Patent Corporation
claiming possible infringement of certain standard PCMCIA PC Card features
incorporated into our PC Cards. General Patent Corporation brought suit
against a number of companies that manufacture PC Card products including
IBM Corporation, 3Com, Hayes, Xircom and New Media claiming similar
infringement and seeking royalty payments, which have been subsequently
settled. No litigation is currently pending against us. There can be no
assurance that we will not receive future communications from other third
parties asserting that our products infringe, or may infringe, the
proprietary rights of third parties, and that in connection with such
claims or the claims of General Patent Corporation, that litigation could
be brought against us which could result in significant additional expense
or the discontinuation of use or redesign of infringing products.
Sales and Marketing
We market our products through OEMs, computer platform vendors,
vertical market value added resellers, and a worldwide network of
distributors and resellers. We support our distributors and resellers
through education, training and customer assistance by our sales, marketing
and technical support staff and third party manufacturers' sales
representatives. We added third party sales representatives in Europe and
in Asia during the second half of 1998. During 1998, United States
distributors Ingram Micro and Tech Data and international distributor PPCP
(U.K.) accounted for 29%, 11% and 10% of our revenues, respectively. During
the nine month period ended September 30, 1999, Ingram Micro and Merisel
accounted for 25% and 10% of our revenue, respectively. As of December 20,
1999, we had 12 people in sales, marketing and technical support. We intend
to increase our sales and marketing effort by adding personnel and
increasing promotional activities. However, competition for sales and
marketing personnel is intense, and we may be unable to recruit qualified
sales and marketing personnel as needed.
Consistent with industry practice, we provide our distributors with
stock balancing and price protection rights which permit these distributors
to return slow-moving products to us for credit and to receive price
adjustments for inventories of our products held by distributors if we
lower the price of those products. The effect of such returns and
adjustments on our operating results is minimized since we recognize
revenues on products shipped to distributors at the time the merchandise is
sold by the distributor. To date, we have not experienced any significant
returns or price protection adjustments.
We rely significantly on our OEMs, distributors and resellers for the
marketing and distribution of our products. Our agreements with OEMs,
distributors and resellers, in large part, are nonexclusive and may be
terminated on short notice by either party without cause; furthermore, our
OEMs, distributors and resellers are not within our control, are not
obligated to purchase products from us, and may represent other lines of
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products. A reduction in sales effort or discontinuance of sales of our
products by our OEMs, distributors and resellers could lead to reduced
sales and could materially adversely affect our operating results.
Export sales represented approximately 34%, 34%, 49% and 40% of our
revenue for the nine months ended September 30, 1999 and for the years
ended December 31, 1998, 1997 and 1996, respectively. Export sales are
subject to the complications of complying with laws of various countries
and the risk of import/export restrictions and tariff regulations.
Manufacturing
We subcontract the manufacture of substantially all of our products to
independent, third party contract manufacturers. We perform final product
testing and package our products at our Newark, California facility.
Sole source components include our proprietary HIS chip manufactured
by Lucent Technologies and our new HIS chip manufactured by Lucky-Goldstar
that controls the signal transmission between our PC and CF+ Serial I/O
Products (all products except Ethernet Cards) and the PC Card or CF+ Card
slot on the mobile or handheld computer; our Ethernet chip manufactured by
Tamarack Corporation, and certain cable and connector components. Although
to date we have generally been able to obtain adequate supplies of these
components, certain of these components are purchased on a purchase order
basis under standard commercial terms and conditions in the industry, and
we do not have long-term supply contracts for these components. Although
our suppliers are generally large, well-financed organizations, in the
event that a supplier were to experience financial or operational
difficulties that resulted in a reduction or interruption in supply, it
would materially adversely our results of operations until we established
sufficient manufacturing supply through an alternative source which could
take a significant period of time, including qualifying an alternative
subcontractor, redesigning the product as necessary, and commencing
manufacturing.
Research and Development
Since our inception, we have made substantial investments in research
and development. We believe that our future performance will depend in
large part on our ability to develop significant enhancements to our
existing connection products and to develop successful new products for
emerging and existing markets. In particular, we believe the timely
completion and expected introduction of additional Digital Phone Card Plug-
in Products, expanding our family of Bar Code Scanning products, developing
combination memory and input/output cards, and developing Bluetooth
cordless connection products are important to maintain a technological
leadership position in wireless and wired connection solutions during 2000
and remain competitive. As of December 20, 1999 we had six persons on our
product development staff and we hire engineering consultants to perform
additional engineering services as required. Research and development
expenditures were $0.9 million for the nine months ended September 30,
1999, $1.0 million in 1998, $1.1 million in 1997 and $1.1 million in 1996.
We anticipate that we will continue to commit substantial resources to
research and development in the future and will be increasing the size of
our research and development staff as a result of planned or anticipated
development projects.
Competition
The overall market for communications products is increasingly
competitive, and we expect competition in each of our market areas to
intensify. We anticipate intense competition from a number of new and
established wired and wireless computer, communications and network
equipment companies. Increased competition, direct and indirect, could
materially adversely affect our revenues and our ability to achieve
profitability through pricing pressure and loss of market share.
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Substantially all of our present and potential competitors have
substantially greater financial, marketing, technical and other resources
than we do, and may succeed in establishing technology standards or
strategic alliances in the data communications market, obtain more rapid
market acceptance for their products or otherwise gain a competitive
advantage.
We face competition for our Digital Telephone Connection Plug-in Cards
from alternative methods of downloading information into a mobile computer,
primarily over telephone lines through a modem and connecting through a
direct cable connected to a serial port.
We compete with Smart Modular Technologies, Quatech and Silicom, among
others, in the serial PC Card market, although we believe that we are the
world's leading manufacturer of serial card products.
The market for our Ethernet Cards is highly competitive. Market
leaders for Ethernet Cards include 3Com and Xircom, both of which have
introduced CompactFlash Ethernet cards for Windows CE handheld computers.
Competition is also expected from others, including manufacturers of lower
priced cards in Asia.
Development of products incorporating Bluetooth cordless
communications technology may become highly competitive, with a choice of
Bluetooth chips and software and expected widespread adoption of this
technology.
Personnel
As of December 20, 1999, we employed 29 people on a full-time basis.
Of these, 12 were responsible for sales, marketing and customer technical
support, six were in research and development, four were in finance and
administration and seven were involved in operations. Our employees are not
represented by a union, and we consider our employee relationships to be
good. Our future success will depend in significant part upon the continued
service of certain key technical and senior management personnel, and our
continuing ability to attract, assimilate and retain highly qualified
technical, managerial and sales and marketing personnel.
Real Property
We lease a 23,000 square foot facility in Newark, California. The
lease expires in October 2001. The current monthly rent is approximately
$16,325. We believe that our current facilities are sufficient to meet our
needs for the foreseeable future.
Legal Proceedings
We are not currently a party to any material legal proceedings.
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MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
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 Friendly(TM) products are designed to work with
these Windows CE computers and also with Windows notebook computers.
We distribute our products primarily through worldwide distribution
channels. In the United States, 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.
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 mobile digital telephone and data collection
markets.
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
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<PAGE>
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 United States distribution channels in October 1999. Several United
States phone carriers have launched or announced intentions to launch
nationwide digital services. 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
United States Our GSM telephone connection cards began shipping in the
fourth quarter of 1999.
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 first half of 2000.
We believe that we have developed strong working relationships with
Microsoft and with Windows CE handheld computer manufacturers for
integrating connection solutions into Windows CE devices, with our
strategic development partners, and with software application developers in
providing technical assistance in the porting of their applications to the
Windows CE operating system.
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 some
of our product lines. The Company has in development combination 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 first quarter of 2000 and possibly longer.
Results of Operations for the Three and Nine Months Ended
September 30, 1999
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.
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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
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.
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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.
On December 9, 1999, we sold 1,000,000 common shares at $4.66 per
share (for an aggregate purchase price of $4,660,000). After costs and
expenses of the offering, the financing increased our cash and net equity
by approximately $4,500,000.
We believe that our cash balances, including the proceeds from the
financing completed on December 9, 1999, are adequate to fund our
operations during 2000. In addition, we have outstanding public warrants
that expire on June 5, 2000 which, if fully exercised, would raise an
additional $4,600,000 in cash and equity capital. However, there are no
assurances that these warrants will ever be exercised. Should the warrants
expire without exercise, we may elect to raise 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.
Results of Operations for the Fiscal Year Ended December 31, 1998
Revenue
In 1998, revenue was $5,477,804, an increase of 15% from 1997 revenue
of $4,779,200. 1997 revenue increased 5% compared to 1996 revenue of
$4,570,438. Revenue growth in 1998 was primarily due to increases in the
sale of three new products introduced at the end of 1997, a low power
Ethernet PC Card, a dual serial PC Card and a Data Collection PC Card for
attaching bar code scanners. Revenues also increased moderately due to
recurring OEM sales of serial card products to one customer that commenced
in the fourth quarter of 1998 and the introduction of CompactFlash (CF+)
Ethernet, serial and data collection connection products in the second half
of 1998. 1998 revenues included $250,000 in contract engineering revenues,
compared to $100,000 in contract engineering revenues in 1997. Revenue
growth in 1998 was partially offset by reductions in the sale of standard
Ethernet connection products. Revenue growth in 1997 resulted from new
serial card products released at the end of 1996 as the Company expanded
its serial card line to add a ruggedized serial PC card and a dual port
serial PC card and, in the fourth quarter of 1997, a bar code scanner PC
card for Windows CE handheld computers. Ethernet PC Card sales grew due to
significant sales to an international customer for standard Ethernet PC
Cards, and from new products consisting of an Ethernet/serial multifunction
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card released at the end of 1996 and a low-power Ethernet card for Windows
CE 2.0 computers released in the fourth quarter of 1997. Revenue growth in
1997 was partially offset by lower sales of the Company's PageCard wireless
messaging system, which was terminated at the end of 1997, and the
termination of sales of its GPS PC card which was sold through the first
half of 1996.
The Company markets its products primarily through distributors and
other equipment manufacturers "OEMs". Recognition of revenue on shipments
to distributors and the related cost of sales are deferred until such
distributors resell the products to their customers. Recognition of revenue
on shipments to customers other than distributors occurs generally at the
time of shipment. Export sales constituted 34%, 49% and 40% of revenue in
1998, 1997, and 1996, respectively. The decline in export sales in 1998
reflected lower sales of standard Ethernet PC cards to one international
customer in 1998 and concentration of growth in U.S. markets in 1998 for
Windows CE connection products.
Gross Profit
Gross profit for 1998 was $3,239,146, or 59% of revenue compared to
$1,991,092, or 42% of revenue in 1997 and $2,074,410, or 45% of revenue in
1996. Product gross profit in 1997 was impacted by a write-off of
primarily PageCard inventory of $588,572. Gross profit before the
inventory write-off in 1997 was 54%. Gross profit in 1998 compared to 1997
(before 1997 inventory write-off) increased moderately due to a favorable
product mix from higher margin new products and contract engineering
revenues and a reduction in sales of older lower margin products. Gross
profit on 1997 (before inventory write-off) increased over 1996 due to
favorable product mix from a higher percentage of higher margin serial card
sales, higher product gross profit margins on new products, and lower
product manufacturing costs.
Research and Development
Research and development expense in 1998 was $999,362, a decrease of
5% from 1997 expense of $1,050,411. The decrease reflected moderate
reductions in costs of personnel, equipment and contract engineering
services. 1997 research and development expense was essentially flat with
1996 expense of $1,067,399, reflecting similar levels of staffing and
research and development activities in both years. To date, the Company has
not capitalized any software development costs. The Company expects to
increase its research and development expense in 1999.
Sales and Marketing
Sales and marketing expense in 1998 was $2,009,003, a decrease of 26%
over 1997 expense of $2,719,050. The decrease reflected lower 1998
staffing levels due to the discontinuation in 1997 of the PageCard selling
and marketing programs including the costs of staff reductions in 1997,
partially offset by increases in sales personnel and marketing activities
for other products in 1998. Marketing expense in 1997 also included the
cost of a new products marketing study. 1997 sales and marketing expense
increased 2% over 1996 sales and marketing expense of $2,666,933. The
moderate increase in 1997 reflected higher sales and marketing staffing
levels in the first half of 1997 and higher costs associated with a
marketing study for new products, offset in the second half of the year
with staffing reductions net of personnel severance costs relating to
discontinued selling activities for the Company's PageCard. The Company
expects to increase its sales and marketing expense in 1999.
General and Administrative
General and administrative expense in 1998 was $1,192,452, a decrease
of 26% from 1997 expense of $1,613,492. The decrease primarily reflected
professional fees associated with financing and contemplated (subsequently
discontinued) merger activities during 1997 and one-time severance costs
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<PAGE>
for the Company's former CEO whose services terminated in April 1997. 1997
expense decreased 2% compared to 1996 expense of $1,647,335, reflected
lower staffing levels in 1997 and lower occupancy costs from a move of the
Company in the fourth quarter of 1996, offset by approximately $450,000 of
expense increase associated with discontinued merger and financing
activities charged to operations during 1997. The Company expects to
increase its general and administrative expense in 1999.
Interest Income, Interest Expense, Net
Interest income reflects interest earned on cash balances. Interest
expense reflects interest on convertible preferred notes issued on various
dates in 1997 and converting into Series C convertible preferred stock or
common stock in March and May 1998 (see Note 5 to Notes to Financial
Statements), interest expense relating to bank lines (see Note 7 to Notes
to Financial Statements) and equipment lease financing obligations (see
Note 8 to Notes to Financial Statements).
Income Taxes
There was no provision for federal or state income taxes for the years
ended December 31, 1998, 1997 and 1996, as the Company incurred net
operating losses. As of December 31, 1998, the Company has federal and
state net operating loss carryforwards of approximately $13,000,000 and
$5,800,000, respectively. The Company also has federal and state tax
credit carryforwards of approximately $180,000 and $150,000, respectively.
The net operating losses and credit carryforwards will expire at various
dates beginning in 1999 through 2018, if not utilized. The utilization of
approximately $5,200,000 of the federal net operating loss included in the
above amounts will be subject to a cumulative annual limitation of
approximately $600,000 per year pursuant to the stock ownership change
provision of the Tax Reform Act of 1986. Future changes in ownership,
including stock offerings, may result in additional limitations. For
financial reporting purposes, a valuation allowance of $6,702,000 has been
recorded to offset deferred tax assets recognized under Financial
Accounting Standards No. 109, "Accounting for Income Taxes," primarily
related to net operating losses and capitalized research and development
costs. See Note 14 of Notes to Financial Statements.
Preferred Stock Dividend; Accretion of Preferred Stock
Preferred stock dividend in 1998 reflect dividends earned at 8% per
annum on Series B convertible preferred stock, on 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 (see Notes 4, 5 and 6 to Notes to Financial Statements). Preferred
stock dividends in 1997 reflect dividends earned at 6% per annum on Series
A preferred stock issued in November 1996 and converted at the option of
the holder into common stock at various dates through November 1997 (see
Note 3 to Notes to Financial Statements). Accretion of preferred stock in
1998 reflected a purchase price discount of 20% from market for $1.0
million of Series B preferred stock issued during the first quarter of
1998. Accretion of preferred stock in 1996 reflected a purchase discount
of 35% from market for $1.55 million of Series A convertible preferred
stock issued in November 1996.
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
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<PAGE>
information and are therefore not affected by the Year 2000 date change.
We have made the necessary upgrades to our internal systems to make our
systems Year 2000 compliant at an approximate cost of $15,000, paid from
operating funds. We believe that all of our internal systems are Year 2000
compliant. We have also communicated with our major suppliers and
distributors, and are not aware of any compliance issues. We have not
assessed our non-information technology systems to determine whether there
are any Year 2000 issues. We believe that the most reasonably likely worst
case Year 2000 scenarios would relate to problems with the systems of third
parties rather than with our internal systems or products. It is clear we
have the least ability to assess and remedy the Year 2000 problems of third
parties and we believe the risks are greatest with infrastructure (e.g.
electricity supply, water and sewer service), telecommunications,
transportation supply chains and critical suppliers of materials. We are
of the belief that disruption of services, if any, are likely to be of
limited duration (less than 30 days), and that inventory balances of our
products in our distribution channels should be sufficient to cover any
limited duration interruptions. In addition, should such disruptions affect
a supplier or a distributor for a longer time period, we believe that we
have or can develop alternative sources of supply and alternative
distribution channels, ship our products directly from our suppliers or
directly to our customers, or employ other contingency steps to minimize
any disruption affecting our business, results of operations, or financial
condition.
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INFORMATION REGARDING FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning
of the securities laws. These forward-looking statements are subject to a
number of risks and uncertainties, many of which are beyond our control.
All statements other than statements of historical facts included in this
prospectus, including the statements under "Management's Discussion and
Analysis" and elsewhere in this prospectus regarding our strategy, future
operations, financial position, estimated revenues, projected costs,
prospects, plans and objectives of management, are forward-looking
statements. When used in this prospectus, the words "will," "believe,"
"anticipate," "intend," "estimate," "expect," "project" and similar
expressions are intended to identify forward-looking statements, although
not all forward-looking statements contain such identifying words. All
forward-looking statements speak only as of the date of this prospectus.
We do not undertake any obligation to update or revise publicly any
forward-looking statements, whether as a result of new information, future
events or otherwise. Although we believe that our plans, intentions and
expectations reflected in or suggested by the forward-looking statements we
make in this prospectus are reasonable, ultimately we may not achieve such
plans, intentions or expectations.
We disclose important factors that could cause our actual results to
differ materially from our expectations under "Risk Factors" and elsewhere
in this prospectus. Such factors include, among others, the following:
- our ability to achieve profitability,
- the impact on our stock price of shares eligible for future
issuance, including shares that may be sold under this
prospectus,
- developments in the market for our products, including the market
for mobile computers that use the Windows CE operating system,
and
- developments in our relationships with our strategic partners.
These cautionary statements qualify all forward-looking statements
attributable to us or persons acting on our behalf.
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OUR BOARD OF DIRECTORS
The members of our board of directors are as follows:
Director
Director Age Position with the Company Since
- ------------------------ --- ------------------------------------- --------
Charlie Bass............ 57 Chairman of the Board and Chief 1992
Executive Officer
Micheal L. Gifford...... 41 Executive Vice President and Director 1992
Jack C. Carsten......... 58 Director 1993
Edward M. Esber, Jr. ... 47 Director 1998
Gianluca Rattazzi....... 47 Director 1998
Lars Lindgren........... 43 Director 1998
Our directors stand for election at each of our annual meetings.
There are no family relationships among any of our directors or executive
officers.
Charlie Bass co-founded Socket Communications in March 1992, and has
been our Chairman of the Board of Directors from such time to the present.
Dr. Bass also served as our interim Chief Executive Officer during
January and February 1996 and from April 1997 until February 1998, at which
time Mr. Bass assumed the position of Chief Executive Officer. Dr. Bass
has been the General Partner of Bass Associates, a venture capital firm,
since September 1989. Dr. Bass currently serves as a director of Digital
Island, Inc. and several private companies. Dr. Bass holds a Ph.D. in
electrical engineering from the University of Hawaii.
Micheal L. Gifford has been a director of Socket Communications since
its inception in March 1992 and has served as our Executive Vice President
since October 1994. Mr. Gifford served as our President from its inception
in March 1992 to September 1994, and as our Chief Executive Officer from
March 1992 to June 1994. From December 1986 to December 1991, Mr. Gifford
served as a director and as Director of Sales and Marketing for Tidewater
Associates, a computer consulting and computer product development company.
Prior to working for Tidewater Associates, Mr. Gifford co-founded and was
President of Gifford Computer Systems, a computer network integration
company. Mr. Gifford received a B.S. in Mechanical Engineering from the
University of California at Berkeley.
Jack C. Carsten has been a director of Socket Communications since
May 1993. He also served us in a consulting capacity as an interim Chief
Executive Officer of the Company from July 1994 to September 1994. Mr.
Carsten owns and operates Technology Investments, a venture capital firm
and is managing director of Horizon Ventures, a venture capital fund since
1999. Prior to founding Technology Investments, Mr. Carsten was a general
partner of U.S. Venture Partners, a venture capital firm. Prior to U.S.
Venture Partners, he held senior management positions at Intel Corporation,
most recently serving as Senior Vice President and General Manager of the
Component Group, Microcomputer Group and ASIC Components Group. He
received an A.B. in Physics from Duke University.
Edward M. Esber, Jr. has been a director of Socket Communications
since June 1998. Since October 1995, Mr. Esber has served as Chairman of
SoloPoint, Inc., a communications management products company. From
October 1995 to March 1998, Mr. Esber also served as Chief Executive
Officer of SoloPoint, Inc. From May 1994 to June 1995, Mr. Esber was
Chairman, Chief Executive Officer and President of Creative Insights, Inc.,
a computer toys company. From May 1993 to June 1994, Mr. Esber was
President and Chief Operating Officer of Creative Labs, Inc., the US
subsidiary of Creative Technology Ltd. Mr. Esber has served as a director
of Quantum Corp. since 1988 and as a director of SoloPoint, Inc. since
October 1995. Mr. Esber holds a bachelor's degree in computer engineering
from Case Western Reserve University, a master's degree in electrical
engineering from Syracuse University and a M.B.A. in general management
from Harvard Business School.
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<PAGE>
Gianluca Rattazzi has been a director of Socket Communications since June
1998. Dr. Rattazzi co-founded Meridian Data, Inc., a provider of CD ROM
networking software and systems, in July 1988. He has served as President
and a director of Meridian Data since inception and was appointed Chief
Executive Officer of Meridian Data serving from October 1992 until its
recent sale to Quantum Corporation. From 1985 to 1988, Dr. Rattazzi held
various executive level positions at Virtual Microsystems, Inc., a computer
peripheral networking company, most recently as President. Dr. Rattazzi
holds an M.S. degree in Electrical Engineering and Computer Science from
the University of California, Berkeley, and a Ph.D. in Physics from the
University of Rome, Italy.
Lars Lindgren has been a director of Socket Communications since June
1998. Mr. Lindgren currently serves as the Managing Director of
ForetagsByggarna BV, a private venture capital firm which Mr. Lindgren
founded in 1991. Mr. Lindgren has been actively involved in the venture
capital industry in Sweden and to a lesser extent throughout Europe since
1984, and has founded a number of companies including the Swedish Venture
Capital Association, Campanius Venture, a venture capital fund-of-funds of
which Mr. Lindgren continues to serve as the managing partner,
ForetagsByggarna, MiniDoc, a publicly traded company in Sweden that
develops information technology systems for the pharmaceutical industry,
and Nykoping Strand, a real estate company. Mr. Lindgren has served on the
board of directors for numerous companies and is presently on the boards of
Campanius Venture, ForetagsByggarna, JKL, a Swedish public relations firm,
MiniDoc, Proventure, a venture capital fund-of-funds with mainly Finnish
institutional investors, and Time Care, a private company developing
software systems for flexible time management. Mr. Lindgren received an
M.B.A. from the Stockholm School of Economics in 1984 and has also studied
at the Sloan School of Management at M.I.T.
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<PAGE>
OUR MANAGEMENT
Our current executive officers are as follows:
Name of Officer Age Position with the Company
- ------------------------ --- ---------------------------------------------
Charlie Bass........... 57 Chairman of the Board of Directors and
Chief Executive Officer
Micheal L. Gifford..... 41 Executive Vice President and Director
David W. Dunlap........ 57 Vice President of Finance and Administration,
Chief Financial Officer and Secretary
Kevin J. Mills......... 38 Chief Operating Officer
Leonard L. Ott......... 40 Vice President of Engineering
Charlie Bass co-founded Socket Communications in March 1992, and has
been the Chairman of the Board of Directors from such time to the present.
Dr. Bass also served as our interim Chief Executive Officer during
January and February 1996 and from April 1997 until February 1998, at which
time Mr. Bass assumed the position of Chief Executive Officer. Dr. Bass
has been the General Partner of Bass Associates, a venture capital firm,
since September 1989. Dr. Bass currently serves as a director of Meridian
Data, Inc., SoloPoint, Inc. and several private companies. Dr. Bass holds a
Ph.D. in electrical engineering from the University of Hawaii.
Micheal L. Gifford has been a director of Socket Communications since
its inception in March 1992 and has served as our Executive Vice President
since October 1994. Mr. Gifford served as our President from its inception
in March 1992 to September 1994, and as our Chief Executive Officer from
March 1992 to June 1994. From December 1986 to December 1991, Mr. Gifford
served as a director and as Director of Sales and Marketing for Tidewater
Associates, a computer consulting and computer product development company.
Prior to working for Tidewater Associates, Mr. Gifford co-founded and was
President of Gifford Computer Systems, a computer network integration
company. Mr. Gifford received a B.S. in Mechanical Engineering from the
University of California at Berkeley.
David W. Dunlap has served as our Vice President of Finance and
Administration, Secretary and Chief Financial Officer since February 1995.
Prior to joining Socket Communications, Mr. Dunlap served as Vice President
of Finance and Administration at Appian Technology Inc., a semiconductor
company, from September 1993 to February 1995. Appian filed a voluntary
petition for bankruptcy under Chapter 11 of the United States Bankruptcy
Code in August 1994 in connection with the sale of substantially all of its
assets to Cirrus Logic, Inc. Mr. Dunlap served as Vice President of
Finance and Administration and Chief Financial Officer at Mountain Network
Solutions, Inc., a computer peripherals manufacturing company, from
March 1992 to September 1993. He is a certified public accountant, and
received an M.B.A. and a B.A. in Business Administration from the
University of California at Berkeley.
Kevin J. Mills has served as our Chief Operating Officer since
September 1998. Mr. Mills joined Socket Communications in September 1993
as Vice President of Operations. Prior to such time, Mr. Mills worked from
September 1987 to August 1993 at Logitech, Inc., a computer peripherals
company, serving most recently as its Director of Operations. He received
a B.E. in Electronic Engineering from the University of Limerick, Ireland.
Leonard L. Ott was appointed as our Vice President of Engineering in
December 1998. Mr. Ott joined Socket Communications in March 1994 and has
served in several engineering positions including Director of Software
Development and Director of Engineering. Mr. Ott also worked as an
engineering consultant for us from November 1993 to March 1994. Prior to
joining Socket Communications, Mr. Ott, from March 1988 to November 1993,
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<PAGE>
worked at Vision Network Systems, a networking systems company, serving
most recently as its Vice President Research and Development. He received a
B.S. in Computer Science from the University of California at Berkeley.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On November 23, 1998, we sold 17,429 shares of our Series D preferred
stock at a price per share of $5.7375, for an aggregate purchase price of
$100,000, to the Bass Trust in a private offering. Charlie Bass, our Chief
Executive Officer and Chairman of the Board, is the trustee of the Bass
Trust. At the same time, we also issued to the Bass Trust three-year
warrants to acquire 58,097 shares of common stock at $0.57375 per share.
Explorer Fund Management, and its principal, Robert Holz, has served
in a finder's role in connection with our Series B preferred stock
financing of $1.5 million during the first quarter of 1998 and our common
stock financings of $1.0 million and $4.6 million in September and December
1999, respectively. In connection with these financings, Explorer Fund
Management received placement and finders fees in the form of cash and
warrants to acquire common stock at the financing price as follows:
Series B: Five year warrants to acquire 187,500 shares at
$0.40 per share
Series B-1: Five year warrants to acquire 132,750 shares at
$0.565 per share
Series B-2: Five year warrants to acquire 130,725 shares at
$0.57375 per share
Common 9/99: Three year warrants to acquire 100,000 shares at
$1.08 per share
Common 12/99: Three year warrants to acquire 150,000 shares at $4.66
per share and a cash payment of $139,800 representing
3% of the offering proceeds.
Mr. Holz holds rights to attend and observe Socket's Board of Directors
meetings. See also Note 2 under Principal Stockholders.
PRINCIPAL STOCKHOLDERS
The following table sets forth information regarding the beneficial
ownership of our common stock as of December 20, 1999, by the following
individuals or groups:
- each person known by us to own beneficially more than 5.0% of the
outstanding shares of common stock;
- each director of Socket Communications;
- each of the named executive officers, and
- all directors and executive officers as a group.
Unless otherwise indicated, the address of each of the individuals
listed in the table is c/o Socket Communications, Inc., 37400 Central
Court, Newark, California 94560. Except as otherwise noted, to the
Company's knowledge, the persons named in the table have sole voting and
investment power with respect to all shares of common stock shown as
beneficially owned by them, subject to community property laws where
applicable and the information contained in the footnotes to this table.
The table includes information with respect to the beneficial ownership of
our common stock and on an as-converted basis for the shares of Series B, C
and D preferred stock held by them.
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<PAGE>
Percentage ownership in the following table is based on 14,991,583
shares of common stock outstanding as of December 20, 1999. Beneficial
ownership is determined in accordance with the rules of the SEC and
generally includes voting or investment power with respect to securities.
Shares of our common stock subject to options that are presently
exercisable or exercisable within 60 days of December 20, 1999 are deemed
to be outstanding and beneficially owned by the person holding the options
for the purpose of computing the percentage ownership of that person, but
are not treated as outstanding for the purpose of computing the percentage
of any other person.
Number of Shares Percentage of Shares
Name and Address of Beneficial Owner Beneficially Owned Beneficially Owned(%)
- ------------------------------------ ------------------ ---------------------
BarPoint.com........................ 1,735,472(1) 11.2
Explorer Funds...................... 1,433,676(2) 8.8
J. P. Wood.......................... 1,021,030(3) 6.7
Pictet Bank & Trust Limited......... 798,606(4) 5.3
Charlie Bass........................ 1,380,883(5) 8.7
Lars Lindgren....................... 538,567(6) 3.5
Micheal L. Gifford.................. 281,319(7) 1.9
Jack C. Carsten..................... 186,864(8) 1.2
David W. Dunlap..................... 171,939(9) 1.1
Kevin W. Mills...................... 156,456(10) 1.0
Leonard L. Ott...................... 45,206(11) *
Edward M. Esber, Jr. ............... 11,250(12) *
Gianluca Rattazzi................... 11,250(13) *
All directors and officers as a
group (9 persons).............. 2,783,734(14) 16.3
- -------------------------
* Less than 1%
(1) Represents 1,239,743 shares of common stock plus 495,729 shares of
common stock issuable upon exercise of a warrant. The address of
BarPoint.com is 12864 Biscayne Blvd. #262, North Miami, FL 33181.
(2) Consists of 871,500 shares of common stock issuable upon the conversion
of 8,715 shares of Series B-2 convertible preferred stock owned by
Explorer Partners II, L.L.C., 86,201 shares of common stock
representing the payment of dividends to Explorer Partners II through
September 30, 1999, and 485,975 shares owned by Explorer Fund
Management, L.L.C. subject to warrants exercisable within 60 days of
December 15, 1999. Explorer Partners II hold 100% of the shares of
Series B-2 convertible preferred stock outstanding. Explorer Fund
Management, as investment advisor to Explorer Partners II, has shared
voting and investment power of the shares directly owned by Explorer
Partners II with Tom Papoutsis, the Managing Director of Explorer
Partners II. Robert Holz, as Managing Director of Explorer Fund
Management, exercises voting and investment control with respect to the
shares held by Explorer Fund Management. Messrs. Papoutsis and Holz
disclaim beneficial ownership of the shares held by the Explorer Funds
except to the extent of their respective pecuniary interests therein.
The address of Explorer Funds is 444 North Michigan Avenue, Suite 2190,
Chicago, IL 606ll.
(3) Represents 785,408 shares of common stock plus 235,622 shares of common
stock issuable upon exercise of a warrant. The address of J. P. Wood is
Bird House, Lyford Cay, Nassau, Bahamas N7776.
(4) Represents 694,440 shares of common stock plus 104,166 shares of common
stock issuable upon exercise of a warrant. The address of Pictet Bank
& Trust Limited is Charlotte House, Charlotte Street, P.O. Box N4837,
Nassau, Bahamas.
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<PAGE>
(5) Consists of 366,747 shares owned by Bass Associates (including 64,735
shares of common stock subject to options exercisable within 60 days of
December 15, 1999) and 1,014,136 shares owned by Bass Trust (including
106,764 shares of common stock, 363,644 shares of common stock issuable
upon conversion of Series C convertible preferred stock within 60 days
of December 15, 1999, 346,667 shares of common stock subject to options
exercisable within 60 days of December 15, 1999, 174,290 shares of
common stock issuable upon conversion of Series D convertible preferred
stock within 60 days of December 15, 1999, and 22,771 shares of common
stock subject to warrants exercisable within 60 days of December 15,
1999). Dr. Bass is the General Partner of Bass Associates and may be
deemed to share voting and investment power with respect to these
shares. However, Dr. Bass disclaims beneficial ownership of shares
owned by Bass Associates except to the extent of his pecuniary interest
therein.
(6) Includes 527,317 shares of common stock issuable upon conversion of
Series C convertible preferred stock within 60 days of December 15,
1999 and 11,250 shares of common stock subject to options exercisable
within 60 days of December 15, 1999. ForetagsByggarna BV, an
investment management company, holds the Series C convertible preferred
stock outstanding. Mr. Lindgren is the beneficial owner of these
shares and exercises ownership and investment control.
(7) Includes 126,963 shares of common stock and 154,356 shares of common
stock subject to options exercisable within 60 days of December 15,
1999.
(8) Includes 139,847 shares of common stock and 47,017 shares of common
stock subject to options exercisable within 60 days of December 15,
1999.
(9) Includes 23,087 shares of common stock and 148,852 shares of common
stock subject to options exercisable within 60 days of December 15,
1999.
(10) Includes 5,564 shares of common stock and 150,892 shares of common
stock subject to options exercisable within 60 days of December 15,
1999.
(11) Includes 246 shares of common stock and 44,960 shares of common stock
subject to options exercisable within 60 days of December 15, 1999.
(12) Represents 11,250 shares of common stock subject to options
exercisable within 60 days of December 15, 1999.
(13) Represents 11,250 shares of common stock subject to options
exercisable within 60 days of December 15, 1999.
(14) See notes (5) through (13) above
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<PAGE>
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth the compensation we paid during the
fiscal years ended December 31, 1998, 1997 and 1996 to our Chief Executive
Officer and any of our other executive officers whose total 1998 salary and
bonus exceeded $100,000.
<TABLE>
<CAPTION>
Long-term
Compensation
Awards
Annual Compensation Securities Other All
----------------------- Underlying Annual Other
Name and Principal Position Year Salary ($) Bonus ($)(1) Options(#) Compensation($) Compensation($)
- ------------------------------------ ---- ---------- ----------- ------------ --------------- --------------
<S> <C> <C> <C> <C> <C> <C>
Charlie Bass (2)................... 1998 -- -- 530,767(3) 7,500(2) --
Chief Executive Officer 1997 -- -- 30,000 -- --
and Director 1996 -- -- 55,767(4) -- --
Micheal L. Gifford................. 1998 125,000 17,536 172,411(3) -- --
Executive Vice President 1997 120,000 21,829 32,500 -- --
and Director 1996 120,000 22,211 35,745(4) -- --
David W. Dunlap(5)................. 1998 125,000 17,114 152,580(3) -- --
Vice President of Finance and 1997 120,000 20,696 32,500 -- --
Administration, Chief Financial 1996 120,000 18,775 15,914(4) -- --
Officer and Secretary
Kevin J. Mills..................... 1998 125,000 17,239 152,580(3) -- --
Vice President of Operations 1997 115,000 20,930 32,500 -- --
1996 99,999 22,291 15,914(4) -- --
Leonard L. Ott..................... 1998 101,250 7,133 60,703(3) -- --
Vice President of Engineering
</TABLE>
- --------------------
(1) Represents cash bonuses earned for work performed during 1998.
Bonuses earned during the first three fiscal quarters of 1998 were paid
in 1998 whereas bonuses earned during the fourth quarter of 1998 were
paid in the first quarter of 1999.
(2) Dr. Bass served as Acting Chief Executive Officer from April 24, 1997
through January 1998, at which time Dr. Bass assumed the role of Chief
Executive Officer. In consideration for such services, we granted Dr.
Bass an option in 1998 to purchase 500,000 shares of our common stock at
an exercise price of $0.6875 and vesting over a four year period
commencing April 24, 1997. Dr. Bass serves without cash compensation.
Other annual compensation consists of fees for attendance at board
meetings for which each director (except Mr. Gifford) was paid $1,500
per meeting attended during 1998.
(3) Includes options granted pursuant to the Board of Director's decision
on January 14, 1998 to reprice certain outstanding options by exchanging
outstanding options for new options priced to reflect the market price
of our common stock on the date of the exchange. See "Report on
Repricing of Options" below.
(4) Includes options granted pursuant to the Compensation Committee's
decision on December 18, 1996 to reprice certain outstanding options by
exchanging outstanding options for new options priced to reflect the
market price of our common stock on the date of the exchange.
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<PAGE>
Report on Repricing of Options
In January 1998, our board of directors authorized the reduction of
the exercise price of options that had exercise prices of $1.55 per share
or higher granted under the 1995 Stock Plan to employees, including
executive officers and directors, to $0.46 per share, the then current
market value. The repricing was accomplished by an exchange of each option
held by an optionee at the time of the repricing for an option with a lower
exercise price and an extended vesting period. Options provide an
incentive for employees to seek the long term success of our company. The
decline in the market price of our common stock prior to the repricing
diminished the incentive power of options previously granted. Thus, our
board of directors recommended the reduction of the exercise price of our
employees' outstanding options to the market price at the time of the
exchange.
Option Grants in 1998
The following table sets forth information for the fiscal year ended
December 31, 1998 with respect to options granted to the following
executive officers. No stock appreciation rights were granted during 1998.
All options were granted at an exercise price equal to the fair market
value of our common stock as determined by the board of directors on the
date of grant.
Individual Grants
----------------------------------------------------
Number of % of Total
Securities Options Exercise
Underlying Granted to Price Per
Options Employees in Share Expiration
Name Granted Fiscal 1998(1) ($) Date
- ----------------------- ----------- -------------- ----------- ----------
Charlie Bass.......... 500,000 41.9 0.6875 06/10/08
Micheal L. Gifford.... 70,000 5.9 0.46 01/14/08
66,666 5.6 0.6875 06/10/08
David W. Dunlap....... 70,000 5.9 0.46 01/14/08
66,666 5.6 0.6875 06/10/08
Kevin J. Mills........ 70,000 5.9 0.46 01/14/08
66,666 5.6 0.6875 06/10/08
Leonard L. Ott........ 30,000 2.5 0.6875 06/10/08
24,000 2.0 0.4375 12/09/08
- -------------------------
(1) Based on options granted to employees, consultants and directors in
1998 to purchase 1,192,148 shares of our common stock.
Aggregated Option Exercises in Fiscal 1998 and Fiscal Year-End Option
Values
None of the executive officers listed below exercised any stock
options during 1998. The following table provides information on the value
of such officers' unexercised options at December 31, 1998.
Number of Securities
Underlying Unexercised Value of Unexercised
Options At In-the-Money Options at
December 31, 1998(#) December 31, 1998($)(1)
Name Exercisable Unexercisable Exercisable Unexercisable
- --------------------- ----------- ------------- ----------- -------------
Charlie Bass......... 257,027 308,229 3,622 1,279
Micheal L. Gifford... 83,141 121,770 7,423 7,299
David W. Dunlap...... 77,637 121,770 4,845 7,299
Kevin J. Mills....... 79,677 121,770 4,845 7,299
Leonard J. Ott....... 23,147 53,167 1,083 3,688
- -------------------------
(1) Based upon a final bid price, as of December 31, 1998, of $0.59 per
share.
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<PAGE>
Board of Directors
We pay each director (except Micheal Gifford who also serves as an
officer and employee) a board meeting attendance fee of $1,500 per meeting.
The Board held a total of five meetings in 1998 and four meetings in 1999.
Each director (except Micheal Gifford and Charlie Bass in 1998) also
received a stock option grant of 10,000 shares vesting monthly over 24
months in June 1998 and a stock option grant of 10,000 shares vesting
monthly over 24 months in June 1999 for their services as a director. Both
grants were priced at the fair market value of our common stock on the date
of grant. None of our directors (except Micheal Gifford who receives a
salary and employee stock options as an officer and employee and Mr. Bass
who received a stock option grant in June 1998 of 500,000 shares vesting
monthly over 48 months as compensation for his services as Chief Executive
Officer) received no other compensation during 1998 or 1999.
Executive Employment Contracts and Change-in-Control Arrangements
In October 1997, we entered into separate employment agreements with
Micheal Gifford, our Vice President of Business Development, Kevin Mills,
our Chief Operating Officer, and David Dunlap, our Chief Financial Officer.
Pursuant to these agreements, which expire on December 31, 2000 and are
each terminable at will by each party, respectively, if we terminate the
executive's employment without cause, we shall pay the executive:
- six months' base salary regardless of whether he secures other
employment during those six months,
- (ii) health insurance until the earlier of the date of the executive's
eligibility for the health insurance benefits provided by another
employer or the expiration of six months,
- (iii) the full bonus amount to which he would have been entitled for the
first quarter following termination and one-half of such bonus amount
for the second quarter following termination, and
- (iv) certain other benefits including the ability to purchase at book
value certain items of Company property purchased by the Company for the
executive's use, which may include a personal computer, a cellular
phone, and other similar items.
In February 1998, we initiated a bonus plan under which we will create
a bonus pool in the amount of 10% of any consideration payable by a buyer
in a change of control transaction to be allocated to the executive
officers and such other employees the board of directors determines in its
sole discretion to include in such bonuses. Additionally, under the 1995
and 1999 Stock Option Plans, all optionees' rights to purchase stock shall,
upon a change of control of the Company, be immediately vested and be fully
exercisable under certain circumstances.
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<PAGE>
PLAN OF DISTRIBUTION
Up to 100,000 shares of common stock covered by this prospectus may be
offered and sold from time to time upon exercise of the 50,000
Underwriters' warrants. Up to 2,551,168 shares of common stock covered by
this prospectus may be offered and sold from time to time upon exercise of
the redeemable warrants, including redeemable warrants issuable upon
exercise of the Underwriters' warrants. The holders of the Underwriters'
warrants and redeemable warrants will act independently of us in making
decisions with respect to the timing, manner and size of each exercise of
warrants.
LEGAL MATTERS
Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto,
California will pass upon certain legal matters relating to the validity of
our common stock offered under this prospectus.
EXPERTS
Ernst & Young LLP, independent auditors, have audited our financial
statements at December 31, 1998 and 1997, and for each of the three years
in the period ended December 31, 1998, as set forth in their report (which
contains an explanatory paragraph describing conditions that raise
substantial doubt about the Company's ability to continue as a going
concern as described in Note 1 to the financial statements). We've
included our financial statements in the prospectus and elsewhere in the
registration statement in reliance on Ernst & Young LLP's report, given on
their authority as experts in accounting and auditing.
INDEMNIFICATION
Delaware corporate law authorizes a court to award, or a corporation's
board of directors to grant, indemnity to directors and officers in terms
sufficiently broad to permit such indemnification under certain
circumstances for liabilities (including reimbursement for expenses
incurred) arising under the Securities Act. Article VII of our Certificate
of Incorporation and Article VI of our Bylaws provide for indemnification
of our directors, officers, employees and other agents to the maximum
extent permitted by Delaware Corporate law. In addition, we have entered
into Indemnification Agreements with our officers and directors and certain
stockholders.
Insofar as indemnification by us for liabilities arising under the
Securities Act may be permitted to our directors, officers and controlling
persons pursuant to the provisions referenced above or otherwise, we have
been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the
Securities Act, and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than the payment
by us of expenses incurred or paid by one of our directors, officers, or
controlling persons in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered hereunder, we will, unless
in the opinion of our counsel the matter has been settled by controlling
precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by it is against public policy as expressed in
the Securities Act and will be governed by the final adjudication of such
issue.
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<PAGE>
WHERE YOU CAN FIND MORE INFORMATION
We have filed with the Securities and Exchange Commission a
registration statement on Form SB-2, of which this prospectus is a part,
with respect to the units and shares of common stock offered by this
prospectus. This prospectus does not contain all of the information
included in the registration statement. Statements contained in this
prospectus describing the provisions of any document are not necessarily
complete. You should refer to the copies of these documents filed as
exhibits to the registration statement or otherwise filed by us with the
SEC for a more complete understanding of the matter involved. Each
statement about these documents is qualified in its entirety by reference
to the actual document.
We are subject to the informational requirements of the Exchange Act
and in accordance therewith file reports, proxy statements and other
information with the SEC. The SEC maintains a website that contains
reports, proxy statements and other information regarding us. The address
of the SEC website is http://www.sec.gov. Copies of our reports, proxy
statements and other information also may be inspected and copied at the
public reference facilities maintained by the SEC at:
Judiciary Plaza Citicorp Center Seven World Trade Center
Room 1024 500 West Madison Street 13th Floor
450 Fifth Street, N.W. Suite 1400 New York, NY 10048
Washington, D.C. 20549 Chicago, Illinois 60661
Copies of these materials can also be obtained by mail at prescribed
rates from the Public Reference Section of the SEC, 450 Fifth Street, N.W.,
Washington, D.C. 20549 or by calling the SEC at 1-800-SEC-0330. Our
reports, proxy statements and other public filings may also be inspected
at:
The National Association of Securities Dealers
1735 K Street, N.W.
Washington, D.C. 20006
You can also call David W. Dunlap, Chief Financial Officer of Socket
Communications, at (510) 744-2735 with any questions about the offering
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<PAGE>
SOCKET COMMUNICATIONS, INC.
INDEX TO FINANCIAL STATEMENTS
For the Years Ended December 31, 1997 and 1998
Report of Ernst & Young LLP, Independent Auditors..................F-1
Balance Sheets.....................................................F-2
Statements of Operations...........................................F-3
Statements of Stockholders' Equity (Deficit).......................F-4
Statements of Cash Flows...........................................F-5
Notes to Financial Statements......................................F-6
For the Three and Nine Months Ended September 30, 1998 and 1999 (unaudited)
Condensed Balance Sheets..........................................F-18
Condensed Statements of Operations................................F-19
Condensed Statements of Cash Flows................................F-20
Notes to Condensed Financial Statements...........................F-21
<PAGE>
REPORT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
The Board of Directors and Stockholders
Socket Communications, Inc.
We have audited the accompanying balance sheets of Socket
Communications, Inc. as of December 31, 1998 and 1997, and the related
statements of operations, stockholders' equity (deficit) and cash flows for
each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements
based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the
overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the financial position of Socket
Communications, Inc. at December 31, 1998 and 1997 and the results of its
operations and its cash flows for each of the three years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming
Socket Communications, Inc. will continue as a going concern. As discussed
in Note 1 to the financial statements, the Company's recurring operating
losses and stockholders' equity and working capital balances raise
substantial doubt about its ability to continue as a going concern.
Management's plans as to these matters are also discussed in Note 1. The
financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
ERNST & YOUNG LLP
San Jose, California
February 18, 1999
-F-1-
<PAGE>
SOCKET COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1998 1997
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $971,157 $276,900
Accounts receivable, net of allowance for doubtful
accounts of $42,265 in 1998 and $44,691 in 1997.. 874,895 855,925
Accounts receivable from related party............. -- 43,371
Inventories........................................ 479,578 195,127
Prepaid expenses................................... 41,764 9,048
------------ ------------
Total current assets............................. 2,367,394 1,380,371
------------ ------------
Property and equipment:
Machinery and office equipment..................... 595,419 600,851
Computer equipment................................. 480,725 530,239
------------ ------------
1,076,144 1,131,090
Accumulated depreciation........................... (850,056) (807,502)
------------ ------------
226,088 323,588
Other assets......................................... 68,603 66,305
------------ ------------
Total assets..................................... $2,662,085 $1,770,264
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Bank line of credit................................ $520,727 $523,941
Convertible subordinated notes..................... -- 1,950,000
Accounts payable................................... 1,140,445 1,581,008
Accounts payable to related parties................ -- 66,966
Accrued expenses................................... 221,783 314,380
Accrued payroll and related expenses............... 201,952 277,553
Deferred revenue................................... 240,118 178,625
Current portion of capital leases and equipment
financing notes................................. 41,083 61,804
------------ ------------
Total current liabilities........................ 2,366,108 4,954,277
Long-term portion of capital leases and equipment
financing notes................................. -- 40,931
Commitments and contingencies
Stockholders' equity (deficit):
Preferred stock, $0.001 par value;
Authorized shares -- 3,000,000
Series B Convertible Preferred Stock:
Designated shares - 37,500; Issued and
outstanding shares -- 30,065 at December 31,
1998 and none at December 31, 1997; Aggregate
liquidation preference -- $1,530,000 at
December 31, 1998............................. 1,565,976 --
Series C Convertible Preferred Stock:
Designated shares - 175,000; Issued and
outstanding shares -- 163,468 at December 31,
1998 and none at December 31, 1997; Aggregate
liquidation preference -- $1,824,320 at
December 31, 1998............................. 1,714,043 --
Series D Convertible Preferred Stock:
Designated shares - 175,000; Issued and
outstanding shares -- 174,292 at December 31,
1998 and none at December 31, 1997; Aggregate
liquidation preference -- $1,010,543 at
December 31, 1998............................. 769,887 --
Common stock, $0.001 par value:
Authorized shares -- 15,000,000
Issued and outstanding shares -- 7,365,914
in 1998 and 6,501,275 in 1997................. 7,366 6,501
Additional paid-in capital......................... 14,217,366 13,208,038
Accumulated deficit................................ (17,978,661) (16,439,483)
------------ ------------
Total stockholders' equity (deficit)............. 295,977 (3,224,944)
------------ ------------
Total liabilities and stockholders' equity
(deficit).................................... $2,662,085 $1,770,264
============ ============
</TABLE>
See accompanying notes.
-F-2-
<PAGE>
SOCKET COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues................................ $5,477,804 $4,779,200 $4,570,438
Cost of revenue......................... 2,238,658 2,788,108 2,496,028
------------ ------------ ------------
Gross profit............................ 3,239,146 1,991,092 2,074,410
------------ ------------ ------------
Operating expenses:
Research and development.............. 999,362 1,050,411 1,067,399
Sales and marketing................... 2,009,003 2,719,050 2,666,933
General and administrative............ 1,192,452 1,613,492 1,647,335
------------ ------------ ------------
Total operating expenses............ 4,200,817 5,382,953 5,381,667
------------ ------------ ------------
Operating loss.......................... (961,671) (3,391,861) (3,307,257)
Interest income......................... 4 2,544 29,496
Interest expense........................ (105,872) (165,472) (50,609)
------------ ------------ ------------
Net loss................................ (1,067,539) (3,554,789) (3,328,370)
Preferred stock dividend................ (221,639) (45,465) --
Accretion of preferred stock............ (250,000) -- (542,500)
------------ ------------ ------------
Net loss applicable to common
stockholders.......................... ($1,539,178) ($3,600,254) ($3,870,870)
============ ============ ============
Basic and diluted net loss per share
applicable to common stockholders..... ($0.22) ($0.70) ($1.28)
============ ============ ============
Weighted average shares outstanding..... 7,103,395 5,148,729 3,015,263
============ ============ ============
</TABLE>
See accompanying notes.
-F-3-
<PAGE>
SOCKET COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Series A Series B Series C Series D
Convertible Convertible Convertible Convertible
Preferred Stock Preferred Stock Preferred Stock Preferred Stock
-------------------- ------------------- -------------------- -------------------
Shares Amount Shares Amount Shares Amount Shares Amount
-------- ----------- ------- ----------- -------- ----------- --------- ---------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1995... -- $ -- -- $ -- -- $ -- -- $ --
Issuance of Series A
Convertible Preferred Stock.. 15,500 1,251,313 -- -- -- -- -- --
Exercise of Common Stock
Options...................... -- -- -- -- -- -- -- --
Accretion of Preferred Stock... -- 542,500 -- -- -- -- -- --
Net Loss....................... -- -- -- -- -- -- -- --
-------- ----------- ------- ----------- -------- ----------- --------- ---------
Balance at December 31, 1996... 15,500 1,793,813 -- -- -- -- -- --
Conversion of Series A
Convertible Preferred Stock
to common stock.............. (15,500) (1,793,813) -- -- -- -- -- --
Dividends on Series A
Convertible Preferred Stock.. -- -- -- -- -- -- -- --
Exercise of Common Stock
Options...................... -- -- -- -- -- -- -- --
Net Loss....................... -- -- -- -- -- -- -- --
-------- ----------- ------- ----------- -------- ----------- --------- ---------
Balance at December 31, 1997... -- -- -- -- -- -- -- --
Issuance of Series B
Convertible Preferred Stock.. -- -- 30,065 1,565,976 -- -- -- --
Conversion of Subordinated
Convertible Notes and
Accrued Interest to Series C
Convertible Preferred Stock
and Common Stock............. -- -- -- -- 163,468 1,714,043 -- --
Issuance of Series D
Convertible Preferred Stock.. -- -- -- -- -- -- 174,292 769,887
Accretion of Preferred Stock -- -- -- -- -- -- -- --
Dividends on Convertible
Preferred Stock.............. -- -- -- -- -- -- -- --
Dividends Paid/Payable in
Common Stock................. -- -- -- -- -- -- -- --
Issuance of Common Stock
Warrants in Connection with
Preferred Stock Issuances.... -- -- -- -- -- -- -- --
Charge for Compensatory Stock
Option....................... -- -- -- -- -- -- -- --
Net loss....................... -- -- -- -- -- -- -- --
-------- ----------- ------- ----------- -------- ----------- --------- ---------
Balance at December 31, 1998... -- $ -- 30,065 $1,565,976 163,468 $1,714,043 174,292 $769,887
======== =========== ======= =========== ======== =========== ========= =========
</TABLE>
SOCKET COMMUNICATIONS, INC.
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
<TABLE>
<CAPTION>
Total
Common Stock Additional Stockholders'
------------------ Paid-in Accumulated Equity
Shares Amount Capital Deficit (Deficit)
---------- ------- ------------ ------------- -------------
<S> <C> <C> <C> <C> <C>
Balance at December 31, 1995... 2,990,870 $2,991 $11,393,663 ($8,968,359) $2,428,295
Issuance of Series A
Convertible Preferred Stock.. -- -- -- -- 1,251,313
Exercise of Common Stock
Options...................... 38,106 38 20,257 -- 20,295
Accretion of Preferred Stock... -- -- -- (542,500) --
Net Loss....................... -- -- -- (3,328,370) (3,328,370)
---------- ------- ------------ ------------- -------------
Balance at December 31, 1996... 3,028,976 3,029 11,413,920 (12,839,229) 371,533
Conversion of Series A
Convertible Preferred Stock
to common stock.............. 3,466,649 3,466 1,790,347 -- --
Dividends on Series A
Convertible Preferred Stock.. -- -- -- (45,465) (45,465)
Exercise of Common Stock
Options...................... 5,650 6 3,771 -- 3,777
Net Loss....................... -- -- -- (3,554,789) (3,554,789)
---------- ------- ------------ ------------- -------------
Balance at December 31, 1997... 6,501,275 6,501 13,208,038 (16,439,483) (3,224,944)
Issuance of Series B
Convertible Preferred Stock.. -- -- -- -- 1,565,976
Conversion of Subordinated
Convertible Notes and
Accrued Interest to Series C
Convertible Preferred Stock
and Common Stock............. 756,338 757 379,949 -- 2,094,749
Issuance of Series D
Convertible Preferred Stock.. -- -- -- -- 769,887
Accretion of Preferred Stock -- -- -- (250,000) (250,000)
Dividends on Convertible
Preferred Stock.............. -- -- -- (221,639) (221,639)
Dividends Paid/Payable in
Common Stock................. 108,301 108 216,922 -- 217,030
Issuance of Common Stock
Warrants in Connection with
Preferred Stock Issuances.... -- -- 303,396 -- 303,396
Charge for Compensatory Stock
Option....................... -- -- 109,061 -- 109,061
Net loss....................... -- -- -- (1,067,539) (1,067,539)
---------- ------- ------------ ------------- -------------
Balance at December 31, 1998... 7,365,914 $7,366 $14,217,366 ($17,978,661) $295,977
========== ======= ============ ============= =============
</TABLE>
See accompanying notes.
-F-4-
<PAGE>
SOCKET COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.............................. ($1,067,539) ($3,554,789) ($3,328,370)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation........................ 135,067 108,280 79,095
Amortization........................ 59,147 163,835 150,634
Loss on disposal of property and
equipment......................... -- -- 7,173
Compensatory stock option grant..... 109,061 -- --
Changes in operating assets and
liabilities:
Accounts receivable................. (18,970) (22,666) 67,458
Accounts receivable from related
party............................ 43,371 (43,371) --
Inventories......................... (284,451) 543,681 (228,477)
Prepaid expenses.................... (32,716) 11,475 11,357
Other assets........................ (2,298) (18,070) 24,201
Accounts payable.................... (283,350) 503,611 99,579
Accounts payable to related
parties.......................... (66,966) 48,312 (25,109)
Accrued expenses.................... (92,597) 99,371 92,004
Accrued payroll and related
expenses......................... (75,601) 46,795 (127,013)
Deferred revenue.................... 61,493 (60,151) 126,633
------------ ------------ ------------
Net cash used in operating
activities....................... (1,516,349) (2,173,687) (3,050,835)
INVESTING ACTIVITIES
Purchase of equipment................. (96,714) (183,178) (296,048)
------------ ------------ ------------
Net cash used in investing
activities....................... (96,714) (183,178) (296,048)
FINANCING ACTIVITIES
Payments on capital leases and
equipment financing notes........... (61,652) (109,236) (121,640)
Proceeds from equipment financing..... -- -- 85,861
Net advances(repayments) on
revolving line of credit............ (3,214) 201,198 322,743
Proceeds from issuance of
convertible subordinated notes...... -- 1,950,000 --
Preferred stock dividends paid........ (17,073) (30,318) --
Stock options exercised............... -- 3,777 20,295
Net proceeds from sale of
preferred stock and warrants........ 2,389,259 -- 1,251,313
------------ ------------ ------------
Net cash provided by financing
activities....................... 2,307,320 2,015,421 1,558,572
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents...................... 694,257 (341,444) (1,788,311)
Cash and cash equivalents at
beginning of year..................... 276,900 618,344 2,406,655
------------ ------------ ------------
Cash and cash equivalents at end
of year............................... $971,157 $276,900 $618,344
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest.................. $54,734 $63,061 $50,609
Dividends paid/payable in cash.......... $4,609 $15,147 $ --
Dividends paid in common stock.......... $217,030 $ -- $ --
Notes payable and accrued interest
converted to preferred stock.......... $1,714,043 $ -- $ --
Notes payable and accrued interest
converted to common stock............. $380,706 $ -- $ --
Conversion of preferred stock to
common stock.......................... $ -- $1,793,813 $ --
Accretion of preferred stock............ $250,000 $ -- $542,500
Warrants issued in conjunction
with preferred stock financing........ $303,396 $ -- $ --
</TABLE>
See accompanying notes.
-F-5-
<PAGE>
NOTE 1 - Organization and Basis of Presentation
Socket Communications, Inc. ("Socket" or the "Company") develops and
sells connection solutions for handheld computers that use the Windows CE
operating system from Microsoft Corporation ("Microsoft") and for mobile
computers that use Microsoft's Windows 9x and NT operating systems. These
connection solutions include a family of low power PC Card adapters for
serial communications, Ethernet connectivity, mobile data collection, and
wireless communications. Socket also developed during 1998, and is further
developing during 1999, its family of PC cards in a CompactFlash form
factor for use with smaller handheld computers such as the Windows CE Palm-
size PC and other small devices. The Company's family of serial, Ethernet
and data collection plug-in card products are its principal sources of
revenues. The Company is incorporated in the state of Delaware.
Basis of Presentation
The financial statements have been prepared on a going concern basis.
As of December 31, 1998, the Company had working capital of $1,286 and an
accumulated deficit of $17,978,661, used cash in operating activities of
$1,516,349 in 1998, and had recurring losses. The Company will require
additional funding in 1999 to finance and strengthen its working capital
balances, which the Company intends to accomplish through the issuance of
additional equity securities, through increased borrowings on the Company's
bank line as the levels of receivables permit, and through development
funding from development partners. The Report of Independent Auditors on
the Company's financial statements for the year ended December 31, 1998
included in Form 10-KSB contains an explanatory paragraph regarding the
Company's need for additional financing and indicated substantial doubt
about the Company's ability to continue as a going concern. There can be
no assurances that such capital will be available on acceptable terms, if
at all, and such terms may be dilutive to existing stockholders. The
Company's inability to secure the necessary funding would have a material
adverse affect on the Company's financial condition and results of
operations. 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. See Note
16 - Subsequent Event, Common Stock Financings (Unaudited).
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements
and accompanying notes. Actual results could differ from those estimates.
NOTE 2 - Summary of Significant Accounting Policies
Cash Equivalents
The Company considers all highly liquid investments purchased with a
maturity date of three months or less at date of purchase to be cash
equivalents as of December 31, 1998 and 1997. All of the Company's cash
and cash equivalents consisted of monies held in demand deposits.
-F-6-
<PAGE>
Inventories
Inventories consist principally of raw materials and sub-assemblies,
which are stated at the lower of cost (first-in, first-out) or market.
December 31,
-------------------------
1998 1997
------------ ------------
Raw materials and sub-assemblies....... $454,836 $179,267
Finished goods......................... 24,742 15,860
------------ ------------
$479,578 $195,127
============ ============
Property and Equipment
Property and equipment are stated at cost. Depreciation and
amortization are computed using the straight-line method, over the
estimated useful lives of the assets which range from one to five years.
Assets under capital leases are amortized over the shorter of the asset
life or the remaining lease term.
Concentration of Credit Risk
The Company uses financial instruments that potentially subject it to
concentrations of credit risk. Such instruments include cash equivalents
and accounts receivable. The Company invests its cash in cash demand
deposits. The Company places its investments with high-credit-quality
financial institutions and limits the credit exposure to any one financial
institution or instrument. To date, the Company has not experienced losses
on these investments. The Company sells primarily to distributors and
original equipment manufacturers. The Company performs ongoing credit
evaluations of its customers' financial condition but generally requires no
collateral. Reserves are maintained for potential credit losses, and such
losses have been within management's expectations.
Revenue Recognition
Product revenue to customers other than distributors is recognized at
the time of shipment. Revenue on shipments to distributors, which are
subject to certain rights of return and price protection, is deferred until
the merchandise is sold by the distributors. Contract engineering revenue
is recognized as earned based on contract milestones.
Sales Returns and Warranties
The Company accrues for estimated sales returns/exchanges for end user
sales and warranty costs upon recognition of sales. The Company has not
experienced significant warranty claims to date.
Research and Development
Research and development expenditures are generally charged to
operations as incurred. Statement of Financial Accounting Standards No. 86,
"Accounting for the Costs of Computer Software to be Sold, Leased or
Otherwise Marketed," requires the capitalization of certain software
development costs subsequent to the establishment of technological
feasibility. Based on the Company's product development process,
technological feasibility is established upon the completion of a working
model. Costs incurred by the Company between the completion of the working
model and the point at which the product is ready for general release have
been insignificant. Accordingly, the Company has charged all such costs to
research and development expenses in the accompanying statements of
operations.
-F-7-
<PAGE>
Advertising Expense
The cost of advertising is expensed as incurred. The Company incurred
$373,054, $343,910, and $370,945 in advertising costs during 1998, 1997,
and 1996 respectively.
Net Loss Per Share
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 (amounts in thousands except per share):
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Numerator for basic:
Net loss.............................. ($1,067) ($3,555) ($3,328)
Preferred stock dividends............. (222) (45) --
Accretion of preferred stock.......... (250) -- (543)
------------ ------------ ------------
Net loss applicable to common
stockholders.......................... ($1,539) ($3,600) ($3,871)
============ ============ ============
Denominator:
Weighted average common shares
outstanding used in computing
basic net loss per share............ 7,103 5,149 3,015
============ ============ ============
Basic and diluted net loss per share
applicable to common stockholders..... ($0.22) ($0.70) ($1.28)
============ ============ ============
</TABLE>
The diluted net loss per share is equivalent to the basic net loss per
share because the Company has experienced losses since inception and thus
no potential common shares from stock options, convertible preferred stock
or convertible notes have been included in the net loss per share
calculation.
Comprehensive Earnings
Effective January 1, 1998, the Company adopted Statement of Financial
Accounting Statement No. 130, "Reporting Comprehensive Income." This
Statement requires that all items recognized under accounting standards as
components of comprehensive earnings be reported in an annual financial
statement that is displayed with the same prominence as other annual
financial statements. This Statement also requires that an entity classify
items of other comprehensive earnings by their nature in an annual
financial statement. For example, other comprehensive earnings may include
foreign currency translation adjustments, minimum pension liability
adjustments, and unrealized gains and losses on marketable securities
classified as available-for-sale. As the Company has no components of other
comprehensive earnings, there are no disclosure requirements involved in
the Company's adoption of this Statement.
Impact of New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board issued
Statement 133, "Accounting for Derivative Instruments and Hedging
Activities," which is required to be adopted in years beginning after June
15, 1999. Because of the Company's minimal use of derivatives, management
does not anticipate that the adoption of the new Statement will have a
significant effect on earnings or the financial position of the Company.
-F-8-
<PAGE>
Segment Information
The Company adopted Statement No. 131, "Disclosures about Segments of
an Enterprise and Related Information," in fiscal 1998. Statement No. 131
supersedes Statement No. 14, "Financial Reporting for Segments of a
Business Enterprise," and establishes standards for reporting information
about operating segments. Operating segments are defined as components of
an enterprise about which separate financial information is available that
is evaluated regularly by the chief operating decision maker, or group, in
deciding how to allocate resources and in assessing performance. 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 years ended December 31, 1998, 1997 and 1996 are
as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Revenues: (in thousands)
United States........................ $3,598 $2,424 $2,749
Europe............................... 1,490 2,011 1,145
Asia and rest of world............... 390 344 676
------------ ------------ ------------
$5,478 $4,779 $4,570
============ ============ ============
</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
Customers who accounted for at least 10% of total revenues were as
follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Ingram Micro......................... 29% 21% 17%
Tech Data............................ 11% 15% 12%
PPCP Ltd (UK)........................ 10% 21% --
</TABLE>
NOTE 3 - Series A Convertible Preferred Stock
The board of directors may issue 3,000,000 shares of preferred stock
in one or more series and may fix the rights, privileges and restrictions
granted to or imposed upon any wholly unissued series of preferred stock,
as well as to fix the number of shares constituting any series and
designations of such series, without any further vote or action by the
stockholders. In October 1996, the Company designated 1,000,000 shares of
the 3,000,000 Preferred Stock as Series A Convertible Preferred Stock.
On November 1, 1996 (the "Closing"), the Company sold 15,500 shares of
its Series A Convertible Preferred Stock, $0.001 par value, at $100 per
share pursuant to Regulation D of the Securities Act of 1933, as amended
(the "Series A Transaction"). The Series A Transaction was effected
pursuant to a Private Offering Memorandum. Each share of Series A
Convertible Preferred Stock was convertible at the option of the holder, in
whole or in part, at any time on or after the 60th day following the
Closing, into shares of Common Stock of the Company equal to $100 divided
by the lower of: (i) the closing bid price of the Company's Common Stock,
as reported on the Nasdaq OTC Bulletin Board Market, on the date of
Closing; and (ii) 65% of the average bid price of the Company's Common
Stock, as reported on the OTC bulletin board, for the five business days
prior to the business day on which notice of conversion is transmitted by
the holder of such share of Series A Convertible Preferred Stock, subject
to adjustment in certain events. Each share of Series A Convertible
Preferred Stock converted automatically into shares of Common Stock on the
first anniversary of the Closing. In connection with the Series A
Transaction, the placement agent received a warrant to purchase 43,539
-F-9-
<PAGE>
shares of common stock at an exercise price of $3.56 per share. The
warrant is immediately exercisable and has a five year term. No warrants
were exercised as of December 31, 1998. The holders of the Series A
Convertible Preferred Stock were entitled to receive dividends at an annual
rate of 6% (adjusted ratably if a holder converts Series A Convertible
Preferred Stock into Common Stock prior to a Dividend Payment Date, as
defined hereafter), payable on April 1,1997 and November 1, 1997 (each a
"Dividend Payment Date"), and otherwise when, and as and if declared by the
board of directors at the same rate as to which any dividend is declared
and paid on shares of Common Stock. During 1997 and 1998, the Company
accrued dividends of $50,074 ($0.01 per share) of which $30,318 was paid in
cash in 1997 and $17,073 was paid in cash in 1998. During 1997, all
Series A Convertible Preferred shares converted into 3,466,649 shares of
common stock. The Company recorded accretion of $542,500 for the 35%
discount given to the Series A convertible preferred stockholders in the
fourth quarter of 1996.
NOTE 4 - Series B Convertible Preferred Stock
In January 1998, the board of directors designated 37,500 shares of
Preferred Stock as Series B Convertible Preferred Stock ("Series B
Preferred Stock). Series B Preferred Stock is convertible into Common
Stock anytime at the option of the Holder prior to the mandatory conversion
date of two years after issue and automatically converts earlier in the
event of a merger or consolidation of the Company if, as a result of such
transaction, the holders of Common Stock immediately prior to such merger
or consolidation would hold less than 50% of the voting securities of the
surviving entity immediately following such merger or consolidation. The
holders of Series B Preferred Stock have voting rights equal to the number
of common shares issuable upon conversion. In the event of liquidation,
holders of Series B Preferred Stock are entitled to liquidation preferences
over common stockholders equal to their initial investment plus all accrued
but unpaid dividends. Dividends accrue at the rate of 8% per annum and are
payable quarterly in cash or in Common Stock, at the option of the Company.
Dividends for the first three quarters of 1998 of $74,795 were paid by the
issuance of 108,301 shares of Common Stock during 1998. Accrued dividends
at December 31, 1998 were $30,000, which were paid through the issuance of
62,139 shares of Common Stock in January 1999.
Series B Closing
On January 21, 1998 (the "Series B Closing"), the Company sold 12,500
shares of its Series B Convertible Preferred Stock, $0.001 par value, at
$40 per share (total of $500,000) pursuant to Section 4(2) of the
Securities Act of 1933, as amended (the "Series B Transaction"). The
Series B stock will convert into a total of 1,250,000 shares of Common
Stock. The conversion ratio for the Series B Transaction was based upon
the average bid price of the Company's Common Stock for the ten days prior
to the Series B Closing. The Company also issued five-year warrants to
acquire 187,500 shares of Common Stock at $0.40 per share and granted two
options to invest an additional $500,000 on similar terms, with the first
option expiring on February 15, 1998 and the second option expiring on
March 15, 1998.
Series B-1 Closing
On February 6, 1998, (the "Series B-1 Closing"), the Company sold
8,850 shares of Series B Convertible Preferred Stock, $0.001 par value, at
$56.50 per share, pursuant to exercise of the option to invest an
additional $500,000 expiring on February 15, 1998. On March 18, 1998, such
8,850 shares of Series B were exchanged for a like number of Series B-1
Convertible Preferred Stock, $.001 par value (the "Series B-1
Transaction"). The Series B-1 stock will convert into a total of 885,000
shares of Common Stock. The conversion ratio for the Series B-1
Transaction was based upon 80% of the average high and low sales price of
the Company's Common Stock for the ten days prior to the Series B-1
Closing. The Company also issued five-year warrants to acquire 132,750
-F-10-
<PAGE>
shares of Common Stock at $0.565 per share. The Company recorded Accretion
of Preferred Stock of $125,000 in 1998 for the 20% discount given to the
Series B-1 holders.
Series B-2 Closing
On March 18, 1998, (the "Series B-2 Closing"), the Company sold 8,715
shares of Series B-2 Convertible Preferred Stock, $0.001 par value, at
$57.375 per share, pursuant to exercise of the option to invest an
additional $500,000 (the "Series B-2 Transaction"). The Series B-2 stock
will convert into a total of 871,500 shares of Common Stock. The
conversion ratio for the Series B-2 Transaction was based upon 80% of the
average high and low sales price of the Company's Common Stock for the ten
days prior to the Series B-2 Closing. The Company also issued five-year
warrants to acquire 130,725 shares of Common Stock at $0.57375 per share.
The Company recorded Accretion of Preferred Stock of $125,000 in 1998 for
the 20% discount to market price given to the Series B-2 holders.
These transactions resulted in the valuation of warrants of $153,378
which was recorded as additional paid in capital in 1998.
NOTE 5 - Conversion of Convertible Subordinated Notes into Series C
Convertible Preferred Shares and Common Stock
On March 31, 1998, $1,750,000 of convertible subordinated notes and
$140,076 of accrued interest were converted into 95,037 shares of Series C
Preferred Stock at $10.60 per share, 51,574 shares of Series C-1 Preferred
Stock at $10.60 per share and 671,803 shares of Common Stock. On May 15,
1998, $200,000 of convertible subordinated notes and $13,353 of accrued
interest were converted into 16,857 shares of Series C-2 Preferred Stock at
$10.00 per share and 84,535 shares of Common Stock. Series C, C-1, and C-2
Preferred Stock plus accrued dividends at 8% per annum are convertible into
Common Stock at the option of the holder, with a mandatory conversion date
of March 31, 2000 for Series C and C-1 and May 15, 2000 for Series C-2.
The per share conversion rates are based upon the conversion rates of the
underlying notes which are Series C: $1.00; Series C-1: $0.50; Series C-2:
$0.53. Series C Preferred Stockholders do not have voting rights. Accrued
dividends in 1998 were $101,692 payable through the issuance of 169,588
shares of Common Stock at the time of conversion. At December 31, 1998,
Series C, C-1, and C-2 shares plus accrued dividends, if converted, would
have converted into 3,049,106 shares of Common Stock. In the event of
liquidation, holders of Series C Preferred Stock are entitled to
liquidation preferences over common stockholders equal to their initial
investment plus all accrued but unpaid dividends.
NOTE 6 - Series D Convertible Preferred Stock
In November 1998, the board of directors designated 175,000 shares of
Preferred Stock as Series D Convertible Preferred Stock ("Series D
Preferred Stock"). Series D Preferred Stock is convertible into Common
Stock anytime at the option of the Holder prior to the mandatory conversion
date of three years after issue and automatically converts earlier in the
event of a merger or consolidation of the Company if, as a result of such
transaction, the holders of Common Stock immediately prior to such merger
or consolidation would hold less than 50% of the voting securities of the
surviving entity immediately following such merger or consolidation. The
holders of Series D Preferred Stock have voting rights equal to the number
of common shares issuable upon conversion. In the event of liquidation,
holders of Series D Preferred Stock are entitled to liquidation preferences
over common stockholders equal to their initial investment plus all accrued
but unpaid dividends. Dividends accrue at the rate of 8% per annum and are
payable quarterly in cash or in Common Stock, at the option of the Company.
-F-11-
<PAGE>
In November 1998 the Company sold 174,292 shares of its Series D
Convertible Preferred Stock, $0.001 par value, at $5.7375 per share (total
of $1,000,000) pursuant to Section 4(2) of the Securities Act of 1933, as
amended. Each share of Series D Convertible Preferred Stock is convertible
into 10 shares of Common Stock at the option of the holder, in whole or in
part, at any time for a period of three years following the date of sale
with a mandatory conversion date three years from date of issue. The
Series D stock will convert into a total of 1,742,920 shares of Common
Stock. The Company also issued three-year warrants to acquire 640,972
shares of Common Stock at $0.57375 per share. Accrued dividends at
December 31, 1998 were $10,543, which were paid through the issuance of
23,431 shares of Common Stock in January 1999.
These transactions resulted in the valuation of warrants of $150,018
which was recorded as additional paid in capital in 1998.
NOTE 7 - Bank Financing Arrangements
The Company entered into a credit agreement with a bank ("Original
Agreement"), which commenced in July 1995 and expired on March 15, 1998.
In March 1998, the Company entered into a new credit agreement ("New
Agreement") which expires on April 15, 1999 (together, the "Agreements").
The Agreements are secured by the Company's current and future assets. The
credit facility under the Agreements allows the company to borrow up to
$500,000 based on the level of qualified receivables at an interest rate of
the lender's index rate, which is based on prime plus 1.5% (9.25% at
December 31, 1998). The Agreements contain covenants that require the
Company to maintain certain financial ratios including current ratio and
tangible net worth. As of December 31, 1998 and 1997 the Company was not
in compliance with the covenants and had obtained a waiver from the bank.
The waiver as of December 31, 1998 was effective through the expiration
date of the New Agreement. As of December 31, 1998 and December 31, 1997,
outstanding borrowings under the Agreements were $419,727 and $268,908
respectively, which were the amounts available under the line.
In 1998 and 1997, the Company entered into an international credit
agreement ("International Agreement") with a commercial lending institution
which expires on August 31, 1999. The International Agreement is secured
by the Company's international receivables and by the Company's current and
future assets. The credit facility under the International Agreement
allows the Company to borrow up to $500,000 based on the level of qualified
international receivables at the lender's index rate, which is based on
prime plus 2.75% (10.5% at December 31, 1998). As of December 31, 1998 and
1997 outstanding borrowings under the International Agreement were $101,000
and $255,033 respectively, which were the amounts available under the line.
NOTE 8 - Capital Lease Obligations and Equipment Financings
The Company leases certain of its equipment under capital leases. The
leases are collateralized by the underlying assets. At December 31, 1998
and 1997, property and equipment with a cost of $233,757, were subject to
such financing arrangements. Related accumulated amortization at December
31, 1998 and 1997, amounted to $225,143 and $165,996, respectively. Future
minimum payments under capital lease and equipment financing arrangements
as of December 31, 1998 were $43,110 in 1999, of which $2,027 represents
interest and $41,083 as the present value of net minimum payments.
-F-12-
<PAGE>
NOTE 9 - Commitments
In November 1996, the Company moved into new facilities under a five-
year noncancelable operating lease which expires in October 2001. Future
minimum lease payments under operating lease:
1999........................................... $195,905
2000........................................... 195,905
2001........................................... 163,254
------------
$555,064
============
Rental expense under all operating leases was $195,905, $194,122, and
$330,097 for the years ended December 31, 1998, 1997 and 1996,
respectively.
NOTE 10 - Stock Option/Stock Issuance Plan
The Company's 1993 Stock Option/Stock Issuance Plan (the 1993 Plan)
provides for the grant of incentive stock options and nonstatutory stock
options or the immediate issuance of the Company's common stock to
employees, directors, and consultants of the Company at prices not less
than 85% of the fair market value of the common stock on the date of grant,
as determined by the board of directors. The vesting and exercise
provisions are determined by the board of directors, with a maximum term of
ten years. Options granted and shares issued under the 1993 Plan generally
vest over a four-year period, with 25% vesting after one year and 2.08%
each month afterwards. Unvested shares which have been purchased are
subject to repurchase by the Company.
Information with respect to the 1993 Plan is summarized as follows:
<TABLE>
<CAPTION>
Outstanding Options
-------------------------
Shares Weighted
Available Number Average
for of Price Per
Grant Shares Share
------------ ------------ ------------
<S> <C> <C> <C>
Balance at December 31, 1995............ 83,505 143,759 $0.61
Canceled.............................. 13,386 (13,386) $0.62
Exercised............................. -- (38,106) $0.56
------------ ------------
Balance at December 31, 1996............ 96,891 92,267 $0.63
Canceled.............................. 8,846 (8,846) $0.65
Exercised............................. -- (5,650) $0.67
------------ ------------
Balance at December 31, 1997............ 105,737 77,771 $0.63
Canceled.............................. 6,359 (6,359) $0.63
------------ ------------
Balance at December 31, 1998............ 112,096 71,412 $0.63
============ ============
</TABLE>
As of December 31, 1998, 1997 and 1996, 71,119, 68,474 and 67,286
options were exercisable at a weighted average exercise price of $0.63,
$0.63 and $0.64, respectively. The exercise price of the options at
December 31, 1998 ranged from $0.59 to $0.67. The Company has not granted
options from the 1993 Plan since February 1995 and does not intend to make
any future grants from the 1993 Plan. The weighted average contractual
life for options outstanding under the 1993 Plan at December 31, 1998 is
approximately 5.5 years.
The Company's 1995 Stock Plan (the 1995 Plan) provides for the grant
of incentive stock options and nonstatutory stock options to employees,
directors, and consultants of the Company. The exercise price per share of
all incentive stock options granted must be at least equal to the fair
market value per share of Common Stock on the date of grant. The exercise
price per share of all nonstatutory stock options shall be not less than
85% of the fair market value of the common stock on the date of grant. The
vesting and exercise provisions are determined by the board of directors,
with a maximum term of ten years.
-F-13-
<PAGE>
Information with respect to the 1995 Plan is summarized as follows:
<TABLE>
<CAPTION>
Outstanding Options
-------------------------
Options Weighted
Available Number Average
for of Price Per
Grant Shares Share
------------ ------------ ------------
<S> <C> <C> <C>
Balance at December 31, 1995............ 157,298 127,702 $5.00
Increase in shares authorized......... 150,000 --
Granted............................... (360,650) 360,650 $2.98
Canceled.............................. 91,254 (91,254) $4.60
Repriced options canceled............. 260,192 (260,192) $4.12
Repriced options granted.............. (260,192) 260,192 $1.55
------------ ------------
Balance at December 31, 1996............ 37,902 397,098 $1.57
Increase in shares authorized......... 300,000 --
Granted............................... (381,620) 381,620 $0.61
Canceled.............................. 285,189 (285,189) $1.40
------------ ------------
Balance at December 31, 1997............ 241,471 493,529 $0.93
Increase in shares authorized......... 1,000,000 --
Granted............................... (1,192,148) 1,192,148 $0.63
Canceled.............................. 55,867 (55,867) $0.55
Repriced options canceled............. 167,789 (167,789) $1.55
Repriced options granted.............. (167,789) 167,789 $0.46
------------ ------------
Balance at December 31, 1998............ 105,190 1,629,810 $0.60
============ ============
</TABLE>
In 1998, the Company granted employees, including executives, the
option to exchange 167,789 options with an aggregate exercise price of
$260,073 for new options with an exercise price of $0.46 per share, the
fair value of the stock on the day of exchange. All vested options that
are repriced will vest monthly over an additional one year period and the
unvested repriced options will vest under the original terms of the option
grant. As of December 31, 1998, 1997 and 1996, 667,197, 223,891 and zero
options were exercisable at a weighted average exercise price of $0.58,
$1.28 and zero, respectively. The exercise price of options at December
31, 1998 ranged from $0.4375 to $0.6875. The weighted average fair value
of options granted during the years ended December 31, 1998, 1997, and 1996
was $0.49, $0.42, and $0.99 respectively. The weighted average contractual
life for options outstanding under the 1995 Plan at December 31, 1998, is
approximately 9.1 years.
The Company has elected to follow Accounting Principle Board Opinion
No. 25, "Accounting for Stock Issued to Employees" (APB 25) and related
Interpretations in accounting for its employee stock options because, as
discussed below, the alternative fair value accounting provided for under
FASB Statement No. 123, "Accounting for Stock-Based Compensation," requires
use of option valuation models that were not developed for use in valuing
employee stock options. Under APB 25, because the exercise price of the
Company's employee stock options equals the market price of the underlying
stock on the date of grant, no compensation expense is recognized.
Pro forma information regarding net loss and loss per share is
required by Statement 123, and has been determined as if the Company had
accounted for its employee stock options under the fair value method of
that Statement. The fair value of these options was estimated at the date
of grant using the Black-Scholes option pricing model with the following
weighted average assumptions for the years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Risk-free interest rate (%)............. 5.52% 6.28% 8.00%
Dividend yield.......................... -- -- --
Volatility factor....................... 0.921 0.808 0.600
Expected remaining option life (years).. 6.5 5.5 5.5
</TABLE>
-F-14-
<PAGE>
The Black-Scholes option valuation model was developed for use in
estimating the fair value of traded options which have no vesting
restrictions and are fully transferable. In addition, option valuation
models require the input of highly subjective assumptions including the
expected stock price volatility and expected option life. Because the
Company's employee stock options have characteristics significantly
different from those of traded options, and because changes in the
subjective input assumptions can materially affect the fair value estimate,
in management's opinion, the existing models do not necessarily provide a
reliable single measure of the fair value of its employee stock options.
Had compensation cost for the Company's stock-based compensation plans
been determined based on the fair value at the grant dates for awards under
those plans consistent with the method of Statement 123, the Company's net
loss per share would have increased to the pro forma amounts indicated
below:
<TABLE>
<CAPTION>
1998 1997 1996
------------ ------------ ------------
<S> <C> <C> <C>
Pro forma net loss
applicable to common stockholders.... ($1,731,291) ($3,703,075) ($3,921,363)
Pro forma net loss per share
applicable to common stockholders.... ($0.24) ($0.72) ($1.30)
</TABLE>
The effects of applying FAS 123 pro forma disclosures are not likely
to be representative of effects on pro forma disclosures of future years.
NOTE 11 - Warrants
The Company issued warrants to purchase common stock in connection
with its initial public offering and periodically granted warrants in
connection with certain financing agreements and certain lease agreements.
The Company has the following warrants outstanding to purchase common stock
at December 31, 1998:
<TABLE>
<CAPTION>
Number Price
of Per Issue Expiration
Reason Shares Share Date Date
- -------------------------------- --------- ---------- ----------- -----------
<S> <C> <C> <C> <C>
Initial public offering......... 550,275 $8.40 * Jun 1995 Jun 2000
IPO underwriting................ 150,000 $8.40 * Jun 1995 Jun 2000
Series A Pfd underwriting....... 43,539 $3.56 Nov 1996 Nov 2001
Equipment leasing............... 8,791 $5.6875 Dec 1996 Dec 2001
Bank line financing............. 50,000 $0.50 Dec 1997 Dec 2002
Series B financing.............. 187,500 $0.40 Jan 1998 Jan 2003
Series B-1 financing............ 132,750 $0.565 Feb 1998 Feb 2003
Series B-2 financing............ 130,725 $0.57375 Mar 1998 Mar 2003
Series D financing.............. 640,972 $0.57375 Nov 1998 Nov 2001
</TABLE>
- -------------------------
* The common warrants expiring in June 2000 are subject to certain
dilution adjustments resulting from the subsequent issuance of common
stock or securities converting into common stock at prices below the
initial offering price for the Company's common stock. At December 31,
1998, the effects of the dilution adjustments relating to these warrants
were to increase the number of shares exercisable from 550,275 shares to
2,248,058 shares and from 150,000 to 612,800 and to correspondingly
reduce the exercise price of these warrants from $8.40 per share to
$2.06 per share.
-F-15-
<PAGE>
NOTE 12 - Shares Reserved
Common stock reserved for future issuance was as follows at December
31, 1998:
<TABLE>
<S> <C>
Stock option plans outstanding (see Note 10)................ 1,701,222
Reserved for future stock option grants (see Note 10)....... 217,286
Common stock warrants (see Note 11)......................... 4,055,135
Series B conversion (see Note 4)............................ 3,006,500
Series C conversion (see Note 5)............................ 2,879,518
Series D conversion (see Note 6)............................ 1,742,920
Preferred Stock dividends .................................. 255,158
-----------
Total common stock reserved for future issuance............. 13,857,739
===========
</TABLE>
NOTE 13 - Retirement Plan
During fiscal year 1996, the Company adopted a tax-deferred savings
plan, the Socket Communications, Inc. 401(k) Plan ("The Plan"), for the
benefit of qualified employees. The Plan is designed to provide employees
with an accumulation of funds at retirement. Qualified employees may elect
to make contributions to The Plan on a quarterly basis. No contributions
are made by the Company. Administrative expenses relating to The Plan are
not significant.
NOTE 14 - Income Taxes
Due to the Company's loss position, there was no provision for income
taxes for the years ended December 31, 1998, 1997 and 1996.
As of December 31, 1998, the Company had federal and state net
operating loss carryforwards of approximately $13,000,000 and $5,800,000,
respectively. The Company also has federal and state tax credit
carryforwards of approximately $180,000 and $150,000, respectively. The
net operating loss and credit carryforwards will expire at various dates
beginning in 1999 through 2018, if not utilized.
The utilization of approximately $5,200,000 of the federal net
operating loss included in the above amounts will be subject to a
cumulative annual limitation of approximately $600,000 per year pursuant to
the stock ownership change provision of the Tax Reform Act of 1986. Future
changes in ownership, including stock offerings, may result in additional
limitations.
Deferred income taxes reflect the net tax effects of temporary
differences between the carrying amount of assets and liabilities for
financial reporting purposes and the amount used for income tax purposes.
Significant components of deferred tax assets are as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------
1998 1997
----------- -----------
<S> <C> <C>
Net operating loss carryforwards................... $4,800,000 $4,407,000
Credits............................................ 284,000 283,000
Capitalized research and development costs......... 806,000 837,000
Reserves........................................... 369,000 371,000
Other.............................................. 443,000 412,000
----------- -----------
Total deferred tax assets........................ 6,702,000 6,310,000
Valuation allowance for deferred tax assets........ (6,702,000) (6,310,000)
----------- -----------
Net deferred tax assets.......................... $ -- $ --
=========== ===========
</TABLE>
-F-16-
<PAGE>
NOTE 15 - Related Parties
The Company in 1997 jointly developed products with Cetronic AB, a
Swedish company which converted $1.1 million in convertible subordinated
notes held at December 31, 1997 into preferred and common stock during
1998. The Company completed its development obligations during 1997 and
had insignificant related expenses in 1998. The Company had outstanding
accounts payable to Cetronic of $1,288 and $45,681 at December 31, 1998 and
1997 respectively. The Company had an outstanding accounts receivable
balance from Cetronic of $43,371 at December 31, 1997.
NOTE 16 - Subsequent Event, Common Stock Financings (Unaudited)
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.
On December 9, 1999, the Company sold 1,000,000 shares of common
stock in a private placement financing at $4.66 per share with total
proceeds of $4,660,000 and net proceeds after costs and expenses of the
financing of approximately $4,500,000. In conjunction with the financing,
the Company issued three-year warrants to investors to acquire an
additional 150,000 shares of common stock at $4.66 per share and issued
150,000 three-year warrants to the Finder to acquire common stock at the
same price.
-F-17-
<PAGE>
(UNAUDITED)
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.
-F-18-
<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.
-F-19-
<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.
-F-20-
<PAGE>
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 and on Page F1
of this Form SB-2 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. See
Note 9-Subsequent Event, Common Stock Financing.
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.
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
============ ============
-F-21-
<PAGE>
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.
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
-F-22-
<PAGE>
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
===============
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.
-F-23-
<PAGE>
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>
Note 9-Subsequent Event, Common Stock Financing
On December 9, 1999, the Company sold 1,000,000 shares of common stock
in a private placement financing at $4.66 per share with total proceeds of
$4,660,000 and net proceeds after costs and expenses of the financing of
approximately $4,500,000. In conjunction with the financing, the Company
issued three-year warrants to investors to acquire an additional 150,000
shares of common stock at $4.66 per share and issued 150,000 three-year
warrants to the Finder to acquire common stock at the same price.
-F-24-
<PAGE>
==============================================================================
2,651,168 Shares and
50,000 Redeemable Warrants
SOCKET COMMUNICATIONS, INC.
-------------------------
Common Stock
and
Redeemable Warrants
-------------------------
PROSPECTUS
January 14, 2000
==============================================================================
