SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number 0-24752
Wave Systems Corp.
(Exact name of registrant as specified in its charter)
Delaware 13-3477246
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
480 Pleasant Street
Lee, Massachusetts 01238
(Address of principal executive offices)
(Zip code)
(413) 243-1600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes _X_ No ___
The number of shares outstanding of each of the issuer's classes of common
stock as of June 30, 1997: 14,865,116 shares of Class A Common Stock and
5,512,026 shares of Class B Common Stock.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Condensed Consolidated Balance Sheets
<TABLE>
<CAPTION>
June 30, December 31,
Assets 1997 1996
------------ ------------
(Unaudited)
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 907,061 $ 4,064,324
Prepaid expenses and other receivables 15,600 70,358
Total current assets 922,661 4,134,682
Property, equipment, and leasehold improvements, less accumulated depreciation
and amortization of $790,101 in 1997 and $622,356 in 1996 1,024,687 934,798
Goodwill, net of accumulated amortization of $134,930 in 1997 and $39,686 in 1996 817,508 912,752
Other assets 140,822 254,987
$ 2,905,678 $ 6,237,219
------------ ------------
Liabilities and Stockholders' Equity (Deficit)
Current liabilities:
Accounts payable and accrued expenses $ 985,321 $ 937,163
Total current liabilities 985,321 937,163
Note Payable 487,929 465,500
Preferred Stock:
Series A Cumulative Redeemable Preferred Stock, $.01 par value; 360 shares
issued and outstanding in 1997 and 1996; involuntary liquidation value $460,800 453,733 432,334
Series B Cumulative Convertible Preferred Stock, $.01 par value; 350 shares
issued and outstanding in 1996 - 195,520
Series C Cumulative Convertible Preferred Stock, $.01 par value; 31,000 shares and
150,000 shares issued and outstanding in 1997 and 1996; involuntary liquidation
value $638,600 638,600 2,647,742
Series D Cumulative Convertible Preferred Stock, $.01 par value; 80 shares
issued and outstanding in 1997; involuntary liquidation value $1,608,000 1,608,000 -
------------ ------------
Total Preferred Stock 2,700,333 3,275,596
Stockholders' equity (deficit):
Preferred stock, $.01 par value, Authorized 2,000,000 shares:
360 shares issued and outstanding as Series A Cumulative Redeemable Preferred Stock - -
31,000 shares issued and outstanding as Series C Cumulative Convertible Preferred Stock - -
80,000 shares issued and outstanding as Series D Cumulative Convertible Preferred Stock - -
Common stock, $.01 par value, Authorized 25,000,000 shares as Class A;
14,865,116 issued and outstanding at June 30, 1997; 11,582,086 at December 31, 1996 148,651 115,821
Common stock, $.01 par value, authorized 13,000,000 shares as Class B;
5,515,026 issued and outstanding at June 30, 1997; 6,208,141 at December 31, 1996 55,150 62,081
Capital in excess of par value 35,372,990 33,052,432
Deficit accumulated during the development stage (36,591,332) (31,426,669)
Less: Note receivable from stockholder, including accrued interest of $80,189
in 1997 and $71,530 in 1996 (253,364) (244,705)
Total stockholders' equity (deficit) (1,267,905) 1,558,960
$2,905,678 $6,237,219
</TABLE>
-2-
See accompanying notes to unaudited
condensend consolidated financial statements.
<PAGE>
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Condensed Consolidated Statements of Operations
(Unaudited)
<TABLE>
<CAPTION>
Period From
February 12,
Three Months Six Months 1988
Ended Ended (Inception)
June 30, June 30, Through
---------------------------- ---------------------------- June 30,
1997 1996 1997 1996 1997
------------ ------------ ------------ ------------ ------------
Revenues $ 2,133 $ 310 $ 2,548 $ 1,458 $ 4,006
------------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C>
Operating expenses:
Selling, general, and administrative 1,677,959 1,646,654 3,266,701 2,632,104 22,818,057
Research and development 910,395 810,994 1,915,179 1,721,291 14,416,864
2,588,354 2,457,648 5,181,880 4,353,395 37,234,921
Interest income 11,216 49,906 37,098 115,689 1,040,148
Interest expense (11,398) (447) (22,429) (447) (413,285)
Other income 0 0 0 0 12,720
------------ ------------ ------------ ------------ ------------
(182) 49,459 14,669 115,242 639,583
Net loss (2,586,403) (2,407,879) (5,164,663) (4,236,695) (36,591,332)
Accrued dividends on preferred stock
(including accretion of assured incremental
yield on Series D preferred stock of $401,267
and $1,122,743 for the three and six month
periods ended June 30, 1997 and 1996,
respectively) 722,591 29,702 1,857,468 40,150 2,852,981
Net loss to common stockholders ($ 3,308,994) ($ 2,437,581) ($ 7,022,131) ($ 4,276,845) ($39,444,313)
Weighted average number of common shares
outstanding during the period 19,202,817 14,332,435 18,549,189 14,295,594 9,052,613
Loss per common share ($ 0.17) ($ 0.17) ($ 0.38) ($ 0.30) ($ 4.36)
</TABLE>
-3-
See accompanying notes to unaudited
condensend consolidated financial statements.
<PAGE>
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Condensed Consolidated Statements of Cash Flows
(Unaudited)
<TABLE>
<CAPTION>
Period From
February 12,
Six Months 1988
Ended (Inception)
June 30, Through
---------------------------- June 30,
1997 1996 1996
------------ ------------ ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net loss ($ 5,054,663) ($ 4,236,695) ($36,591,332)
Adjustments to reconcile net loss to net cash
used in operating activities:
Depreciation and amortization 267,153 126,732 967,827
Reserve for short-term loans to affiliate - 568,601 1,672,934
Accrued interest on marketable securities - (5,102) (106,962)
Noncash expenses:
Common stock issued in connection with
License and Cross-License Agreement - - 1,124,960
Common stock issued for services rendered
and additional interest on borrowings 194,800 63,072 2,566,362
Accrued interest on note payable 22,429 31,929
Preferred stock issued for services rendered - - 265,600
Compensation associated with issuance of
stock options - - 399,740
Amortization of deferred compensation - - 398,660
Amortization of discount on notes payable - - 166,253
Common stock issued by principal stockholder for
services rendered - - 565,250
Changes in assets and liabilities:
Increase in accrued interest on note receivable (8,659) (8,658) (80,189)
Decrease (increase) in prepaid expenses and
other receivables 54,758 107,597 (15,600)
Decrease (increase) in other assets 111,679 (252,931) (158,224)
(Decrease) increase in accounts payable and
accrued expenses (61,842) (524,537) 1,012,833
------------ ------------ ------------
Net cash used in operating activities (4,474,345) (4,161,921) (27,669,959)
------------ ------------ ------------
Cash flows from investing activities:
Acquisition of property, equipment & leasehold improvements (259,113) (72,160) (1,809,925)
Short-term loans to affiliate - (568,601) (1,672,934)
Organizational costs - - (14,966)
Redemption of marketable securities - 4,000,000 27,653,731
Purchase of marketable securities - (2,999,257) (27,546,769)
------------ ------------ ------------
Net cash (used in) provided by investing activities (259,113) 359,982 (3,390,863)
------------ ------------ ------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 98,195 272,685 22,669,777
Net proceeds from issuance of Series B Preferred Stock - 3,214,026 5,950,027
Net proceeds from issuance of Series D Preferred Stock 1,478,000 1,478,000
Sale of warrants - - 4
Note receivable from stockholder - - (173,175)
Proceeds from notes payable and warrants to stockholders - - 2,083,972
Repayments of notes payable to stockholders - - (1,069,972)
Proceeds from notes payable and warrants - - 1,284,250
Repayment of notes payable - - (255,000)
Advances from stockholder - - 227,598
Repayments of advances from stockholders - - (227,598)
Decrease in deferred offering costs - - -
------------ ------------ ------------
Net cash provided by financing activities 1,576,195 3,486,711 31,967,883
------------ ------------ ------------
Net (decrease) increase in cash and cash equivalents (3,157,263) (315,228) 907,061
Cash and cash equivalents at beginning of period 4,064,324 2,511,928 -
------------ ------------ ------------
Cash and cash equivalents at end of period $ 907,061 $ 2,196,700 $ 907,061
============ ============ ============
</TABLE>
No cash was paid for interest during the six months ended June 30, 1996 or 1995
-4-
See accompanying notes to unaudited
condensend consolidated financial statements.
<PAGE>
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Condensed Consolidated Statements of Stockholders' Equity
Six Months Ended June 30, 1996
(Unaudited)
<TABLE>
<CAPTION>
Class A Class B
Common Stock Common Stock
----------------------------------- -----------------------------------
Shares Amount Shares Amount
------------ ------------ ------------ ------------
<S> <C> <C> <C> <C>
Balance at
December 31,
1996 11,582,086 $ 115,821 6,208,141 $ 62,081
Exercise of options
to purchase
Class A stock 41,665 417 -- --
Conversion of Series B 117,240 1,172 -- --
preferred stock
Conversion of Series C 2,351,010 23,510 -- --
preferred stock
Shares issued for
services 80,000 800 -- --
Accrual of interest
on note receivable -- -- -- --
Accrued dividend on
preferred stock -- -- -- --
Exchange of Class B
stock for Class A
stock 693,115 6,931 (693,115) (6,931
Net (loss) for six
months ended
June 30, 1997 -- -- -- --
------------ ------------ ------------ ------------
Balance at June 30,
1997 14,865,116 $ 148,651 5,515,026 $ 55,150
------------ ------------ ------------ ------------
<CAPTION>
Deficit Note
Capital Accumulated Receivable
in Excess During the from
of Development Stock-
Par Value Stage holder Total
------------ ------------ ------------ ------------
Balance at
December 31,
1996 $ 33,052,432 $(31,426,669) $ (244,705) $ 1,558,960
Exercise of options
to purchase
Class A stock 97,778 -- -- 998,195
Conversion of Series B 198,044 -- -- 199,216
preferred stock
Conversion of Series C 2,403,238 -- -- 2,426,748
preferred stock
Shares issued for
services 356,224 -- -- 357,024
Accrual of interest
on note receivable -- -- (8,659) (8,659)
Accrued dividend on
preferred stock (734,726) -- -- (734,726)
Exchange of Class B
stock for Class A
stock -- -- -- --
Net (loss) for six
months ended
June 30, 1997 -- (5,164,663) -- (5,164,663)
------------ ------------ ------------ ------------
Balance at June 30,
1997 $ 35,372,990 $(36,591,332) $ (253,364) $ (1,267,905)
============ ============ ============ ============
</TABLE>
-5-
See accompanying notes to unaudited
condensend consolidated financial statements.
<PAGE>
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes To Condensed Consolidated Financial Statements
June 30, 1997 and 1996
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial position of the
Company as of June 30, 1997, and the results of its operations and cash flows
for the six months ended June 30, 1997. Such financial statements have been
condensed in accordance with the applicable regulations of the Securities and
Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. It is suggested that these condensed consolidated financial
statements be read in conjunction with the Company's audited financial
statements and notes thereto for the year ended December 31, 1996, included in
its Form 10-K filed in March 1997. The results of operations for the three and
six months ended June 30, 1997 are not necessarily indicative of the operating
results for the full year.
1. Loss per Share:
Loss per share is computed based on the weighted average number of common shares
outstanding. The inclusion of common stock equivalents (warrants, options and
convertible preferred stock) in this computation would be antidilutive.
2. Going Concern:
The Company has incurred significant losses in current and prior periods.
Management intends to continue to devote resources toward the research,
development and marketing of its products in order to generate future revenues
from licensing and product sales. In addition, the Company is actively pursuing
additional short and long term financing sources, including debt and equity
financing. Although management believes that it can successfully research,
develop and market its products and obtain additional financing, there can be no
assurance that it will be able to do so.
3. Stock Options and Grants:
During the quarter and six months ended June 30, 1997, the Company granted
employees options to purchase a total of 9,750 shares and 65,250 shares,
respectively, of Class A Common Stock at prices ranging from $1.56 to $2.91 per
share. These options were granted at the market price on the date next preceding
the date of grant.
4. Capital Stock:
-6-
<PAGE>
In May of 1997, the Company raised $1,315,976, net of issuance costs of $284,024
($162,024 of which related to the value ascribed to warrants issued) through the
placement of 80,000 shares of Series D Preferred Stock pursuant to Regulation D
of the Act. The Series D Preferred Stock has a stated value of $20 per share,
which accrues dividends payable quarterly in cash at 6% per annum.
Any unpaid dividends become due on the date conversion takes place. The Series D
Preferred Stock ranks senior to the Company's common stock and junior to the
Series A, B and C Preferred Stock. Series D Preferred Stock is convertible by
the holder, in increments, into the Company's Class A common stock based on the
market price of the Company's Class A common stock at the time of conversion.
Conversion can occur at the earlier of 75 days after the original issue date or
the date the Securities and Exchange Commission declares a registration
statement, filed to register the Class A common stock received upon conversion,
effective.
The Series D Preferred Stock is convertible at the lesser of $1.35 per share or
80%, as adjusted, of the average of the fair value of the Class A common stock
for the five days prior to the conversion date. In the event of any conversion,
by a holder or holders, would exceed 20% of the total number of shares of Class
A common stock then outstanding, the holder has the option to convene a meeting
to obtain shareholder approval or require the Company to redeem the number of
shares of Series D Preferred Stock that are in excess of 20%. The Series C and
Series D Preferred Stock may be redeemed for cash under certain circumstances.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Wave Systems Corp. ("Wave" or the "Company") is in transition from a company
focused principally on research and development of new technology to a company
focused on the commercialization of its technology through licensing and product
sales. Since its inception in February of 1988, the Company has devoted
substantially all of its efforts and resources to research, feasibility studies,
design, development, and market testing of a system that meters the usage of
electronic content (the "Wave System"). Electronic content refers to any data,
graphic software, video or audio sequence that can be digitally transmitted.
Concurrent with its research and development activities, the Company has devoted
increased resources to market research, market development and other related
activities.
The Company believes that the Wave System can fundamentally change how
electronic content is consumed by providing more efficient and flexible pricing,
greater protection against unauthorized usage and secure, low-cost, and accurate
data on the usage of the electronic content. The currently operational Wave
System enables the merchandising of electronic content at the point of purchase,
increasing the probability that consumers will sample and consume the electronic
content that they want. The Wave System accurately and securely records
information pertaining
<PAGE>
to the usage of the electronic content. This facilitates the payment of
royalties to content owners and the customized distribution of content to
customers.
The Wave System consists of many individually distributed processors (the
"WaveMeter"). These devices decrypt content on demand from end users. The
WaveMeter is a proprietary application-specific integrated circuit, mounted on a
printed circuit board, or used as an add-in device in a stand-alone PC. The
WaveMeter allows transactions to occur without the expense of a real-time
network connection for every transaction. The WaveMeter securely stores
electronic funds and batched information about the usage of electronic content
to be securely transmitted to a central transaction processing center
("WaveNet"). WaveNet manages encryption and decryption keys, processes credit
and usage charges, automatically obtains credit authorization, calculates
royalty distributions, and can provide user and usage data to electronic content
owners. The Wave System is compatible with existing content delivery systems
such as CD-ROM, the Internet and Direct Broadcast Satellite.
In 1996 the Company developed a production software version of the WaveMeter
that offers a subset of the feature of the hardware version of the WaveMeter and
has been implemented as part of the Company's Internet commerce server (the
"WaveMeter server"). The WaveMeter server supports a publishing service called
WINPublish and a purchasing function called WINPurchase. Through WINPublish, an
electronic content owner can sell encrypted content from its site on the Web to
purchasers using the WINPurchase function.
The Company's strategy is to achieve broad market acceptance of the Wave System
as a standard platform for commerce in electronic content. To achieve this goal
the Company pursues strategic relationships with manufacturers of personal
computers and companies involved in electronic content commerce. Wave also
promotes the use of the Wave System by electronic content owners, particularly
among developers and distributors of entertainment and educational software. The
compatibility with the Web provides the foundation for the broad acceptance of
the Wave System. The Company views the acceptance by developers, distributors
and consumers of entertainment and educational software as an important factor
in the development of a broad installed base of WaveMeters. The Company further
believes that once there is a broad installed base of WaveMeters, electronic
content owners from other market segments are likely to be attracted to the Wave
System.
Since the end of the second quarter, the Company furthered its goal of achieving
broad market acceptance of the Wave System by entering into strategic
relationships. The Company and Aladdin Knowledge Systems, Ltd. ("Aladdin")
closed a licensing agreement whereby in return for an equity position in Wave,
Aladdin licensed its proprietary persistent encryption technology. The Company
believes that the incorporation of this technology into the Wave System will
facilitate the commerce in electronic content on a pay-per-use basis. The
Company also has set the groundwork for the acceptance of the Wave System in
Europe. In July, the Company entered into a joint venture with Internet
Technology Group, Plc. Pursuant to this agreement, Wave licensed certain
elements of the Wave System to a joint venture company, Global Wave, Ltd., to
promote the use of the Wave System in Europe.
<PAGE>
The Company intends to continue to pursue strategic relationships with hardware
manufacturers, including personal computer manufacturers, and companies involved
in the commerce of electronic content both in North America and overseas. The
development of WINPublish and WINPurchase services and the Great Stuff Network
site, provide innovative alternatives for the distribution of electronic content
on the Web.
Significant uncertainty currently exists with respect to the adequacy of current
funds to support the Company's activities. This uncertainty will continue until
a positive cash flow from operations can be achieved. Additionally, the Company
is uncertain as to the availability of financing from other sources to fund any
cash deficiencies. These uncertainties raise doubt about the Company's ability
to continue as a going concern.
In order to reduce these uncertainties, the Company is currently evaluating
additional financing options and may therefore elect to raise capital, from time
to time, through equity or debt financings in order to capitalize on business
opportunities and market conditions and insure the continued development of the
Company's technology, products and services.
The Company presently has no material commitments for capital expenditures.
However, in order to bring the Wave System to market, the Company anticipates
spending additional amounts on inventory items such as computer chips and
boards, additional hardware, and related materials. Such spending will vary
based on the Company's performance.
Results of Operations
Three Months Ended June 30, 1997 and 1996
Research and development expenses for the three months ended June 30, 1997 were
$910,395, as compared to $810,994 for the comparable period of 1996. The
increase in research and development expenses was primarily attributable to the
costs associated with the design and development of the Company's proprietary
integrated circuit technology, including non-recurring engineering costs and
prototype purchases, and the costs associated with the design and development of
WaveNet.
Selling, general and administrative expense for the three months ended June 30,
1997 were $1,677,959, as compared to $1,646,654 for the comparable period of
1996. The slight increase in selling, general and administrative expenses was
primarily attributable to an increase in personnel and other related costs
associated with the development and marketing of new applications of the
Company's technology.
Interest income for the three months ended June 30, 1997 was $11,216, as
compared to $49,906 for the comparable period of 1996. The decrease in interest
income is primarily attributable to a decrease in interest-bearing assets. The
increase in interest expense is related to the Company's $465,000 note payable
to Southeast Interactive Technology Fund I, LLC.
<PAGE>
Due to the reasons set forth above, the Company's net loss for the three months
ended June 30, 1997 was $2,586,403 as compared to $2,407,879 for the comparable
period of 1996.
Six Months Ended June 30, 1997 and 1996
Research and development expenses for the six months ended June 30, 1997 were
$1,915,179, as compared to $1,721,291 for the comparable period of 1996. The
increase in research and development expenses was primarily attributable to the
costs associated with the design and development of the Company's proprietary
integrated circuit technology, including non-recurring engineering costs and
prototype purchases, and the costs associated with the design and development of
WaveNet.
Selling, general and administrative expense for the six months ended June 30,
1997 were $3,266,701, as compared to $2,632,104 for the comparable period of
1996. The increase in selling, general and administrative expenses was primarily
attributable to an increase in personnel and other related costs associated with
the development and marketing of new applications of the Company's technology.
Interest income for the six months ended June 30, 1997 was $37,098, as compared
to $115,689 for the comparable period of 1996. The decrease in interest income
is primarily attributable to a decrease in interest-bearing assets. The increase
in interest expense is related to the Company's $465,000 note payable to
Southeast Interactive Technology Fund I, LLC.
Due to the reasons set forth above, the Company's net loss for the six months
ended June 30, 1997 was $5,164,663 as compared to $4,236,695 for the comparable
period of 1996.
Liquidity and Capital Resources
The Company has experienced net losses and negative cash flow from operations
since its inception, and, as of June 30, 1997, had a deficit accumulated during
the development stage of $36,591,332 and a stockholders' deficit of $1,267,905.
The Company has financed its operations through June 30, 1997 principally
through the private placement of Class B Common Stock for an aggregate amount of
$6,201,931 (before deduction of expenses incurred in connection therewith), the
issuance of $2,873,250 in aggregate principal amount of its 10% Convertible
Notes and 15% Notes (of which $2,098,250 was converted into Class B Common
Stock), the sale of 3,728,200 shares of its Class A Common Stock in an initial
public offering raising approximately $15,711,000 after all expenses, and the
private placement of 350 shares of Series B Preferred Stock , 150,000 shares of
Series C Convertible Preferred Stock and 80,000 shares of Series D Convertible
Preferred Stock for an aggregate amount of $8,100,000 (before deduction of
expenses incurred in connection therewith). In addition, the Company has
attempted to contain costs and reduce cash flow requirements by using
consultants and compensating key employees,
<PAGE>
consultants, suppliers and other vendors with Common Stock and options to
purchase Common Stock.
At June 30, 1997, the Company had approximately $907,000 in cash and cash
equivalents. The Company held no marketable securities at June 30, 1997. At
December 31, 1996, the Company had approximately $4,064,000 in cash and cash
equivalents and held no marketable securities. The decrease in cash and cash
equivalents is attributable to the net cash used in operations. At June 30,
1997, the Company had a deficit in working capital of approximately $63,000 The
Company expects to incur substantial additional expenses resulting in
significant losses at least through the period ending December 1997 due to
minimal revenues associated with initial market entry, continued research and
development costs as well as increased sales and marketing expenses associated
with market testing and roll-out. On October 19, 1997 the Company's Series A
Cumulative Redeemable Preferred Stock becomes mandatorily redeemable for a total
amount of $450,000 plus accumulated interest.
Significant uncertainty currently exists with respect to the adequacy of current
funds to support the Company's activities. This uncertainty will continue until
a positive cash flow from operations can be achieved. Additionally, the Company
is uncertain as to the availability of financing from other sources to fund any
cash deficiencies. These uncertainties raise doubt about the Company's ability
to continue as a going concern.
In order to reduce these uncertainties, the Company is currently evaluating
financing options and may therefore elect to raise additional capital, from time
to time, through equity or debt financings in order to capitalize on business
opportunities and market conditions and insure the continued development of the
Company's technology, products and services.
The Company presently has no material commitments for capital expenditures.
However, in order to bring the Wave System to market, the Company anticipates
spending additional amounts on inventory items such as computer chips and
boards, additional hardware, and related materials. Such spending will vary
based on the Company's performance.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
On June 27, 1997 a complaint alleging breach of contract, among other related
claims, was filed against the Company by Carl A. Artopoeus and Artopoeus Capital
Management (collectively, "Artopeous") with the Sacramento Superior Court in
Sacramento, California in connection with the engagement of Artopeous by the
Company to arrange financing. No hearing has been set nor have any processes
been served.
Item 2. Changes in Securities
<PAGE>
On May 30, 1997 the Company issued 80,000 shares of newly created Series D
Convertible Preferred Stock, at a price of $20 per share, for an aggregate of
$1,600,000. The shares were sold to one accredited investor (the "Investor")
pursuant to Regulation D promulgated under the Securities Act of 1933. The
Series D Convertible Preferred Stock is convertible into the Class A Common
Stock of the Company at an effective conversion price of the lower of (i) $1.35,
or (ii) 80% of the average closing bid price on the Nasdaq National Market
System of the Company's Class A Common Stock for the five trading days
immediately preceding the date the Investor converts the Series D Convertible
Preferred Stock.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: July 13, 1997
WAVE SYSTEMS CORP.
(Registrant)
By:/s/Peter J. Sprague
--------------------------------------------
Name: Peter J. Sprague
Title: Chairman, Chief Executive Officer
(Principal Financial Officer and Duly
Authorized Officer of the Registrant)
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1997
<CASH> 907,061
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 922,661
<PP&E> 1,814,788
<DEPRECIATION> 790,101
<TOTAL-ASSETS> 2,905,678
<CURRENT-LIABILITIES> 985,321
<BONDS> 487,929
2,700,333
0
<COMMON> 203,801
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 2,905,678
<SALES> 0
<TOTAL-REVENUES> 2,548
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 5,181,880
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 22,429
<INCOME-PRETAX> (5,164,663)
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 5,164,663
<EPS-PRIMARY> (0.38)
<EPS-DILUTED> 0.00
</TABLE>
