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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
Commission file number 1-13810
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SOCKET COMMUNICATIONS, INC.
(Name of small business issuer in its charter)
Delaware 94-3155066
(State or other jurisdiction (IRS Employer
of incorporation or organization) Identification No.)
37400 Central Court, Newark, CA 94560
(Address of principal executive offices including zip code)
(510) 744-2700
(Registrant's telephone number, including area code)
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Securities registered under Section 12(b) of the Exchange Act:
Title of each class Name of each exchange on which registered
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Common Stock Pacific Exchange
($0.001 par value)
Securities registered under Section 12(g) of the Exchange Act: none
Check whether the issuer (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Exchange Act during the preceding
12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. YES [X] NO [ ]
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B contained herein, and no disclosure will be
contained, to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. YES [X] NO [ ]
Revenue for the fiscal year ended December 31, 1999: $6,876,108
Aggregate market value of Common Stock ($0.001 par value) held by non-
affiliates on March 9, 2000 based on closing price on such date:
$640,000,000. For purposes of this disclosure, shares of Common Stock held
by persons who hold more than 5% of the outstanding shares of Common Stock
and shares held by officers and directors of the registrant have been
excluded because such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily conclusive for other
purposes.
Number of shares of Common Stock ($0.001 par value) outstanding as of
March 09, 2000 is 18,869,261 shares.
Documents Incorporated by Reference:
Document Part of Form 10-KSB
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Proxy Statement for the Annual Meeting of Part III
Stockholders for fiscal year ended December 31, 1999
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PART I
Item 1. 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 low power "Battery Friendly(TM)" connection
solutions for Windows-powered handheld computers and notebooks, which
together we refer to as mobile computers. We classify our products
into four product families. Our Digital Phone Cards connect mobile
computers to data-enabled digital mobile phones that allow a mobile
computer user to wirelessly access the Internet, and access email or
other data through a mobile phone while mobile. Our Peripheral
Connection Cards connect computer peripherals or other electronic
devices to mobile computers. Our Data Collection Cards connect bar
code wands and bar code laser scanners to mobile computers, which
serve as data collection devices for scanned bar code information.
Our Data Collection Cards also include our In-Hand Scan Card, which is
a laser scanner on a CompactFlash card that plugs into the expansion
slot on the mobile computer and is activated by the computer's
external buttons. Our Ethernet Card connects a mobile computer to a
corporate Ethernet network and provides location-independent
computing. We are developing for the second half of 2000 a Bluetooth
wireless communications plug-in module for mobile computers to
wirelessly connect mobile computers to other Bluetooth-enabled devices
such as mobile phones or other appliances. We are also developing for
third quarter of 2000 combination flash memory and input/output
connections that add a slot for MultiMediaCard(TM) flash memory from
SanDisk Corporation, enabling data such as prerecorded music or large
data files to be easily removed or inserted into the mobile computer.
Our connection products utilize industry standard PC Card and
CompactFlash form factors. We are a leading supplier of low-power
connectivity products to the Windows-powered computing market. This
market continues to expand, stimulated by the development of new
handheld devices that utilize Microsoft's Windows operating systems,
development of digital phone networks that will transfer data as well
as voice, and development of consumer software applications such as
electronic books software to facilitate reading a book on a mobile
computer, and streaming video software to allow the viewing of audio
and video as it is transferred from the Internet.
Significant Business Developments during 1998 and 1999
During 1998 and 1999, we completed a number of steps to strengthen our
mobile computer connection products leadership position and to improve
our financial condition and operating results:
- We expanded our PC Card connection family of products to add a
family of CompactFlash (CF+) Peripheral Connection Card, Low Power
Ethernet Card, Data Collection (bar code scanning) Card and Digital
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Phone Card products to support the smallest Windows-powered handheld
computer, the Pocket PC and other computers containing a CompactFlash
slot.
- We sought recurring OEM business for our products. Our
Peripherals Connection 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.
- We established several key strategic relationships with industry
leaders for developing new products for use with Windows-powered
mobile computers including Symbol Technologies (attaching laser
scanners to mobile computers by cable, and developing an integrated
laser scanner in a CompactFlash form factor for insertion in a Pocket
or tablet-sized mobile computer) and SanDisk Corporation (adding
MultiMediaCard flash memory to our connection products). We also
began working closely with several North American digital phone
service providers to develop digital mobile phone connection products
for connecting mobile computers to data-enabled digital mobile phones
designed to transfer voice and data over digital mobile phone
networks. Our Digital Phone Cards began shipping in the second half of
1999. We connect to data-enabled phones from the leading mobile phone
manufacturers in the North American CDMA phone markets and the
worldwide GSM phone markets.
- 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 allowed us to
increase our data transfer speeds and reduce our manufacturing costs.
Product improvements also included creating enhanced Ethernet drivers
and a crossover connector to improve Ethernet ease-of-use and setup,
and the extension of our ruggedized form factor to more of our
products.
- We expanded our distribution channels and more closely aligned
them with those used by the mobile computer 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.
- 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 $5.5 million
in new equity financings in 1999. In addition, we issued public
warrants to acquire common stock in June 1995 that commenced
exercising in January 2000. We expect these warrants to raise
approximately $4.6 million of capital during the first half of 2000.
As of March 20, 2000, approximately $3.0 million of warrants have been
exercised.
- We improved our operating results by increasing our revenues 15%
in 1998 over 1997 and 26% in 1999 over 1998, improved our gross
margins from 42% in 1997 to 59% in 1998 and 1999. We have also
reduced our operating expenses as a percentage of our revenue from
$5.4 million in 1997 (113% of revenue) to $4.2 million in 1998 (77% of
revenue), to $4.9 million in 1999 (71% of revenue). We expect to
further improve our operating expense ratios as our revenues increase.
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- 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 combination input/output
and memory cards by adding removable flash memory to our current
connection products. These combination cards are expected to be
available in the third quarter of 2000. We filed patent applications
for the technology we developed to make removable memory work in a
removable connection device. We are also developing cordless
connection products for shipment in the second half of 2000 that will
utilize Bluetooth technology to replace connection cables with close
proximity cordless communications.
Although we believe that our focus on Windows-powered mobile
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 half of 2000 and possibly longer and such losses,
should they continue, may require us to raise additional capital in
the future. There are no assurances that such capital would be
available on acceptable terms, if at all.
As of December 31, 1999, we had a cash balance of $4,284,670,
stockholders' equity of $5,008,597 and working capital of $4,615,491.
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 or charge
batteries. Changing or recharging handheld computer batteries
frequently is inconvenient and expensive and reduces the user's
productivity. We continue to focus on further reducing the power
consumption of our products, since Windows CE handheld computers
operate on two AA sized or similar 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 matchbook and conform to
standards established by the CompactFlash Association. Almost all
Windows-powered notebooks and handheld computers except for the Pocket
PC have a PC Card slot. The Pocket PC uses a CompactFlash slot for
input/output connections. In 1997, we worked with Microsoft
Corporation and the Windows CE handheld device manufacturers to adapt
the CompactFlash form factor as a 3.3 and 5.0 volt input/output
connector for the Pocket PC. Previously, the CompactFlash form factor
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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 began serving as a
director in 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 MultiMediaCardT flash memory from SanDisk
Corporation. We are also developing 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 are shipping Digital Phone Connection Card
products and are developing Bluetooth cordless connection products.
Digital Phone Card connection products have been designed to transfer
data between a new generation of data-enabled digital CDMA (Code
Division Multiple Access) mobile telephones or digital GSM (Global
Standard for Mobile) mobile phones and Windows-powered mobile
computers. CDMA is the most widely used digital mobile phone network
technology in North America and GSM is the most widely used digital
mobile phone network technology in Europe. The Digital Phone Cards
support data-enabled mobile phones from most of the major mobile phone
manufacturers. The Digital Phone Card directly connects the phone and
the mobile computer through either the PC Card or CompactFlash Card
slot on the computer, and allows the user to use browser, email and
other phone connection software installed on the mobile computer to
dial and connect wirelessly to the Internet for browsing the web,
retrieving or sending e-mail, or connecting to corporate databases in
the same manner that a user would use a modem to connect through a
landline telephone. We believe that our Digital Phone Card offers
several advantages over a direct serial connection cable, including
minimal power drain on the mobile phone, interchangeability between
mobile computers and capacity for future higher data transfer speeds
as network data transfer speeds increase.
Bluetooth cordless connection products will allow close proximity
wireless connections between a handheld computer or notebook and other
Bluetooth-enabled devices such as printers, desktops, bar code
scanners, other handheld devices, set top boxes, digital cameras, home
appliances or mobile phones. We are developing cordless connections
for Windows-powered mobile computers and other devices utilizing
Bluetooth technology. Bluetooth is the name given to cordless
communications standards being developed by a consortium of mobile
phone, software and hardware companies to facilitate close proximity
communications between Bluetooth-enabled devices. We do not expect
cordless products to be widely commercially available until near the
end of 2000.
Peripheral connection products - We believe that we produce the
world's leading family of Peripheral Connection PC and CF+ Cards
utilizing serial technology. In December 1996 and during 1997, we
expanded our Peripheral Connection Card product line by adding
ruggedized connections, dual connection cards, and an Ethernet/serial
multifunction PC Card. In 1998 we added CompactFlash connection
cards. During the first half of 2000, we expect to complete a Quad (4
port) Peripheral Connection PC Card. Our Peripheral Connection Cards
operate as a standard communication port and can work with
conventional serial communications programs. Peripheral devices that
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can attach to our Peripheral Connection 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 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 Peripheral
Connection Card was the 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 is used in all of our
peripheral connection product lines. The new chip lowers power
consumption, improves functionality including higher data transfer
speeds, and costs 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, and 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. In 1997 we also introduced 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 handheld 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. We plan to expand our present Low Power Ethernet
product line with a 10/100 MB card in the second half of 2000.
Data Collection Products - 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 data collection products,
an LED bar code scanning wand manufactured by Welch Allyn, which can
be attached to a Windows-powered handheld computer or Windows notebook
computer through a PC Card computer slot. 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 sufficient power from the computer, and
eliminates the need to carry a separate bar code 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 bar code scanning products,
connecting two mobile laser bar code scanning guns from Symbol
Technologies to a Data Collection PC card for use with Windows
notebooks and Windows-powered handheld devices. In October 1999, we
began shipping an integrated laser scanner card, our In-Hand Scan
Card, which attaches a laser bar code scanning engine to a
CompactFlash card for insertion in a Pocket 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 bar code scanner Software
Developers Kit, which includes our SocketScan(TM)keyboard wedge
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software. The kit simplifies bar code scanner application development
on Pocket PCs, other handheld PCs and Windows notebooks.
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 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);
- supports multiple low-power processors which allow
mobile computers to run for 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 variations of the CE and NT operating systems.
Our focus on low-power PC Card and CompactFlash products for Windows-
powered devices running the Windows CE operating system 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 Palm Inc., 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.
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Windows-powered Handheld Computers - H/PCs. H/PCs 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 second smallest size of four
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-powered Handheld Computers - Palm-size PCs and Pocket PCs.
Pocket PCs are pocket-sized computers and were introduced as Palm-size
PCs 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 the first color units began shipping in
the first quarter of 1999. The Pocket and 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 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 Pocket PC are
designed to make information more readily accessible to the user. New
Pocket PCs are expected to begin shipping in the second quarter of
2000. These devices are designed for multimedia applications
including playing of stereo digital music and viewing of audio/video
information, contain trimmed-down versions of popular Microsoft Office
programs Word and Excel, contain the Microsoft personal information
management program Pocket Outlook (calendar, tasks, email) and have an
Internet browser. Major Pocket PC computer manufacturers include
Casio, Compaq, and Hewlett-Packard.
Windows-powered Handheld Computers - H/PC Professionals. H/PC
Professionals are 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 operating
system 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-powered Handheld Computers - Tablets. During 1999, several
manufacturers including Fujitsu and Hitachi introduced a tablet-sized
Windows CE operating system 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 of PC Card 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 computer 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
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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 handheld 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. Notebooks
continue to be designed to be lighter, and recent slimmer notebooks
have been introduced without an RS-232 serial port, which may increase
demand for our Peripheral Connection Cards.
Expansion of bar code scanning to Windows-powered 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
more than 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 bar code scanning guns are the most widely used scanners,
followed by CCD bar code scanning guns and LED bar code wands. We
believe that our family of bar code scanning products offer several
advantages over existing connection 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 bar code scanning
devices become easily removable and interchangeable, and the ability
to power the bar code scanner from the mobile computer or data
collection device. In addition, we believe that the Windows-powered
handheld 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.
Addition of removable memory to Windows-powered handheld computers -
SanDisk Corporation has developed removable flash memory cards in a
CompactFlash form factor (matchbook size) and a smaller MultiMediaCard
form factor (thumbnail size), which are becoming widely used in
devices requiring removable memory such as digital cameras and MP3
players. Windows-powered handheld computers, particularly the Pocket
PC, are designed to support multimedia applications including
streaming video and the playing of prerecorded music. In addition,
from time to time a computer user may choose to access a large data
file which today must either be downloaded into the computer's memory
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or recorded on removable flash memory and inserted in the mobile
computer's CompactFlash expansion slot. To the extent the data is
recorded onto removable memory, a potential slot conflict is created
between the use of the handheld computer's expansion slot for
input/output applications and the use of the expansion slot for
memory. We are working with SanDisk to develop combination
input/output and memory cards, which will allow a user to insert a
MultiMediaCard into our input/output card (removable memory in a
removable card) and to access the memory card while the input/output
card is inserted into the computer. We expect to introduce these
combination products during the second half of 2000.
Convergence of digital mobile phones and mobile computing - The two
most widely deployed digital mobile phone networks are the CDMA
networks in North America and the GSM networks covering Europe and
other countries including recent introduction into the United States.
Mobile digital phones 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 landline
phone connection is available. Several major phone manufacturers
including Qualcomm and Nokia have recently designed CDMA mobile
digital phones with a data port on the mobile phone. The port is
designed to facilitate direct connections between the mobile phone and
data collection and computing devices. GSM phones today support data
transfer and are beginning to adopt data port architecture. Network
transfer speeds are currently limited to 14.4 KBS for CDMA networks
and 9.6 KBS for GSM networks, however there are several initiatives
underway by the network carriers to increase these transfer rates. We
believe that with the improved clarity and lower cost of operations of
digital telephones, with improving transfer speeds, and with the new
built-in data port, that mobile computer users will now be encouraged
to connect their mobile digital phones to their computer and to access
their corporate networks and the Internet wirelessly over the digital
mobile networks. Accordingly, we have designed Digital Phone Cards
for both the CDMA and GSM mobile phone markets that will allow the
user to directly connect one of these new mobile digital phones to a
Windows-powered mobile computer. Our Digital Phone Cards began
shipping in the second half of 1999 for the CDMA market and for
Windows-powered handheld computers in the GSM markets.
Enabling of wireless personal area close-proximity networking with
Bluetooth technology - Bluetooth, backed by Nokia and Ericsson in
concert with Microsoft, Intel and other hardware, software, mobile
phone carriers and networking companies, is a system for short range
(30 feet), low-power wireless communications and synchronization
between portable electronic devices including mobile computers, data-
enabled mobile phones, desktop computers and other appliances such as
printers, scanners, fax machines, digital cameras, headsets, keyboards
or any other digital device. The technology allows for wireless
Personal Area Networks (PANs) to be setup between a user's personal
devices. We are developing a Bluetooth plug-in module that will
enable devices with standard CompactFlash plug-in slots to communicate
with other Bluetooth-enabled devices. Bluetooth products including
our plug-in module and Bluetooth-enabled mobile phones are expected to
become commercially available toward the end of 2000.
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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-powered computer manufacturers
in co-marketing and in developing connection solutions for Windows-
powered devices. We also support third party software application
developers by providing technical assistance in the porting of their
applications to the various Windows operating systems.
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 network 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
began shipping in the fourth quarter of 1998. Our products are also
recommended by Compaq for use with their Windows-powered handheld
computers.
- 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 use with their Windows-powered
handheld computers.
- Hitachi Corporation, a leading manufacturer of consumer electronics
and Windows-powered handheld 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-powered
operating systems, has worked closely with us in insuring that our
connection products work with Windows-powered devices. Microsoft
announced in November 1999 the development and availability of the
Microsoft Connection Kit for use with our Digital Phone Cards. We
also jointly developed with Microsoft the CompactFlashT form factor
for use with smaller Windows-powered handheld computers.
- PacketVideo, a leading developer in the emerging wireless video
streaming market, has executed a non-binding Memorandum of
Understanding with us for co-marketing and market development for
wireless video streaming.
- SanDisk Corporation, a leading supplier of flash memory products,
is supporting development of our planned combination memory/input-
output connection products with slots to insert removable
MultiMediaCard memory cards.
- 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-powered mobile computers.
These products include attaching two of Symbol's laser scanning
- 11 -
<PAGE>
guns to Windows-powered computers and an integrated bar code
scanner (In-Hand Scan Card) in CompactFlash form factor for use
with Pocket or tablet PCs.
- Welch Allyn, a leading manufacturer of bar code scanning devices,
has signed an Agreement whereby we are creating bar code wand
scanning products for Windows-powered mobile computers.
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 that 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 HIS
chip, a low-power, highly integrated general purpose interface chip
used in our family of Peripheral Connection Cards, Data Collection
Cards, and Digital Phone 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 the Windows CE operating system and in notebooks running
Windows 9x and Windows 2000 operating systems.
Early in 1999 we also applied for patents covering our proprietary
technology around the implementation of removable memory in a
removable I/O adapter. We have subsequently added amendments to our
filings and are waiting on a response from the General Patent Office.
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 (removable memory in a removable card). 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 patents they hold by 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
- 12 -
<PAGE>
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, and as of March 10,
2000, we had 13 people in sales, marketing and technical support..
United States distributor Ingram Micro accounted for 24% of our
revenue in 1999 and 29% of our revenue in 1998. 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 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 33%, 34%, and 49% of our
revenue for the years ended December 31, 1999, 1998 and 1997,
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 Hyundai/Lucky-Goldstar that controls the signal transmission
between our PC and CF+ Products (all products except our Ethernet
- 13 -
<PAGE>
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 products, expanding our family of Data Collection Card
products for bar code scanning and other data collection applications,
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 March 10, 2000 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 $1.2 million in
1999, $1.0 million in 1998, and $1.1 million in 1997. We anticipate
that we will continue to commit substantial resources to research and
development in the future and we expect to increase the size of our
research and development staff in 2000 as a result of planned
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. 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 Phone Cards from alternative
methods of downloading information into a mobile computer from remote
locations, including over telephone landlines through a modem, and by
connecting a mobile computer through a serial cable connected to a
serial port on a notebook. Users may also choose to view data on the
viewing screen on a mobile phone instead of downloading data to a
Windows-powered mobile computer, although the smaller screen on a
mobile phone usually limits the viewer to Internet images from
- 14 -
<PAGE>
specially designed WAP (Wireless Applications Protocol) sites that
eliminate graphics and restrict the amount of text and do not readily
accommodate long email messages or email attachments.
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 card products utilizing serial
technology. 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-powered
handheld computers. Competition is also expected from others,
including manufacturers of lower priced cards in Asia.
Development of products incorporating Bluetooth cordless
communications technology is expected to become highly competitive,
with a choice of Bluetooth chips and software and expected widespread
adoption of this technology. Bluetooth technology is currently in a
development stage with first commercial products expected to be
available near the end of 2000.
Personnel
As of March 10, 2000, we employed 30 people on a full-time basis. Of
these, 13 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.
Item 2. Description of Property
We lease a 23,000 square foot facility in Newark, California. We
believe that our current facilities are sufficient to meet our needs
for the foreseeable future.
Item 3. Legal Proceedings
We are not currently a party to any material legal proceedings.
Item 4. Submission of Matters to a Vote of Security Holders
No matters were submitted for vote by security holders during the
fourth quarter of 1999.
PART II
Item 5. Market for Common Equity and Related Stockholder Matters
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 10,000 investors of
record. We have applied for listing on the Nasdaq National Market
Exchange.
- 15 -
<PAGE>
The quarterly high and low sales prices of our common stock, as
reported on the OTC Bulletin Board through March 10, 2000 and for the
last three 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
-------------------
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............................... $10.06 $1.03
2000
March 31, 2000 (through March 10, 2000)......... $51.38 $7.94
- --------------------
On March 20, 2000, the closing sale price for our common stock as reported on th
OTC Bulletin Board was $31.75.
- 16 -
<PAGE>
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". Each warrant is convertible into 4.25 common shares at an
exercise price of $8.40 per warrant. The warrants expire on June 5,
2000. As of March 10, 2000, approximately 60% of the warrants were
converted into common stock. The redeemable warrants are currently
held by approximately 200 record holders.
The quarterly high and low sales prices of our redeemable warrants, as
reported on the OTC Bulletin Board through March 10, 2000 and for the
last three 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............................... $33.00 $0.19
2000
March 31, 2000 (through March 10, 2000)......... $210.00 $22.25
- --------------------
On March 20, 2000, the closing sale price for our redeemable warrants as reporte
on the OTC Bulletin Board was $120.00.
- 17 -
<PAGE>
Recent Sales of Unregistered Securities
On December 9, 1999, the Company sold 1,000,000 shares of common
stock to two investors 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.
The issuance of the above referenced securities was deemed to be
exempt from registration under the Securities Act of 1933, as amended
(the "Securities Act"), in reliance on Section 4(2) of the Securities
Act as a transaction by an issuer not involving any public offering.
In addition, the recipients of the securities and the transactions
represented their intention to acquire the securities for investment
only and not with a view for sale in connection with any distribution
thereof and appropriate legends were affixed to the securities issued
in such transactions.
- 18 -
<PAGE>
Management's Discussion and Analysis of Financial Condition and
Results of Operations
Overview
We are a leading supplier of connectivity products to the Windows-
powered handheld and notebook computing market. During 1998, we
expanded our PC Card connection family of products to add a family of
CompactFlash ("CF+") Peripheral Connection, low power Ethernet and
Data Collection (bar code scanning) connection products to support the
smallest Windows-powered handheld computer, the Pocket PC. We
expanded this family in the second half of 1999 with the development
of an integrated CF+ bar code scanner ("In-Hand Scan Card") and
Digital Phone Cards for the North American CDMA and worldwide GSM
telephone markets. Our families of low-power Peripheral Connection and
Ethernet Card connection products, our family of Data Collection Cards
for bar code scanning products, and, commencing with the fourth
quarter of 1999, our family of Digital Phone Cards, are our principal
sources of revenues.
Four classes of Windows-powered handheld 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 Pocket 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 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 Pocket 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 Pocket 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-powered
handheld 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 original equipment manufacturers.
Our core technologies are in transferring data into and out of
Windows-powered mobile computing devices through the PC Card or CF+
slot, achieving high data transfer speeds and low power consumption.
Our peripheral connection products are designed to connect one or more
peripheral devices such as a keyboard, monitor or another computer, to
a mobile computer. Our data collection cards are designed to connect
bar code scanners such as a bar code wand, scanning gun, or a bar code
printer to a mobile computer. Our digital phone cards are designed to
connect a data-enabled mobile phone to a mobile computer. Our
Ethernet cards 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
- 19 -
<PAGE>
cable) designs that work with Windows-powered handheld and notebook
computers.
We believe that we have developed strong working relationships with
Microsoft and with Windows-powered mobile computer manufacturers for
integrating connection solutions into Windows-powered mobile computing
devices. We have also developed strategic relationships with:
- Welch Allyn and Symbol Technologies in creating data collection
cards to connect their bar code scanners to Windows-powered mobile
computers;
- software application developers in providing technical
assistance in the porting of their applications to the various
Windows-powered operating systems;
- SanDisk Corporation for developing during the first half of 2000
combination removable memory and input/output cards utilizing
MultiMediaCard memory from SanDisk across several of our product
lines, and
- Cambridge Silicon Radio and its affiliated company, Cambridge
Consultants in licensing Bluetooth hardware components and software
for a Bluetooth connection card expected to be available near the end
of 2000.
Although we believe that our focus on the Windows-powered operating
systems for handheld and mobile computers with the anticipated growth
in sales of these computing devices, our new products and our
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 half of 2000 and
possibly longer. The Company has historically needed to raise capital
to fund its operating losses. Although the Company believes that it
has sufficient cash to fund its operations during 2000, continuing
losses could make it necessary for the Company to raise additional
capital in the future and there are no assurances that such capital
would be available on acceptable terms, if at all.
Annual Results of Operations
Revenue
In 1999, revenue was $6,876,108, an increase of 26% from 1998 revenue
of $5,477,804. 1998 revenue increased 15% compared to 1997 revenue of
$4,779,200. Revenue in 1999 grew across all of the Company's product
lines stimulated by underlying growth in sales of Windows-powered
computers. Peripheral connection product revenue also benefited from
increased sales of custom connection products to original equipment
manufacturers. Data collection product revenue reflected the
introduction in 1999 of laser bar code scanning connection products
and in the fourth quarter of 1999, an integrated laser scanner plug-in
card. Digital phone cards were also introduced as a new product
category in the second half of 1999. 1999 revenue included $105,000
in contract engineering revenues compared to $250,000 in contract
engineering revenues in 1998 and $100,000 in contract engineering
revenue in 1997.
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
- 20 -
<PAGE>
attaching bar code scanners. Revenues also increased moderately in
1998 due to recurring OEM sales of Peripheral Connection Card products
to one customer that commenced in the fourth quarter of 1998 and the
introduction of CompactFlash (CF+) Ethernet, Peripheral Connection and
Data Collection products in the second half of 1998. Revenue growth
in 1998 was partially offset by reductions in the sale of standard
Ethernet PC Card products.
The Company markets its products primarily through distributors and
original equipment manufacturers. 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 33%, 34%
and 49% of revenue in 1999, 1998 and 1997, 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 1999 and 1998 was 59% of revenue compared to gross
profit of 42% of revenue in 1997. Gross profit in 1999 compared to
1998 benefited from moderate reductions in the cost of products,
offset by lower nonrecurring higher margin engineering revenues in
1999. Gross profit in 1997 was impacted by a write-off of 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.
Research and Development
Research and development expense in 1999 was $1,237,538, an increase
of 24% over research and development expense in 1998 of $999,362.
1998 research and development expense decreased 5% from 1997 expense
of $1,050,411. The increase in 1999 expense compared to 1998
reflected increased product development activities including
additional engineering personnel and higher amounts of contract
engineering services. The decrease in 1998 expense over 1997
reflected moderate reductions in costs of personnel, equipment and
contract engineering services. To date, the Company has not
capitalized any software development costs. The Company expects to
further increase its research and development expense in 2000.
Sales and Marketing
Sales and marketing expense in 1999 was $2,378,363, an increase of 18%
over 1998 expense of $2,009,003. 1998 sales and marketing expense
represented a decrease of 26% over 1997 expense of $2,719,050. The
increase in 1999 compared to 1998 reflected increased personnel and
increased selling and marketing activities associated with expanding
product lines including increased advertising and attendance at more
trade shows. The decrease in 1998 expense compared to 1997 reflected
lower 1998 staffing levels due to the discontinuation in 1997 of
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.
The Company expects to further increase its sales and marketing
expense in 2000.
- 21 -
<PAGE>
General and Administrative
General and administrative expense in 1999 was $1,278,500, an increase
of 7% over 1998 expense of $1,192,452. 1998 general and
administrative expense represented a decrease of 26% from 1997 expense
of $1,613,492. The increase in 1999 compared to 1998 reflected
moderate increases in personnel costs and higher costs of outside
professional services. The decrease in 1998 expense compared to 1997
primarily reflected professional fees in 1997 associated with
financing and contemplated (subsequently discontinued) merger
activities during 1997 and one-time severance costs for the Company's
former CEO whose services terminated in April 1997. The Company
expects to increase its general and administrative expense in 2000.
Interest Income, Interest Expense, Net
Interest income reflects interest earned on cash balances. Interest
expense in 1999 reflects interest expense relating to outstanding bank
line balances and equipment lease financing obligations which were
paid off during 1999. Interest expense in 1998 and 1997 also includes
interest on convertible preferred notes issued on various dates in
1997 and converted into Series C convertible preferred stock or common
stock in March and May 1998.
Income Taxes
There was no provision for Federal or state income taxes for the years
ended December 31, 1999, 1998 and 1997, as the Company incurred net
operating losses in all periods.
Preferred Stock Dividend; Accretion of Preferred Stock
Preferred stock dividends in 1999 and 1998 reflect dividends earned at
8% per annum on Series B convertible preferred stock issued during the
first quarter of 1998, 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.
Preferred stock dividends in 1997 reflect dividends earned at 6% per
annum on Series A preferred stock issued in November 1996 and
converted at the option of the holder into common stock at various
dates through November 1997. Accretion of preferred stock 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. Preferred shares were substantially converted into common
shares during 1999 and we expect preferred stock dividends to be
significantly lower during 2000.
Quarterly Results of Operations
The following table sets forth summary quarterly statements of
operations for each of the quarters in 1999 and 1998. This unaudited
quarterly information has been prepared on the same basis as the
annual information presented elsewhere herein, and, in the Company's
opinion, includes all adjustments (consisting only of normal recurring
- 22 -
<PAGE>
entries) necessary for a fair presentation of the information for the
quarters presented. The operating results for any quarter are not
necessarily indicative of results for any future period.
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1999 1999 1999 1999
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SUMMARY QUARTERLY DATA:
Revenue....................... $1,461 $1,802 $1,504 $2,109
Cost of revenue............... 611 703 622 865
--------- --------- --------- ---------
Gross profit.................. 850 1,099 882 1,244
OPERATING EXPENSES:
Research and development.... 268 294 315 361
Sales and marketing......... 556 550 568 704
General and administrative.. 392 279 286 322
--------- --------- --------- ---------
Total operating expenses...... 1,216 1,123 1,169 1,387
Interest expense, net......... (7) (11) (13) 6
--------- --------- --------- ---------
Net loss...................... (373) (35) (300) (137)
Preferred stock dividends..... (84) (75) (51) (36)
Accretion, preferred stock
issue....................... -- -- -- --
--------- --------- --------- ---------
Net loss applicable to
common stockholders......... ($457) ($110) ($351) ($173)
========= ========= ========= =========
Net loss per ahare applicable
to common stockholders........ ($0.06) ($0.01) ($0.03) ($0.01)
========= ========= ========= =========
</TABLE>
<TABLE>
<CAPTION>
Quarter Ended
---------------------------------------
March 31, June 30, Sept. 30, Dec. 31,
1998 1998 1998 1998
--------- --------- --------- ---------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
SUMMARY QUARTERLY DATA:
Revenue....................... $1,176 $1,486 $1,368 $1,448
Cost of revenue............... 520 564 537 618
--------- --------- --------- ---------
Gross profit.................. 656 922 831 830
OPERATING EXPENSES:
Research and development.... 252 254 248 245
Sales and marketing......... 457 501 500 551
General and administrative.. 299 290 251 353
--------- --------- --------- ---------
Total operating expenses...... 1,008 1,045 999 1,149
Interest expense, net......... (63) (14) (19) (10)
--------- --------- --------- ---------
Net loss...................... (415) (137) (187) (329)
Preferred stock dividends..... (14) (67) (64) (76)
Accretion, preferred stock
issue....................... (250) -- -- --
--------- --------- --------- ---------
Net loss applicable to
common stockholders......... ($679) ($204) ($251) ($405)
========= ========= ========= =========
Net loss per ahare applicable
to common stockholders........ ($0.10) ($0.03) ($0.03) ($0.05)
========= ========= ========= =========
</TABLE>
The Company has experienced significant quarterly fluctuations in
operating results and anticipates such fluctuations in the future. The
Company generally ships orders as received and as a result typically
has little or no backlog. Quarterly revenue and operating results
therefore depend on the volume and timing of orders received during
the quarter, which are difficult to forecast. Historically, the
Company has often recognized a substantial portion of its revenue in
the last month of the quarter, often in the last week. Operating
results may also fluctuate due to factors such as the demand for the
Company's products, the size and timing of customer orders, the
introduction of new products and product enhancements by the Company
or its competitors, changes in the proportion of revenue attributable
to contract engineering, product mix, timing of software enhancements,
changes in the level of operating expenses, and competitive conditions
in the industry. Because the Company's staffing and other operating
expenses are based on anticipated revenue, a substantial portion of
which is not typically generated until the end of each quarter, delays
in the receipt of orders can cause significant variations in operating
results from quarter to quarter.
Liquidity and Capital Resources
Cash used in operating activities was $1,389,400 in 1999 compared to
$1,516,349 in 1998 and $2,173,687 in 1997 reflecting lower net losses
from the prior year and the effects on cash of working capital
fluctuations primarily in accounts receivable, inventories and
accounts payable balances relating to the timing of sales and purchase
transactions. Changes in operating assets and liabilities during 1999
used cash of $742,946 reflecting higher receivables from increased
sales in the fourth quarter of 1999 and higher inventories supporting
increased sales levels. Changes in operating assets and liabilities
during 1998 used cash of $752,085 reflecting increases in inventories
at the end of 1998 due to increased product lines and the reduction in
accounts payable balances over the previous year-end due to the timing
of purchases and payments. Changes in operating assets and
liabilities during 1997 provided cash of $1,108,987 primarily from
increases in accounts payable and reductions in inventories.
- 23 -
<PAGE>
Cash used for investing activities in 1999 was $233,151 compared to
$96,714 in 1998 and $183,178 in 1997. Investing activities in 1999
reflect tooling costs for new products. The costs of furniture, new
computer equipment and purchased software are included in all three
years.
Cash provided by financing activities during 1999 of $4,936, 064
reflect net proceeds from common stock financings of $5,363,017, the
exercise of $134,857 of options and warrants, less repayments of
remaining equipment lease financing obligations of $41,083 and
repayment of the bank revolving credit line of $520,727. Cash
provided by financing activities during 1998 of $2,307,320 consists
primarily of net proceeds from the sale of Series B and Series D
Preferred Stock. Net cash provided by financing activities in 1997 of
$2,015,421 consists of proceeds from the issuance of subordinated
convertible notes of $1,950,000 and an increase in borrowings under
our bank line of credit, partially offset by payments of equipment
leasing obligations and payment of dividends to Series A preferred
stockholders.
Our cash balances as of March 20, 2000 were approximately $7.7 million
and included the proceeds from exercise of our publicly traded
warrants in 2000 of approximately $3.0 million. During the period
from January 1, 2000 through March 20, 2000, we also raised an
additional $1.0 million from stock options and other warrants that
have been exercised. An additional $0.8 million in cash was also
available from our bank credit lines based upon our levels of
qualified receivables. We believe that our cash balances as of March
20, 2000 are adequate to fund our operations during 2000. In
addition, we have remaining outstanding public warrants that expire on
June 5, 2000, outstanding employee stock options, and warrants from
our private placement financings that, if exercised, will further
increase our cash and equity balances. Remaining unexercised public
warrants, if fully exercised, will raise an additional $1.6 million in
cash and equity capital during the first half of 2000. However, we
may elect to raise additional funding in 2000 to fund our operations
and to strengthen our working capital balances, which we would 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.
- 24 -
<PAGE>
Risk Factors
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.
We have historically relied on our ability to raise equity capital to
fund our operating losses and working capital requirements
Since our inception, we have raised over $24 million in equity
capital and at December 31, 1999, we had an accumulated deficit of
approximately $19 million. Although we believe that our cash balances
as of March 20, 2000 of $7.6 million are adequate to fund our
operations during 2000, continued losses could make it necessary for
us to raise additional capital in the future. 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.
Shares eligible for future sale may adversely affect the market price
for our common stock
As of March 10, 2000, we had outstanding securities convertible
into or exercisable for the following amounts of common stock, all of
which have been registered for resale under the Securities Act of 1933
and accordingly, may be sold into the market without restriction under
the Securities Act of 1933:
- 25 -
<PAGE>
- 2,332,052 shares issuable upon the exercise of stock options under
our 1999, 1995 and 1993 stock plans;
- 2,318,776 shares issuable upon exercise of warrants;
- 940,659 shares issuable upon the conversion of outstanding shares
of convertible preferred stock;
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 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
- 26 -
<PAGE>
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,
- 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.
- 27 -
<PAGE>
Our products may contain undetected flaws and defects
Although we perform testing prior to new product introductions,
our hardware and software products may contain undetected flaws, which
may not be discovered until the products have been used by customers.
From time to time, we may temporarily suspend or delay shipments or
divert development resources from other projects to correct a
particular product deficiency. Such efforts to identify and correct
errors and make design changes may be expensive and time consuming.
Failure to discover product deficiencies in the future could delay
product introductions or shipments, require us to recall previously
shipped products to make design modifications or cause unfavorable
publicity, any of which could adversely affect our business.
Our quarterly operating results may fluctuate in future periods and
our future results are difficult to predict because we have little
order backlog
We expect to experience quarterly fluctuations in operating
results in the future. We generally ship orders as received and as a
result typically have little or no backlog. Quarterly revenues and
operating results therefore depend on the volume and timing of orders
received during the quarter, which are difficult to forecast.
Historically, we have often recognized a substantial portion of our
revenues in the last month of the quarter. This subjects us to the
risk that even modest delays in orders adversely affect our quarterly
operating results. Our operating results may also fluctuate due to
factors such as:
- the demand for our products;
- the size and timing of customer orders;
- unanticipated delays or problems in the introduction of our new
products and product enhancements;
- the introduction of new products and product enhancements by our
competitors;
- changes in the proportion of revenues attributable to royalties and
engineering development services;
- product mix;
- timing of software enhancements;
- changes in the level of operating expenses; and
- competitive conditions in the industry including competitive
pressures resulting in lower average selling prices.
Because we base our staffing and other operating expenses on
anticipated revenue, delays in the receipt of orders can cause
significant variations in operating results from quarter to quarter.
As a result of any of the foregoing factors, our results of operations
in any given 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.
- 28 -
<PAGE>
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 24% of our revenue in 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 33% of our revenue in 1999. Accordingly,
our operating results are subject to the risks inherent in export
sales, including
- longer payment cycles,
- 29 -
<PAGE>
- 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.
- 30 -
<PAGE>
Item 7. Financial Statements
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, 1999 and 1998, and the related
statements of operations, stockholders' equity (deficit) and cash
flows for each of the three years in the period ended December 31,
1999. Our audits also included the financial statement schedule listed
in the index at Item 13(a). These financial statements and schedule
are the responsibility of the Company's management. Our responsibility
is to express an opinion on these financial statements and schedule
based on our audits.
We conducted our audits in accordance with auditing standards
generally accepted in the United States. 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, 1999 and 1998 and the results of
its operations and its cash flows for each of the three years in the
period ended December 31, 1999, in conformity with accounting
principles generally accepted in the United States. Also, in our
opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents
fairly in all material respects the information set forth therein.
/s/ ERNST & YOUNG LLP
San Jose, California
February 16, 2000
except for Note 14,
as to which the date is March 20, 2000
- 31 -
<PAGE>
SOCKET COMMUNICATIONS, INC.
BALANCE SHEETS
<TABLE>
<CAPTION>
December 31,
--------------------------
1999 1998
------------ ------------
<S> <C> <C>
ASSETS
Current assets:
Cash and cash equivalents.......................... $4,284,670 $971,157
Accounts receivable, net of allowance for doubtful
accounts of $67,417 in 1999 and $42,265 in 1998.. 1,557,369 874,895
Inventories........................................ 736,079 479,578
Prepaid expenses................................... 40,999 41,764
------------ ------------
Total current assets............................. 6,619,117 2,367,394
------------ ------------
Property and equipment:
Machinery and office equipment..................... 657,012 595,419
Computer equipment................................. 548,255 480,725
------------ ------------
1,205,267 1,076,144
Accumulated depreciation........................... (884,828) (850,056)
------------ ------------
320,439 226,088
Other assets......................................... 72,667 68,603
------------ ------------
Total assets..................................... $7,012,223 $2,662,085
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Bank line of credit................................ -- $520,727
Accounts payable................................... 1,150,677 1,140,445
Accrued expenses................................... 234,896 221,783
Accrued payroll and related expenses............... 271,642 201,952
Deferred revenue................................... 346,411 240,118
Current portion of capital leases and equipment
financing notes................................. -- 41,083
------------ ------------
Total current liabilities........................ 2,003,626 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 - 4,335 at December 31,
1999 and 30,065 at December 31, 1998; Aggregate
liquidation preference - $221,227 at
December 31, 1999............................. 215,472 1,565,976
Series C Convertible Preferred Stock:
Designated shares - 175,000; Issued and
outstanding shares - 46,431 at December 31,
1999 and 163,468 at December 31, 1998; Aggregate
liquidation preference - $547,856 at
December 31, 1999............................. 479,647 1,714,043
Series D Convertible Preferred Stock:
Designated shares - 175,000; Issued and
outstanding shares - 43,573 at December 31,
1999 and 174,292 at December 31, 1998; Aggregate
liquidation preference - $260,706 at
December 31, 1999............................. 192,472 769,887
Common stock, $0.001 par value:
Authorized shares -- 50,000,000
Issued and outstanding shares - 15,922,220
in 1999, 7,365,914 in 1998.................... 15,922 7,366
Additional paid-in capital......................... 23,174,113 14,217,366
Accumulated deficit................................ (19,069,029) (17,978,661)
------------ ------------
Total stockholders' equity....................... 5,008,597 295,977
------------ ------------
Total liabilities and stockholders' equity...... $7,012,223 $2,662,085
============ ============
</TABLE>
See accompanying notes.
- 32 -
<PAGE>
SOCKET COMMUNICATIONS, INC.
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues................................ $6,876,108 $5,477,804 $4,779,200
Cost of revenue......................... 2,801,091 2,238,658 2,788,108
------------ ------------ ------------
Gross profit............................ 4,075,017 3,239,146 1,991,092
------------ ------------ ------------
Operating expenses:
Research and development.............. 1,237,538 999,362 1,050,411
Sales and marketing................... 2,378,363 2,009,003 2,719,050
General and administrative............ 1,278,500 1,192,452 1,613,492
------------ ------------ ------------
Total operating expenses............ 4,894,401 4,200,817 5,382,953
------------ ------------ ------------
Operating loss.......................... (819,384) (961,671) (3,391,861)
Interest income......................... 12,005 4 2,544
Interest expense........................ (37,441) (105,872) (165,472)
------------ ------------ ------------
Net loss................................ (844,820) (1,067,539) (3,554,789)
Preferred stock dividend................ (245,548) (221,639) (45,465)
Accretion of preferred stock............ -- (250,000) --
------------ ------------ ------------
Net loss applicable to common
stockholders.......................... ($1,090,368) ($1,539,178) ($3,600,254)
============ ============ ============
Basic and diluted net loss per share
applicable to common stockholders..... ($0.11) ($0.22) ($0.70)
============ ============ ============
Weighted average shares outstanding..... 9,939,198 7,103,395 5,148,729
============ ============ ============
</TABLE>
See accompanying notes.
- 33 -
<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, 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
Options...................... -- -- -- -- -- -- -- --
Net loss....................... -- -- -- -- -- -- -- --
-------- ----------- -------- ----------- --------- ----------- --------- ---------
Balance at December 31, 1998... -- -- 30,065 1,565,976 163,468 1,714,043 174,292 769,887
Issuance of Common Stock and
Warrrants.................... -- -- -- -- -- -- -- --
Conversion of Series B
Convertible Preferred Stock
to Common Stock.............. -- -- (25,730) (1,350,504) -- -- -- --
Conversion of Series C
Convertible Preferred Stock
to Common Stock.............. -- -- -- -- (117,037) (1,234,396) -- --
Conversion of Series D
Convertible Preferred Stock
to Common Stock.............. -- -- -- -- -- -- (130,719) (577,415)
Exercise of Warrants........... -- -- -- -- -- -- -- --
Dividends Paid/Payable in
Common Stock................. -- -- -- -- -- -- -- --
Exercise of Common Stock
Options...................... -- -- -- -- -- -- -- --
Charge for Compensatory Stock
Options...................... -- -- -- -- -- -- -- --
Net Loss....................... -- -- -- -- -- -- -- --
-------- ----------- -------- ----------- --------- ----------- --------- ---------
Balance at December 31, 1999... -- $ -- 4,335 $215,472 46,431 $479,647 43,573 $192,472
======== =========== ======== =========== ========= =========== ========= =========
</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, 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
Options...................... -- -- 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
Issuance of Common Stock and
Warrrants.................... 1,936,058 1,936 5,361,081 -- 5,363,017
Conversion of Series B
Convertible Preferred Stock
to Common Stock.............. 2,573,000 2,573 1,347,931 -- --
Conversion of Series C
Convertible Preferred Stock
to Common Stock.............. 1,934,496 1,934 1,232,462 -- --
Conversion of Series D
Convertible Preferred Stock
to Common Stock.............. 1,307,190 1,307 576,108 -- --
Exercise of Warrants........... 334,457 334 110,637 -- 110,971
Dividends Paid/Payable in
Common Stock................. 426,483 427 245,121 (245,548) --
Exercise of Common Stock
Options...................... 44,622 45 23,841 -- 23,886
Charge for Compensatory Stock
Options...................... -- -- 59,566 -- 59,566
Net Loss....................... -- -- -- (844,820) (844,820)
----------- -------- ------------ ------------- -------------
Balance at December 31, 1999... 15,922,220 $15,922 $23,174,113 ($19,069,029) $5,008,597
=========== ======== ============ ============= =============
</TABLE>
See accompanying notes.
- 34 -
<PAGE>
SOCKET COMMUNICATIONS, INC.
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Year Ended December 31,
--------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net loss.............................. ($844,820) ($1,067,539) ($3,554,789)
Adjustments to reconcile net loss
to net cash used in operating
activities:
Depreciation........................ 130,186 135,067 108,280
Amortization........................ 8,614 59,147 163,835
Compensatory stock option grant..... 59,566 109,061 --
Changes in operating assets and
liabilities:
Accounts receivable................. (682,474) 24,401 (66,037)
Inventories......................... (256,501) (284,451) 543,681
Prepaid expenses.................... 765 (32,716) 11,475
Other assets........................ (4,064) (2,298) (18,070)
Accounts payable.................... 10,232 (350,316) 551,923
Accrued expenses.................... 13,113 (92,597) 99,371
Accrued payroll and related
expenses......................... 69,690 (75,601) 46,795
Deferred revenue.................... 106,293 61,493 (60,151)
------------ ------------ ------------
Net cash used in operating
activities....................... (1,389,400) (1,516,349) (2,173,687)
INVESTING ACTIVITIES
Purchase of equipment................. (233,151) (96,714) (183,178)
------------ ------------ ------------
Net cash used in investing
activities....................... (233,151) (96,714) (183,178)
FINANCING ACTIVITIES
Payments on capital leases and
equipment financing notes........... (41,083) (61,652) (109,236)
Net advances(repayments) on revolving
line of credit...................... (520,727) (3,214) 201,198
Proceeds from issuance of
convertible subordinated notes...... -- -- 1,950,000
Preferred stock dividends paid........ -- (17,073) (30,318)
Stock options exercised............... 23,886 -- 3,777
Net proceeds from sale of
preferred stock and warrants........ -- 2,389,259 --
Net proceeds from sale of common
stock and warrants.................. 5,363,017 -- --
Warrants exercised.................... 110,971 -- --
------------ ------------ ------------
Net cash provided by financing
activities....................... 4,936,064 2,307,320 2,015,421
------------ ------------ ------------
Net increase (decrease) in cash and
cash equivalents...................... 3,313,513 694,257 (341,444)
Cash and cash equivalents at
beginning of year..................... 971,157 276,900 618,344
------------ ------------ ------------
Cash and cash equivalents at end
of year............................... $4,284,670 $971,157 $276,900
============ ============ ============
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest.................. $37,441 $54,734 $63,061
Dividends accrued but unpaid............ -- $4,609 $15,147
Dividends paid/payable in common stock.. $245,548 $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.......................... $3,162,315 $ -- $1,793,813
Accretion of preferred stock............ -- $250,000 $ --
Warrants issued in conjunction
with preferred stock financing........ -- $303,396 $ --
</TABLE>
See accompanying notes.
- 35 -
<PAGE>
SOCKET COMMUNICATIONS, INC.
NOTES TO FINANCIAL STATEMENTS
NOTE 1 - Summary of Significant Accounting Policies
Organization and Business
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 families of low
power PC Card adapters for peripheral connections, Ethernet
connectivity, mobile data collection, and wireless communications.
The Company's card products are its principal sources of revenues.
The Company is incorporated in the state of Delaware.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States 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.
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, 1999 and 1998. All of the
Company's cash and cash equivalents consisted of monies held in demand
deposits and a money market fund.
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,
-------------------------
1999 1998
------------ ------------
Raw materials and sub-assemblies....... $707,820 $454,836
Finished goods......................... 28,259 24,742
------------ ------------
$736,079 $479,578
============ ============
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
Financial instruments that potentially subject the Company to
significant concentrations of credit risk consist principally of cash,
cash equivalents and accounts receivable. The Company invests its cash
in cash demand deposits and a money market fund. The Company places
its investments with high-credit-quality financial institutions and
limits the credit exposure to any one financial institution or
instrument. The Company is exposed to credit risk in the event of
- 36 -
<PAGE>
default by these institutions to the extent of the amount recorded on
the balance sheet. As of December 31, 1999, all money market funds are
invested in a single fund. To date, the Company has not experienced
losses on these investments. Accounts receivables are derived
primarily from 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.
Concentration of Suppliers
Several of the Company's component parts are produced by a sole or
limited number of suppliers. Shortages could occur in these essential
materials due to an interruption of supply or increased demand in the
industry. If the Company were unable to procure certain of such
materials, it would be required to reduce its operations which could
have a material adverse effect upon its results.
Revenue Recognition
Product revenue to customers other than distributors is recognized
after shipment has occurred, title to the goods has passed to the
customer, and collectibility is certain. 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, title has passed to the end user, and collectibility is
certain. 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.
Advertising Expense
The cost of advertising is expensed as incurred. The Company
incurred $437,520, $373,054, and $343,910 in advertising costs during
1999, 1998, and 1997 respectively.
Net Loss Per Share
The Company calculates earnings per share in accordance with
Financial Accounting Standards Board Statement No. 128, Earnings per
Share.
- 37 -
<PAGE>
The following table sets forth the computation of basic net loss
per share:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Numerator:
Net loss.............................. ($844,820) ($1,067,539) ($3,554,789)
Preferred stock dividends............. (245,548) (221,639) (45,465)
Accretion of preferred stock.......... -- (250,000) --
------------ ------------ ------------
Net loss applicable to common
stockholders.......................... ($1,090,368) ($1,539,178) ($3,600,254)
============ ============ ============
Denominator:
Weighted average common shares
outstanding used in computing
basic net loss per share............ 9,939,198 7,103,395 5,148,729
============ ============ ============
Basic and diluted net loss per share
applicable to common stockholders..... ($0.11) ($0.22) ($0.70)
============ ============ ============
</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. Options and warrants to purchase
8,468,145, 13,385,295, and 6,429,176 shares of common stock in 1999,
1998, and 1997, respectively, have been omitted from the loss per
share calculation as their effect is antidilutive.
Comprehensive Loss
Effective January 1, 1998, the Company adopted Statement No. 130,
"Reporting Comprehensive Income." The Company has no components of
other comprehensive income.
Segment Information
The Company follows Statement No. 131, "Disclosures about Segments
of an Enterprise and Related Information." 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.
- 38 -
<PAGE>
Information regarding geographic areas for the years ended December
31, 1999, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
Years Ended December 31,
--------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Revenues: (in thousands)
United States........................ $4,602 $3,598 $2,424
Europe............................... 1,779 1,490 2,011
Asia and rest of world............... 495 390 344
------------ ------------ ------------
$6,876 $5,478 $4,779
============ ============ ============
</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,
--------------------------------------
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Ingram Micro......................... 24% 29% 21%
Tech Data............................ * 11% 15%
PPCP Ltd (UK)........................ * 10% 21%
(*Denotes less than 10%)
</TABLE>
New Accounting Pronouncements
In June 1998, the Financial Accounting Standards Board (FASB)
issued Statement of Financial Accounting Standards No. 133,
"Accounting for Derivative Instruments and Hedging Activities" (FAS
133) and in June 1999 the FASB issued FAS 137, "Accounting for
Derivative Instruments and Hedging Activities - Deferral of the
Effective Date of FASB Statement No. 133." FAS 133, as amended by FAS
137, establishes accounting methods for derivative financial
instruments and hedging activities related to those instruments as
well as other hedging activities. The Company will be required to
implement FAS 133, as amended by FAS 137, for the fiscal year ending
December 31, 2001. Because the Company does not currently hold any
derivative instruments and does not engage in hedging activities, the
Company does not expect that the adoption of FAS 133 will have a
material impact on its financial position or results of operations.
In December 1999, The Securities and Exchange Commission issued
Staff Accounting Bulletin No. 101 "Revenue Recognition in Financial
Statements". SAB 101 provides guidance on the recognition,
presentation and disclosure of revenue in financial statements. All
registrants are expected to apply the accounting and disclosures
described in SAB 101. The Company is still assessing the impact of SAB
101 on its consolidated results of operations, financial position and
cash flows.
- 39 -
<PAGE>
NOTE 2 - 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. Dividends for the first three quarters of 1999 of
$74,239 were paid by the issuance of 85,113 shares of common stock
during 1999. Accrued dividends at December 31, 1999 were $14,827,
which were paid through the issuance of 1,910 shares of common stock
in January 2000.
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 $400,000 on similar terms which were subsequently exercised
as Series B-1 and Series B-2 closings.
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 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
- 40 -
<PAGE>
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.
During 1999, holders of the Company's Series B elected to convert
25,730 shares in the amount of $1,350,504 into common stock. Each
share of Series B is convertible into 100 shares of common stock
resulting in 2,573,000 shares issued during the year.
NOTE 3 - 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. 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.
During 1999, 2,125,651 shares of common stock were issued on
conversion of 117,037 shares of Series C convertible preferred shares,
including 191,155 common shares related to accrued dividends. Accrued
dividends in 1999 and 1998 were $38,564 and $101,692 payable through
the issuance of 129,126 and 169,588 shares of common stock,
respectively, at the time of conversion. At December 31, 1999 and
1998, Series C, C-1, and C-2 shares plus accrued dividends, if
converted, would have converted into 1,074,148 and 3,049,106 shares of
common stock, respectively.
NOTE 4 - 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
- 41 -
<PAGE>
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.
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. These transactions resulted in the valuation of
warrants of $150,018 which was recorded as additional paid in capital
in 1998.
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. Dividends for the first three quarters of 1999 of $60,000 were
paid through the issuance of 64,645 shares of common stock during
1999. Accrued dividends at December 31, 1999 were $10,706 which were
paid through the issuance of 1,388 shares of common stock in January
2000.
During 1999, holders of the Company's Series D elected to convert
130,719 shares in the amount of $577,415 into common stock. Each
share of Series B is convertible into 10 shares of common stock
resulting in 1,307,190 common shares issued during the year.
NOTE 5 - Common stock Financings
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
net proceeds of $863,399. 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 with the following assumptions: 0.0% dividend yield rate,
4.0% risk free interest rate, $1.08 fair value of common stock, $1.08
exercise price, and a life of 3 years. $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
net proceeds of $4,499,618. 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. Using a Black-Scholes valuation formula
- 42 -
<PAGE>
with the following assumptions: 0.0% dividend yield rate, 4.5% risk
free interest rate, $4.66 fair value of common stock, $4.66 exercise
price, and a life of 3 years. $513,000 of the proceeds were
attributed to the warrants issued to investors, and the warrants
issued to the placement agent were valued at the same amount.
NOTE 6 - Bank Financing Arrangements
In October 1999, the Company entered into a revolving credit
agreement ("Credit Agreement") with a bank. The related agreement was
amended in March 2000 and expires on February 28, 2001. This amended
credit agreement replaces credit agreements previously in effect. The
credit facility under the Credit Agreement allows the Company to
borrow up to $2,000,000 based on the level of qualified domestic and
international receivables ($1,250,000 and $750,000, respectively), at
the lenders index rate which is based on prime, plus 0.75% and 0.5%,
respectively, on domestic and international receivables. The rates in
effect at the end of the year were 10.0% and 9.5%. There were no
outstanding borrowings on the lines at December 31, 1999. There are
limitations on the company's ability to pay dividends and such
dividends must be payable in common stock under the terms of the
agreement.
During 1999 and prior to October, the Company's previous credit
agreement contained covenants that required the company to maintain
certain financial ratios. The Company was not in compliance with the
covenants for the first two quarters of 1999 and obtained a waiver
from the bank for each of the periods. At December 31, 1999 the
Company was in compliance with all covenants in the credit agreement
in effect at the end of the year.
NOTE 7 - Capital Lease Obligations and Equipment Financings
The Company leased certain of its equipment under capital leases.
The leases were collateralized by the underlying assets. During 1999
the Company completed payment on its lease obligations. At December
31, 1998, property and equipment with a cost of $233,757, was subject
to such financing arrangements. Related accumulated amortization at
December 31, 1998 amounted to $225,143.
NOTE 8 - 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:
2000........................................... 195,905
2001........................................... 163,254
------------
$359,159
============
Rental expense under all operating leases was $195,905, $195,905, and
$194,122 for the years ended December 31, 1999, 1998 and 1997,
respectively.
- 43 -
<PAGE>
NOTE 9 - Stock Option/Stock Issuance Plan
The Company has three Stock Option Plans: the 1993 Stock
Option/Stock Issuance Plan (the 1993 Plan), the 1995 Stock Plan (the
1995 Plan), and the 1999 Stock Plan (the 1999 Plan).
The 1993 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
-------------------------
Options Weighted
Available Number Average
for of Exercise
Grant Shares Price
------------ ------------ ------------
<S> <C> <C> <C>
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
Canceled.............................. 2,806 (2,806) $0.64
------------ ------------
Balance at December 31, 1999............ 114,902 68,606 $0.63
============ ============
</TABLE>
As of December 31, 1999, 1998, and 1997, 68,606, 71,119, and 68,474
options were exercisable at a weighted average exercise price of
$0.63, $0.63 and $0.63, respectively. The exercise price of the
options at December 31, 1999 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 remaining contractual life for options outstanding
under the 1993 Plan at December 31, 1999 is approximately 4.5 years.
The 1995 Plan
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.
- 44 -
<PAGE>
Information with respect to the 1995 Plan is summarized as follows:
<TABLE>
<CAPTION>
Outstanding Options
-------------------------
Shares Weighted
Available Number Average
for of Exercise
Grant Shares Price
------------ ------------ ------------
<S> <C> <C> <C>
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
Increase in shares authorized......... 1,200,000 --
Granted............................... (335,000) 335,000 $0.95
Canceled.............................. 50,689 (50,689) $0.59
Exercised............................. -- (34,205) $0.53
------------ ------------
Balance at December 31, 1998............ 1,020,879 1,879,916 $0.67
============ ============
</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 were repriced vested monthly over an additional one year
period and the unvested repriced options vest under the original terms
of the option grant. As of December 31, 1999, 1998 and 1997,
1,035,431, 667,197, and 223,891 options were exercisable at a weighted
average exercise price of $0.60, $0.58, and $1.28, respectively. The
exercise price of options at December 31, 1999 ranged from $0.4375 to
$1.50. The weighted average remaining contractual life for options
outstanding under the 1995 Plan at December 31, 1999, is approximately
8.3 years.
The 1999 Plan
The Company's 1999 Stock Plan (the 1999 Plan) provides for the
grant of nonstatutory stock options to employees, directors, and
consultants of the Company. 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.
- 45 -
<PAGE>
Information with respect to the 1999 Plan is summarized as follows:
<TABLE>
<CAPTION>
Outstanding Options
-------------------------
Shares Weighted
Available Number Average
for of Exercise
Grant Shares Price
------------ ------------ ------------
<S> <C> <C> <C>
Authorized............................ 1,000,000 --
Granted............................... (440,000) 440,000 $0.56
Exercised............................. -- (10,417) $0.56
------------ ------------
Balance at December 31, 1999............ 560,000 429,583 $0.56
============ ============
</TABLE>
As of December 31, 1999, 40,626 options were exercisable at a
weighted average exercise price of $.56. The exercise price of the
options at December 31, 1999 was $0.56. The weighted average
remaining contractual life for options outstanding under the 1999 Plan
at December 31, 1999, is approximately 9.5 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>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Risk-free interest rate (%)............. 5.94% 5.52% 6.28%
Dividend yield.......................... -- -- --
Volatility factor....................... 0.993 0.921 0.808
Expected option life (years)............ 6.5 6.5 5.5
</TABLE>
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.
- 46 -
<PAGE>
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>
1999 1998 1997
------------ ------------ ------------
<S> <C> <C> <C>
Pro forma net loss...................... ($1,282,236) ($1,731,291) ($3,703,075)
Pro forma net loss per share............ ($0.13) ($0.24) ($0.72)
</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 10 - 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, 1999:
<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................ 73,371 $7.60 * Jun 1995 Jun 2000
Series A Pfd underwriting....... 26,741 $3.56 Nov 1996 Nov 2001
Equipment leasing............... 879 $5.6875 Dec 1996 Dec 2001
Series B financing.............. 122,500 $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.............. 582,875 $0.57375 Nov 1998 Nov 2001
Consulting services............. 10,000 $0.57375 Mar 1999 Mar 2004
Bank line financing............. 50,000 $1.40625 Oct 1999 Oct 2004
Common stock financing.......... 300,121 $1.08 Sep 1999 Sep 2002
Common stock financing.......... 427,672 $4.66 Dec 1999 Dec 2002
-----------
Total warrants.................. 2,407,909
===========
</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, 1999, the effects of the dilution adjustments relating
to these warrants were to increase the number of shares issuable
upon exercise from 550,275 shares to 2,338,669 shares and from
73,371 shares to 152,856 shares, and to correspondingly reduce the
effective per share exercise price from $8.40 per common share to
$1.9765 per common share for the initial public offering warrants,
and from $7.60 per common share to $3.65 per common share for IPO
underwriting warrants.
- 47 -
<PAGE>
NOTE 11 - Shares Reserved
Common stock reserved for future issuance was as follows at
December 31, 1999:
<TABLE>
<S> <C>
Stock option plans outstanding (see Note 9)................. 2,378,105
Reserved for future stock option grants (see Note 9)........ 1,695,781
Common stock warrants (see Note 10)......................... 4,275,788
Series B conversion (see Note 2)............................ 433,500
Series C conversion (see Note 3)............................ 945,022
Series D conversion (see Note 4)............................ 435,730
Preferred Stock dividends .................................. 132,424
-----------
Total common stock reserved for future issuance............. 10,296,350
===========
</TABLE>
NOTE 12 - Retirement Plan
The Company has 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 13 - Income Taxes
Due to the Company's loss position, there was no provision for
income taxes for the years ended December 31, 1999, 1998 and 1997.
As of December 31, 1999, the Company had federal and state net
operating loss carryforwards of approximately $13,445,000 and
$4,850,000, respectively. The Company also has federal and state tax
credit carryforwards of approximately $180,000 and $155,000,
respectively. The net operating loss and credit carryforwards will
expire at various dates beginning in 2000 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.
- 48 -
<PAGE>
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,
-----------------------
1999 1998
----------- -----------
<S> <C> <C>
Net operating loss carryforwards................... $4,853,000 $4,800,000
Credits............................................ 284,000 284,000
Capitalized research and development costs......... 932,000 806,000
Reserves........................................... 429,000 369,000
Other.............................................. 441,000 443,000
----------- -----------
Total deferred tax assets........................ 6,939,000 6,702,000
Valuation allowance for deferred tax assets........ (6,939,000) (6,702,000)
----------- -----------
Net deferred tax assets.......................... $ -- $ --
=========== ===========
</TABLE>
NOTE 14 - Subsequent Events
From January 1, 2000 through March 20, 2000, 352,884 publicly traded
warrants to purchase common stock were exercised resulting in net
proceeds of $2,964,226.
- 49 -
<PAGE>
Item 8. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure
Not Applicable.
PART III
The information required in Items 9-12 is hereby incorporated by
reference from the Company's definitive proxy statement for the Annual
Meeting of Stockholders to be held on June 21, 2000.
PART IV
Item 13. Exhibits and Reports on Form 8-K.
(a) Documents filed as part of this report:
1. All financial statements.
INDEX TO FINANCIAL STATEMENTS PAGE
Report of Ernst & Young LLP, Independent Auditors.......31
Balance Sheets..........................................32
Statements of Operations................................33
Statements of Stockholders' Equity......................34
Statements of Cash Flows................................35
Notes to Financial Statements...........................36
2. Financial statement schedules.
II. Valuation and Qualifying Accounts.................S-1
3. Exhibits.
3.1(1) Certificate of Incorporation.
3.2(1) Bylaws.
3.3(3) Certificate of Designations of Preferences and
Rights of Series B Convertible Preferred Stock.
3.4(3) Certificate of Designations of Preferences and
Rights of Series B-1 Convertible Preferred Stock.
3.5(3) Certificate of Designations of Preferences and
Rights of Series B-2 Convertible Preferred Stock.
- 50 -
<PAGE>
3.6(4) Certificate of Designations of Preferences
and Rights of Series C convertible Preferred Stock
3.7(4) Certificate of Designations of Preferences
and Rights of Series C-1 Convertible Preferred Stock
3.8(5) Certificate of Designations of Preferences
and Rights of Series C-2 Convertible Preferred Stock
3.9(6) Certificate of Designations of Preferences
and Rights of Series D Convertible Preferred Stock
10.1(1) Form of Indemnification Agreement entered into
between the Company and its directors and officers.
10.2(1) 1993 Stock Option/Stock Issuance Plan and
forms of agreement thereunder.
10.3(1) 1995 Stock Plan and forms of agreement
thereunder.
10.4(2) Standard Lease Agreement by and between
Central Court, LLC and the Company dated
September 15, 1996.
10.5(3) Form of Employment Agreement dated October
15, 1997 with: Micheal Gifford, Executive Vice President
Business Development and General Manager, Wireless
Products Division; Kevin Mills, Vice President of
Engineering and Operations and General Manager, Wired
Products Division, and David Dunlap, Vice President
Finance and Administration, Chief Financial Officer and
Corporate Secretary.
10.6(3) Series B Preferred Stock Purchase Agreement
dated January 21, 1998 by and between the Company and
Explorer Partners, L.L.C., a Delaware limited liability
company and Explorer Fund Management, L.L.C., an
Illinois limited liability company and Amendment No. 1
thereto dated March 18, 1998.
10.7(3) Bonus Plan dated February 18, 1998 between
the Company and certain eligible participants.
10.8(3) Form of Amendment No.1 to Stock Option
Agreement between the Company and certain Option Holders
under the 1995 Stock Option Plan.
10.9(6) Series D Convertible Preferred Stock Purchase
Agreement
10.10(6) Common Stock Purchase Warrant dated November 9, 1998
to The Harmat Organization
10.11(6) Common Stock Purchase Warrant dated November 9, 1998
to Global Holdings, LP
- 51 -
<PAGE>
10.12(7) Series D Convertible Stock Purchase Agreement for
Bass Trust
23.1 Consent of Ernst & Young LLP, Independent Auditors.
27.1 Financial Data Schedule.
- --------------------
(1) Incorporated by reference to exhibits filed with Company's
Registration Statement on Form SB-2 (File No. 33-91210-LA)
filed on June 2, 1995 and declared effective on June 6, 1995.
(2) Incorporated by reference to Exhibit 10.5 of the Company's
Registration Statement on Form SB-2 (File No. 333-22273) filed
on February 24, 1997.
(3) Incorporated by reference to exhibits filed with the Company's
Form 10-KSB (File No. 001-13810) for the year ended December
31, 1997 filed on March 30, 1998.
(4) Incorporated by reference to exhibits filed with the Company's
Form 10-QSB (File No. 001-13810) filed on May 13, 1998.
(5) Incorporated by reference to exhibits filed with the Company's
Form 10-QSB (File No. 001-13810) filed on August 14, 1998.
(6) Incorporated by reference to exhibits filed with the Company's
Form 10-QSB (File No. 001-13810) filed on November 13, 1998.
(7) Incorporated by reference to exhibits filed with the Company's
Form 10-KSB (File No. 001-13810) filed on March 30, 1999.
b. Reports on Form 8-K
None
- 52 -
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned, hereunto duly
authorized.
SOCKET COMMUNICATIONS, INC.
----------------------------
Registrant
Date: March 22, 2000 /s/ Charlie Bass
-----------------------------
Charlie Bass
Chairman and Chief Executive Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose
signature appears below constitutes and appoints, jointly and
severally, Charlie Bass and David Dunlap as his attorneys-in-fact,
each with the power of substitution, for him in any and all
capacities, to sign any and all amendments to this Report on Form 10-
KSB and to file the same, with exhibits thereto and other documents in
connection therewith, with the Securities and Exchange Commission,
hereby ratifying and confirming all that each of said attorney-in-
fact, or his substitute or substitutes, may do or cause to be done by
virtue hereof. Pursuant to the requirements of the Securities
Exchange Act of 1934, this report has been signed below by the
following persons on behalf of the Registrant and in the capacities
and on the dates indicated.
Signature Title Date
- ---------------------------- --------------------------------- -------------
By /s/ Charlie Bass Chairman and Chief March 22, 2000
- ---------------------------- Executive Officer
Charlie Bass
By /s/ David W. Dunlap Vice President of Finance March 22, 2000
- ---------------------------- and Administration and
David W. Dunlap Chief Financial Officer
By /s/ Micheal L. Gifford Executive Vice President March 22, 2000
- ---------------------------- and Director
Micheal L. Gifford
By /s/ Jack C. Carsten Director March 22, 2000
- ----------------------------
Jack C. Carsten
By /s/ Edward M. Esber, Jr. Director March 22, 2000
- ----------------------------
Edward M. Esber, Jr.
By /s/ Gianluca Rattazzi Director March 22, 2000
- ----------------------------
Gianluca Rattazzi
By /s/ Lars Lindgren Director March 22, 2000
- ----------------------------
Lars Lindgren
- 53 -
<PAGE>
SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
SOCKET COMMUNICATIONS, INC.
FOR THE THREE YEARS ENDED DECEMBER 31, 1999
<TABLE>
<CAPTION>
Additions
-------------------
Balance Charged
at to Charged Amounts Balance
Beginning Costs and to Written at end
Description of Period Expenses Other Off of Period
- ----------------------------- --------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Accounts Receivable Allowance
for Doubtful Accounts:
1999....................... $42,265 $25,582 -- $430 $67,417
1998....................... $44,691 $9,752 -- $12,178 $42,265
1997....................... $35,330 $11,106 -- $1,745 $44,691
</TABLE>
- S-1 -
<PAGE>
Exhibit 23.1
CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS
We consent to the incorporation by reference in the Registration
Statements (Forms S-3 No. 333-96231 and No. 333-82591; and Form S-8
No. 333-85721) of our report dated February 16, 2000 (except for
Note 14, as to which the date is March 20, 2000), with respect to
the financial statements and schedule of Socket Communications, Inc.
included in this Annual Report (Form 10-KSB) for the year ended
December 31, 1999.
/s/ ERNST & YOUNG LLP
San Jose, California
March 23, 2000
<TABLE> <S> <C>
<ARTICLE> 5
<LEGEND> THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE BALANCE SHEETS AND STATEMENTS OF
OPERATIONS OF THE COMPANY'S FORM 10-KSB FOR THE YEAR ENDED
DECEMBER 31, 1999 AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<S> <C>
<FISCAL-YEAR-END> Dec-31-1999
<PERIOD-START> Jan-01-1999
<PERIOD-END> Dec-31-1999
<PERIOD-TYPE> 12-MOS
<CASH> 4,284,670
<SECURITIES> 0
<RECEIVABLES> 1,624,786
<ALLOWANCES> 67,417
<INVENTORY> 736,079
<CURRENT-ASSETS> 6,619,117
<PP&E> 1,205,267
<DEPRECIATION> 884,828
<TOTAL-ASSETS> 7,012,223
<CURRENT-LIABILITIES> 2,003,626
<BONDS> 0
0
887,591
<COMMON> 15,922
<OTHER-SE> 4,105,084
<TOTAL-LIABILITY-AND-EQUITY> 7,012,223
<SALES> 6,876,108
<TOTAL-REVENUES> 6,876,108
<CGS> 2,801,091
<TOTAL-COSTS> 2,801,091
<OTHER-EXPENSES> 4,894,401
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 37,441
<INCOME-PRETAX> (844,820)
<INCOME-TAX> 0
<INCOME-CONTINUING> (844,820)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (1,090,368)
<EPS-BASIC> ($0.11)
<EPS-DILUTED> ($0.11)
</TABLE>
