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As filed with the Securities and Exchange Commission on December 5, 1997
Registration No. 333-38265
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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AMENDMENT NO. 1
TO
FORM S-3
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
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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
(413) 243-1600
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING
AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
STEVEN SPRAGUE
PRESIDENT AND CHIEF OPERATING OFFICER
WAVE SYSTEMS CORP.
480 PLEASANT STREET
LEE, MASSACHUSETTS 01238
(413) 243-1600
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE
NUMBER, INCLUDING AREA CODE, OF AGENT FOR SERVICE)
Copy to:
JEFFREY N. OSTRAGER, ESQ.
CURTIS, MALLET-PREVOST, COLT & MOSLE
101 PARK AVENUE
NEW YORK, NEW YORK 10178-0061
(212) 696-6000
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APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO PUBLIC: AT SUCH
TIME OR TIMES AFTER THE REGISTRATION STATEMENT BECOMES EFFECTIVE AS THE
SELLING HOLDERS MAY DETERMINE.
If the only securities being registered on this Form are being offered
pursuant to dividend or interest reinvestment plans, please check the
following box. [ ]
If any of the securities being registered on this Form are to be
offered on a delayed or continuous basis pursuant to Rule 415 under the
Securities Act of 1933, other than securities offered only in connection with
dividend or interest reinvestment plans, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following
box and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ] ________
If this Form is a post-effective amendment filed pursuant to Rule
462(c) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ] ________
If delivery of the prospectus is expected to be made pursuant to Rule
434, please check the following box. [ ]
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE
OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT
SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS
REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH
SECTION 8(a) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION
STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(a), MAY DETERMINE.
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PROSPECTUS
5,858,340 SHARES
WAVE SYSTEMS CORP.
CLASS A COMMON STOCK
This Prospectus relates to 5,858,340 shares of the Class A Common Stock,
par value $.01 per share (the "Class A Common Stock"), of Wave Systems Corp.
(the "Company" or "Wave") to be offered and sold from time to time by certain
stockholders of the Company (the "Selling Security Holders"). The Company will
not receive any proceeds from the sale of the shares offered hereby. The
Company's Class A Common Stock trades on the Over-The-Counter Bulletin Board
(the "OTC Bulletin Board") under the symbol: "WAVX." The last reported sales
price of the Company's Class A Common Stock on the OTC Bulletin Board on
December 3, 1997 was $1.125 per share.
The shares of Class A Common Stock offered hereby by the Selling Security
Holders consist of (i) up to 5,669,590 shares issuable upon conversion of
112,500 shares of the Company's Series F Convertible Preferred Stock, par value
$.01 per share (the "Series F Preferred Stock") and as dividends on the Series F
Preferred Stock, (ii) 168,750 shares issuable upon the exercise of warrants
issued in connection with the placement of the Series F Preferred Stock (the
"Placement Warrants"), and (iii) 20,000 shares of Class A Common Stock issued
pursuant to a Software License Agreement entered into between the Company and
Galapagos Software, Inc., dated February 13, 1997 (the "GSI Agreement") in a
transaction exempt from the registration requirements of the Securities Act of
1933, as amended (the "Securities Act"). The Series F Preferred Stock was sold
on October 9, 1997 for an aggregate purchase price of $2,250,000 in a
transaction exempt from the registration requirements of the Securities Act. The
Registration Statement of which this Prospectus is a part has been filed with
the Securities and Exchange Commission (the "Commission") pursuant to a
Registration Rights Agreement, dated as of October 9, 1997 (the "Registration
Agreement"), between the Company and the purchaser of the Series F Preferred
Stock.
The Series F Preferred Stock is convertible into shares of Class A Common
Stock upon the earlier of (i) December 8, 1997 and (ii) the effective date of
the Registration Statement of which this Prospectus is a part. The conversion
price for the Series F Preferred Stock is the lower of (a) $1.05 and (b) 80% of
the average of the five (5) lowest trading prices of the Class A Common Stock
during (x) a day on which the Class A Common Stock is traded on The Nasdaq
National Market or The Nasdaq SmallCap Market or principal national securities
exchange or market on which the Class A Common Stock has been listed, or (y) if
the Class A Common Stock is not listed on The Nasdaq National Market or The
Nasdaq SmallCap Market or any stock exchange or market, a day on which the Class
A Common Stock is traded in the over-the-counter market, as reported by the OTC
Bulletin Board, or (z) if the Class A Common Stock is not quoted on the OTC
Bulletin Board, a day on which the Class A Common Stock is quoted in the
over-the-counter market as reported by the National Quotation Bureau
Incorporated (or any similar organization or agency succeeding its functions of
reporting prices) ("Trading Days"), as reported by Bloomberg Information
Services, Inc. during the ten (10) Trading Days immediately preceding the
conversion date. Holders of the Series F Preferred Stock are entitled to receive
quarterly dividends at a rate of 6% per annum, payable in cash or, subject to
certain conditions, shares of Class A Common Stock. Pursuant to the terms of the
Registration Agreement, the Registration Statement of which this Prospectus is a
part registers 5,669,590 shares of Class A Common Stock with respect to shares
issuable upon conversion of the Series F Preferred Stock and as dividends on the
Series F Preferred Stock. The number of shares of Class A Common Stock issuable
in relation to the Series F Preferred Stock will
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depend on the conversion price which, in turn, will depend on the lowest trading
prices of the Class A Common Stock for five (5) Trading Days during the ten (10)
Trading Days prior to the date of conversion, as well as the number of shares
issuable as dividends on the Series F Preferred Stock. Pursuant to the terms of
the Series F Preferred Stock, the minimum number of shares issuable upon
conversion (without taking into account shares issuable as dividends) would be
2,142,857 shares, assuming a conversion price of $1.05 per share. The actual
number of shares issuable upon conversion of the Series F Preferred Stock and
available for resale under this Prospectus could be materially greater based
upon the market price of the Class A Common Stock at the time or times of
conversion.
The Placement Warrants have an exercise price of $1.26 per share, and
expire on October 9, 2002. The shares issuable upon exercise of the Placement
Warrants are included in this Prospectus pursuant to the terms of the
Registration Agreement.
The shares of Class A Common Stock offered hereby may be offered for
resale by the Selling Security Holders (or their donees) from time to time in
transactions for their own account (which may include block transactions) on any
national securities exchange or quotation service on which the Class A Common
Stock may be listed at the time of sale, in the over-the-counter market, in
negotiated transactions, through the writing of options on the shares, or a
combination of such methods of sale, at fixed prices (which may be changed), at
market prices prevailing at the time of sale, at prices related to such
prevailing market prices or at negotiated prices. The Selling Security Holders
may effect such transactions by selling the shares of Class A Common Stock to or
through broker-dealers, and such broker-dealers may receive compensation in the
form of discounts, concessions or commissions from the Selling Security Holders
and/or the purchasers of shares for whom such broker-dealers may act as agent or
to whom they sell as principal, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions). See "Plan of
Distribution."
The Company has two classes of outstanding common stock. Class A Common
Stock, which is offered hereby, has one vote per share. Class B Common Stock
also has one vote per share, except that Class B Common Stock will have five
votes per share in cases where one or more directors are nominated for election
by persons other than the Company's Board of Directors and where there is a vote
on any merger, consolidation or other similar transaction which is not
recommended by the Company's Board of Directors. In addition, the Class B Common
Stock will have five votes per share on all matters submitted to a vote of the
stockholders in the event that any person or group of persons acquires
beneficial ownership of 20% or more of the outstanding voting securities of the
Company. Both classes vote together as a single class on all matters, except
where class voting is required by the Delaware General Corporation Law.
THE SECURITIES OFFERED HEREBY INVOLVE A HIGH DEGREE OF RISK. SEE "RISK
FACTORS" BEGINNING ON PAGE 8.
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THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY
IS A CRIMINAL OFFENSE.
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The date of this Prospectus is December 5, 1997.
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AVAILABLE INFORMATION
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934, as amended (the "Exchange Act"), and, in accordance
therewith, files reports, proxy and information statements and other information
with the Commission. Such reports, proxy and information statements and other
information may be inspected and copied at the public reference facilities
maintained by the Commission at Room 1024, Judiciary Plaza, 450 Fifth Street,
N.W., Washington, D.C. 20549 and at the Commission's Regional Offices located at
Seven World Trade Center, 13th Floor, New York, New York 10048 and at 500 West
Madison Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials
also can be obtained from the Public Reference Section of the Commission at 450
Fifth Street, N.W., Washington, D.C. 20549, at prescribed rates. The Commission
also maintains a site on the World Wide Web (the "Web") that contains reports,
proxy and information statements and other information regarding registrants
(including Wave) that file electronically with the Commission. The address of
this site is http://www.sec.gov.
The Company has filed with the Commission a Registration Statement on Form
S-3 (herein, together with all amendments and exhibits thereto, called the
"Registration Statement") under the Securities Act with respect to the
securities offered by this Prospectus. This Prospectus does not contain all of
the information set forth or incorporated by reference in the Registration
Statement and the exhibits and schedules relating thereto, certain portions of
which have been omitted as permitted by the rules and regulations of the
Commission. For further information with respect to the Company and the
securities offered by this Prospectus, reference is made to the Registration
Statement and the exhibits filed or incorporated as a part thereof, which are on
file at the offices of the Commission and may be obtained upon payment of the
fee prescribed by the Commission, or may be examined without charge at the
offices of the Commission. Statements contained in this Prospectus as to the
contents of any documents referred to are not necessarily complete, and, in each
such instance, are qualified in all respects by reference to the applicable
documents filed with the Commission.
EXCEPT FOR HISTORICAL INFORMATION CONTAINED HEREIN, THIS REGISTRATION STATEMENT
CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF THE U.S. SECURITIES
LITIGATION REFORM ACT OF 1995. THESE STATEMENTS INVOLVE KNOWN AND UNKNOWN RISKS
AND UNCERTAINTIES THAT MAY CAUSE THE COMPANY'S ACTUAL RESULTS OR OUTCOMES TO BE
MATERIALLY DIFFERENT FROM THOSE ANTICIPATED AND DISCUSSED HEREIN. FURTHER, THE
COMPANY OPERATES IN AN INDUSTRY SECTOR WHERE SECURITIES VALUES MAY BE VOLATILE
AND MAY BE INFLUENCED BY REGULATORY AND OTHER FACTORS BEYOND THE COMPANY'S
CONTROL. IMPORTANT FACTORS THAT THE COMPANY BELIEVES MIGHT CAUSE SUCH
DIFFERENCES ARE DISCUSSED IN THE CAUTIONARY STATEMENTS ACCOMPANYING THE
FORWARD-LOOKING STATEMENTS AND IN THE RISK FACTORS CONTAINED IN THIS PROSPECTUS
AND IN THE RISK FACTORS DETAILED IN THE COMPANY'S OTHER FILINGS WITH THE
COMMISSION DURING THE PAST 12 MONTHS. IN ASSESSING FORWARD-LOOKING STATEMENTS
CONTAINED HEREIN, READERS ARE URGED TO READ CAREFULLY ALL RISK FACTORS AND
CAUTIONARY STATEMENTS CONTAINED IN THIS PROSPECTUS AND IN THOSE OTHER FILINGS
WITH THE COMMISSION.
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INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Commission (File No.
0-24752) pursuant to the Exchange Act are incorporated herein by reference:
1. The Company's Annual Report on Form 10-K, and amendments thereto, for
the fiscal year ended December 31, 1996.
2. The Company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 1997, June 30, 1997 and September 30, 1997.
3. The Company's Current Reports on Form 8-K filed on January 8, 1997,
June 3, 1997 and October 15, 1997.
4. The description of the Class A Common Stock contained in the Company's
Registration Statement on Form 8-A.
In addition, all reports and other documents subsequently filed by the
Company pursuant to Sections 13(a), 13(c), 14 or 15 of the Exchange Act after
the date of this Prospectus and prior to the termination of the offering of
securities hereunder shall be deemed to be incorporated by reference in this
Prospectus from the date of filing of such documents. Any statement contained in
a document incorporated by reference herein shall be deemed to be modified or
superseded for purposes of this Prospectus to the extent that a statement
contained herein or in any subsequently filed document that is also or is deemed
to be incorporated by reference herein modifies or supersedes such statement.
Any such statement so modified or superseded shall not be deemed, except as so
modified or superseded, to constitute a part of this Prospectus. The Company
will provide without charge to each person, including any beneficial owner, to
whom this Prospectus is delivered, upon the written or oral request of such
person, a copy of any and all of the documents that are incorporated herein by
reference (other than exhibits to such documents, unless such exhibits are
specifically incorporated by reference into such documents). Requests for such
documents should be directed to Steven Sprague, Wave Systems Corp., 480 Pleasant
Street, Lee, Massachusetts 01238, telephone number: (413) 243-1600.
NO PERSON IS AUTHORIZED IN CONNECTION WITH ANY OFFERING MADE HEREBY TO
GIVE ANY INFORMATION OR TO MAKE ANY REPRESENTATION OTHER THAN AS CONTAINED IN
THIS PROSPECTUS, AND, IF GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATION MUST
NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE COMPANY, ANY SELLING
SECURITY HOLDER OR ANY UNDERWRITER. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO BUY ANY OF THE SECURITIES OFFERED
HEREBY TO ANY PERSON IN ANY JURISDICTION IN WHICH IT IS UNLAWFUL TO MAKE ANY
SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS PROSPECTUS NOR ANY SALE
MADE HEREUNDER SHALL UNDER ANY CIRCUMSTANCE IMPLY THAT THERE HAS BEEN NO CHANGE
IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.
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PROSPECTUS SUMMARY
The following summary is qualified in its entirety by the more detailed
information and the financial information and statements incorporated by
reference in this Prospectus. Prospective investors should carefully consider
the factors set forth under the caption "Risk Factors." Capitalized terms not
defined in this summary have the meanings given them elsewhere in this
Prospectus.
The Company anticipates that its existing capital resources, including the
net proceeds from the sale of the Series F Preferred Stock, will be adequate to
satisfy its capital requirements into December 1997. In order to continue
operations, the Company will need to raise additional funds through public or
private financings. The Company does not have any other current commitments to
obtain additional funds and is unable to state the amount or potential source of
such additional funds. No assurance can be given that additional financing will
be available or that, if available, it will be available on terms favorable to
the Company or its stockholders.
Effective October 3, 1997 the Company was delisted from The Nasdaq
National Market and granted a listing on The Nasdaq SmallCap Market. On October
24, 1997 the Company was delisted from The Nasdaq SmallCap Market. The Company's
Class A Common Stock is now traded on the OTC Bulletin Board. This will likely
have a material and adverse effect on the market price of the Company's Class A
Common Stock and on the Company's ability to raise additional capital.
THE COMPANY
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 to the usage of the electronic content. This facilitates
the payment of royalties to content owners and the customized distribution of
content to customers.
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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 features 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 of 1997, 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, Wave ITG
Limited, to promote the use of the Wave System in Europe.
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.
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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.
However, there can be no assurance that the Company can raise the additional
financing.
As of October 19, 1997, the Company became obligated to redeem for
approximately $465,000 all of the outstanding shares of the Series A Redeemable
Preferred Stock issued to a certain individual pursuant to the terms of the
Restated Certificate of Incorporation. The Company has not redeemed such shares
as of December 5, 1997.
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.
Effective from the close of trading on October 24, 1997 the Company was
delisted from The Nasdaq SmallCap Market. As a result, shares of the Company's
Class A Common Stock are now traded on the OTC Bulletin Board. Until October 3,
1997 the Company had been listed on The Nasdaq National Market. Because the
Company was unable to meet the minimum net tangible assets requirement of The
Nasdaq National Market, the Company was delisted from The Nasdaq National
Market. From October 3, 1997 to October 24, 1997, the Company was temporarily
listed on The Nasdaq SmallCap Market. Continued listing on The Nasdaq SmallCap
Market was dependent upon the Company meeting certain commercial objectives. The
Company was unable to meet these objectives within the prescribed time period.
The Company believes that not being listed on a national exchange or quotation
system will have a material adverse effect on the price and liquidity of its
securities and consequently its ability to raise capital in the future.
The Company was incorporated in Delaware under the name Indata Corp. on
August 12, 1988. The Company changed its name to Cryptologics International,
Inc. on December 4, 1989. The Company further changed its name to Wave
Systems Corp. on January 22, 1993. The Company's principal executive offices
are located at 480 Pleasant Street, Lee, Massachusetts 01238 and the
telephone number of the Company is (413) 243-1600.
The Company is a development stage company and has realized minimal
operating revenues since its inception. At September 30, 1997, the Company had
an accumulated deficit of approximately $41 million. There can be no assurance
that the Company will be successful in achieving commercial acceptance of the
Wave System.
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RISK FACTORS
An investment in the Class A Common Stock involves the following risks,
which, together with other matters set forth in this Prospectus, should be
carefully considered by investors prior to any purchase of the Class A Common
Stock.
MINIMAL REVENUES; GOING CONCERN REPORTS
The Company has only recognized minimal revenues to date, has incurred
significant losses and has substantial negative cash flow since its inception.
At September 30, 1997, the Company had an accumulated deficit of $40,981,096.
The Company's independent auditors have included an explanatory paragraph in
their report on the Company's consolidated financial statements as of December
31, 1996 and 1995, and for each of the years in the three year period ended
December 31, 1996, and for the period from February 12, 1988 (inception) to
December 31, 1996 which paragraph expresses substantial doubt about the
Company's ability to continue as a going concern.
DEVELOPMENT STAGE COMPANY; NEED FOR ACCEPTANCE OF THE COMPANY'S TECHNOLOGY
The Company is a development stage company and is subject to all of the
risks inherent in the establishment of a new business enterprise. To address
these risks, the Company must, among other things, establish technical
feasibility and complete development of its technology, respond to competitive
developments, continue to attract, retain and motivate qualified personnel, and
successfully market its technology.
The Company's licensed technology is incorporated into the WaveMeter which
has the capability to retrieve encrypted electronic data and record each usage.
The Company is in the early stages of product introduction. Transaction
processing of all transactions recorded by the WaveMeter will be conducted by
WaveNet. There can be no assurance that WaveNet will be able to successfully
process all of its transactions.
The Company will depend upon a number of strategic partners to adapt their
technology to the Wave System and market the Wave System to consumers of
electronic content. The Company must therefore be successful in achieving
acceptance of its technology by its strategic partners. Even if the Company's
technology is accepted by its strategic partners, the ultimate success of the
Wave System depends upon its acceptance by consumers of electronic content.
There can be no assurance that the Wave System will be accepted by consumers or
that, if accepted, it will be accepted at a sufficient level to ensure continued
acceptance of the Wave System.
There are a number of commercial and technological objectives that the
Company must meet in order for the Company's systems to achieve commercial
feasibility. These include, without limitation, formalizing strategic
relationships with hardware producers to include the WaveMeter in their product
lines, to build a sufficient base of WaveMeters to achieve average revenue per
home sufficient to maintain operations and to attract content owners to the Wave
System. The Company is currently attempting to incorporate persistent encryption
technology for executable electronic content into the Wave System. This would
permit consumers to rent or rent-to-own executable electronic content through
the Wave System. There can be no assurance that the Company will be successful
in achieving any or all of these objectives.
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FUTURE CAPITAL NEEDS; UNCERTAINTY OF ADDITIONAL FUNDING
The Company anticipates that its existing capital resources, including the
net proceeds from the sale of the Series F Preferred Stock, will be adequate to
satisfy its capital requirements into December 1997. The Company's long-term
capital requirements will depend on many factors, including, but not limited to,
the rate at which the Company's strategic partners incorporate the Wave System
into their products, the market acceptance of such products, the levels of
promotion and advertising required to launch such products and attain a
competitive position in the marketplace, the extent to which the Company invests
in technology, and the response of competitors to the products based on the
Company's technology. In order to continue operations, the Company will need to
raise additional funds through public or private financings. The Company does
not have any other current commitment to obtain additional funds and is unable
to state the amount or potential source of such additional funds. If additional
funds are raised through the issuance of equity securities, the percentage
ownership of then current stockholders of the Company will be reduced and such
equity securities may have rights, preferences or privileges senior to those of
the holders of the Company's Class A Common Stock. No assurance can be given
that additional financing will be available or that, if available, it will be
available on terms favorable to the Company or its stockholders. If adequate
funds are not available to satisfy either short- or long-term capital
requirements, the Company may be required to curtail its operations
significantly or to obtain funds through arrangements with strategic partners or
others that may require the Company to relinquish material rights to certain of
its technologies or potential markets. The Company believes that not being
listed on a national exchange or quotation system will have a material adverse
effect on the price and liquidity of its securities and consequently its ability
to raise capital in the future.
RAPID TECHNOLOGICAL CHANGE; NEW PRODUCT INTRODUCTIONS
The market for the Company's technology is characterized by rapidly
changing technology and frequent new product introductions. Even if the
Company's technology gains initial market acceptance, the Company's success will
depend, among other things, upon its ability to enhance its product offerings
and to develop and introduce new products and services that keep pace with
technological developments, respond to evolving customer requirements and
achieve market acceptance. There can be no assurance that the Company will be
able to identify, develop, manufacture, market or support new products or deploy
new services successfully, that such new products or services will gain market
acceptance, or that the Company will be able to respond effectively to
technological changes or product announcements by competitors. Any failure by
the Company to anticipate or respond adequately to technological developments
and customer requirements or any significant delays in product development or
introductions could result in a loss of market share or revenues.
DEPENDENCE ON CD-ROM, INTERNET AND BROADBAND MARKETS
Although the Company believes that its system is adaptable to all
significant present modes for the delivery of electronic content, the Company
believes that its technology is particularly well-suited for the CD-ROM,
Internet and broadband markets and that growth in the CD-ROM, Internet and
broadband markets will facilitate and enhance the acceptance of the Company's
technology. There can be no assurance that the CD-ROM, Internet and broadband
markets will continue to grow or that the CD-ROM, Internet and broadband
technologies will not be replaced by other information and software distribution
and access technologies.
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COMPETITION
The Company operates in a highly competitive and fragmented environment
that is characterized by rapidly evolving technology. Many of the Company's
competitors and potential competitors have substantially greater financial and
technical resources than the Company. Also, many current and potential
competitors have greater name recognition and more extensive customer bases that
could be leveraged, thereby gaining market share or product acceptance to the
Company's detriment. The Wave System competes with conventional information
delivery systems, such as on-line services, subscription services on CD-ROM, and
services on the Internet. However, the Company believes that its metering
capability is competitive with other electronic content delivery systems in a
number of applications due to its superior protection against unauthorized
usage, accurate and detailed information on content usage, and transparent
operation. Further, provided that the Company is successful in incorporating the
rental and rent-to-own functionality into the Wave System, the Company believes
that it will be competitive with existing distribution systems, including
traditional retail outlets for entertainment and educational software, due to
its ability to offer these innovative merchandising mechanisms.
The Company is aware of other metering systems which compete directly with
Wave, and other current and evolving technologies that provide some of the
functionality of the Wave System. There are other companies that have developed
or are in the process of developing technologies that are, or in the future may
be, the basis for competitive products in the field of electronic content
distribution. Some of those technologies may have an entirely different approach
or means of accomplishing the desired effects of the products being developed by
the Company. There can be no assurance that either existing or new competitors
will not develop products that are superior to or that otherwise achieve greater
market acceptance than the Company's products.
The Wave System is subject to competition from producers of hardware-based
controllers such as dongles and software unlocking systems. The Company will
compete with well-established producers of dongle-based software unlocking
systems such as Rainbow Technologies, Inc. The Company also competes with
developers of software unlocking systems such as Portland Software. The Company
believes that the Wave System is superior to existing hardware-based and
software unlocking systems in several ways. These systems control the use of
electronic content but are very limited in their ability to measure and record
usage information. The Company believes that the Wave System offers superior
protection from unauthorized usage, low operating costs (because it does not
require constant communication with and authorization from a centralized
processor), and fast operation that is convenient and essentially transparent to
the end user. Both hardware controllers and software unlocking systems offer
only part of the functionality of the Wave System. Distinct from the existing
software unlocking systems, WaveNet provides centralized back-office support to
owners of electronic content.
Many large information industry players are forming alliances and
attempting to capitalize on the information delivery options offered by the
Internet. In electronic content delivery via the Internet, the Wave System
competes with electronic commerce payment technologies developed and offered by
IBM infoMarket(R) Service, Broadvision Inc., Connect, Inc., CyberCash, Inc.,
DigiCash and Open Market, Inc. However, the Company believes that many of the
electronic commerce payment technologies may be used as acceptable currency
through the Wave System and may be complementary to, rather than competitive
with, the Wave System. The Company is also aware of other companies, such as
TestDrive Corporation, Release Software Corporation and IBM Cryptolopes(R), that
provide electronic content encryption functionality for transmission of
electronic content over the Internet. The Company believes that the Wave System
is superior to currently available electronic content encryption
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technologies due to the high level of security and usage reporting capabilities
of the WaveMeter.
The Company believes that the interoperability of the Wave System with
currently available and developing distribution media makes the Wave System
attractive to both distributors and consumers of electronic content. A consumer
with an installed WaveMeter will be able to purchase Wave-enabled content from
sources on CD-ROM and/or the Internet, as well as from sources distributing
electronic content on other developing media such as broadband. In addition,
with the incorporation of the rental and rent-to-own functionality, the Wave
System will offer greater merchandising flexibility than is possible using
currently available electronic commerce solutions. There can be no assurance
that the Wave System will achieve the broad-based acceptance necessary to make
the system a viable competitor with currently existing and developing electronic
commerce solutions.
DEPENDENCE ON STRATEGIC PARTNERS
The Company is dependent on strategic partners in the development of a
sufficient installed base of WaveMeters to attract content providers to the Wave
System. The Company is dependent on semiconductor companies to manufacture
functioning WaveMeters in sufficient numbers and at a low enough cost to enable
the Company to convince hardware manufacturers to incorporate the WaveMeters
into hardware they manufacture or retrofit. The Company is dependent on hardware
manufacturers to incorporate WaveMeters into hardware they manufacture or
retrofit. The Company is dependent on electronic content owners to modify their
products to be used with the WaveMeters and to charge for their products on a
per-use basis. Such companies may choose not to utilize the Company's technology
and could develop or market products or technologies that compete directly with
the Company. Moreover, there can be no assurance that these third parties will
commit the resources necessary to the successful commercialization of the
Company's technology. The Company expects that these strategic partners will
develop their products on schedule. However, any delay would have a material
adverse impact on the ability of the Company to introduce and achieve
commercialization of its systems. The Company has not concluded definitive
agreements with many potential strategic partners, and there can be no assurance
that the Company will be successful in entering into definitive agreements or
that the terms of such agreements will be satisfactory to the Company. Most of
these agreements will provide for the sharing by the Company of its revenues
with its strategic partners.
DEPENDENCE ON KEY PERSONNEL
The Company believes that its future success will be dependent upon the
continued service of its key technical and management personnel and on its
ability to attract and retain highly skilled technical, management, sales and
marketing personnel. The Company is particularly dependent on the skills and
contributions of several key individuals, including Peter J. Sprague and Steven
Sprague, each of whom may voluntarily terminate employment with the Company at
any time and whose departure would have a material adverse effect on the
Company's business. The Company does not have "key person" life insurance
policies on any of its employees. The industry is characterized by a high level
of employee mobility and aggressive recruiting of skilled personnel. There can
be no assurance that the Company's current employees will continue to work for
the Company or that the Company will be able to obtain the services of
additional personnel necessary for the Company's growth.
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PROPRIETARY RIGHTS AND LICENSES AND INTELLECTUAL PROPERTY
The Company's success depends, in part, on its ability to enjoy or obtain
protection for its products and technologies under United States and foreign
patent laws, copyright laws and other intellectual property laws, to preserve
its trade secrets and to operate without infringing the proprietary rights of
third parties. There can be no assurance that any issued patent owned or
licensed by the Company affords adequate protection to the Company or will not
be challenged, invalidated, infringed or circumvented. Furthermore, there can be
no assurance that the Company's activities will not infringe patents owned by
others.
In addition, the Company may be required to obtain licenses to patents or
other proprietary rights of third parties. No assurance can be given that any
licenses required under any such patents or proprietary rights would be made
available on terms acceptable to the Company, if at all. If the Company is
required to and does not obtain such licenses it would be prevented from, or
encounter delays in the development and marketing of, its products and
technologies while it attempted to design around such patents or other rights
and there can be no assurance that such attempts would be successful. Failure to
obtain such licenses or to design around such patents or other rights would have
a material adverse effect on the Company.
The Company holds non-exclusive patent rights relating to the metered use
of encrypted data in local memory under a limited license (the "License
Agreement") from Titan Corporation ("Titan") to a patent (the "Licensed Patent")
jointly held by Titan and a third party. This License Agreement restricts Wave
from metering information produced and used solely by a government entity or
producing products that meter this information. In addition, the License
Agreement is subject to the rights of the joint owner of the Licensed Patent,
who has the right to exploit, or to license to third parties, the Licensed
Patent, including in a manner competitive with the Company. There can be no
assurance that the joint owner of the Licensed Patent will not compete with the
Company or license the Licensed Patent to a competitor of the Company, or that
the Company's business will not exceed the scope of the License Agreement.
Pursuant to the License Agreement, the Company is obligated to pay certain
royalties to Titan. Pursuant to the License Agreement, the Company has granted
to Titan the exclusive right to use the Company's patents for products
distributed to government entities. On February 28, 1997 the Company and Titan
executed an addendum to the License Agreement whereby the Company received a
sole license to the Licensed Patent to develop and distribute products to the
in-home consumer microcomputer market segment. Under this addendum to the
License Agreement, Titan waived any and all defaults by Wave under the License
Agreement occurring prior to February 28, 1997.
The Company is aware of four United States patents (the "Third Party
Patents") each having some claims that are similar to some of the claims in the
Licensed Patent. Based upon information currently known to the Company, some of
the claims of both the Licensed Patent and the Third Party Patents cover certain
material aspects of the Company's technology. Therefore, the commercialization
of the Company's technology would be subject to the rights of the holder of the
Third Party Patents unless the Company is able to invalidate or license such
claims. Also, the holder of the Third Party Patents or a licensee of the Third
Party Patents could seek to invalidate such claims of the Licensed Patent and
therefore be able to commercialize a technology similar to the Company's
technology. In either case, in order to invalidate the other party's patent
rights, the party claiming invalidity might need to prove that it invented the
claimed subject matter prior to the other party. There can be no assurance that
the Company would be successful in invalidating such claims of the Third Party
Patents or that the holder of the Third Party Patents or a licensee of the Third
Party Patents would not be
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successful in invalidating such claims of the Licensed Patent. There also can be
no assurance that the Third Party Patents could be proven to be invalid on any
other basis. Any proceeding involving the validity of the Licensed Patent and
the Third Party Patents would be protracted and costly. In any suit contesting
the validity of a patent, the patent being contested would be entitled to a
presumption of validity and the contesting party would be required to
demonstrate invalidity of such patent by clear and convincing evidence.
If the Third Party Patents are not invalid insofar as their claims relate
to the Company's technology, then the Company would require a license from the
holder of the Third Party Patents to commercialize its technology and make, use,
or sell products or practice methods, or license others to sell products or use
methods, utilizing the technology in the United States. Due to the uncertainty
as to whether the Third Party Patents could be proved to be invalid, the Company
has engaged in preliminary negotiations with the holder of the Third Party
Patents to obtain a license under the Third Party Patents. The negotiations have
so far not produced any agreement and there can be no assurance that a license
will be obtainable on acceptable terms, if at all. The inability to obtain a
license, if needed, on commercially reasonable terms would have a material
adverse effect on the Company's business and its future operations.
The Company has acquired patent rights to the metered use of encrypted
serial data streams under a United States patent and a corresponding patent
application in the European Patent Office (together, the "Wave Patents"), which
are material to protecting certain of the Company's technology. The Company's
rights to the Wave Patent derive from a license, amended and restated in
February 1994, from Mr. Peter J. Sprague, Chairman and Chief Executive Officer
of the Company, of his rights in the Wave Patents (the "Amended License
Agreement"), and several agreements with former officers of the Company
regarding their rights in the Wave Patents. The Amended License Agreement
provides for royalty payments to be made to Mr. Peter J. Sprague and Mr. John R.
Michener, a former officer of the Company, in the aggregate amount of two
percent of gross revenues less certain adjustments as defined in the Amended
License Agreement. The royalty payment is to be apportioned 75 percent to Mr.
Peter J. Sprague and 25 percent to Mr. John R. Michener. Payment of royalties is
secured by a security interest in and to the Wave Patents. The Company believes
that the agreements as a whole provide it with exclusive rights under the Wave
Patents. There can be no assurance that the Company will enjoy exclusive rights
to the Wave Patents under such agreements.
On January 26, 1996, the Company received notice from E-Data Corporation
(formerly Interactive Gift Express, Inc.), claiming that the Company's practice
of its technology infringes U.S. and foreign patents owned by E-Data
Corporation, and offering to license such patents to the Company. The Company is
currently obtaining information needed to investigate the merits of this claim.
The Company believes that there is a viable argument for non-infringement. The
patents owned by E-Data Corporation are currently being litigated by third
parties. The Company is not involved in these proceedings.
The Company relies on trade secrets and proprietary know-how, which it
protects, in part, by confidentiality agreements with its employees and contract
partners. However, there can be no assurance that the Company's confidentiality
agreements will not be breached or that the Company would have adequate remedies
for any breach. There can be no assurance that the Company's trade secrets will
not otherwise become known or be independently discovered by competitors.
The Company also relies on copyright to prevent the unauthorized
duplication of its software and hardware products. The Company has and will
continue to protect its software and its copyright interest therein through
agreements with its consultants. The Company also
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plans to seek protection for its semiconductor integrated circuit designs under
mask work laws. Existing copyright and mask work laws afford only limited
protection, particularly in certain jurisdictions outside the United States
where the Company may seek to market its products and services. There can be no
assurance that the copyright laws or mask work laws will adequately protect the
Company's technology.
The Company has registered trademark and service mark registrations with
the United States Patent and Trademark Office for the marks WaveMeter(R) and
WaveNet(R) and intends to apply for additional name and logo marks in the United
States and foreign jurisdictions as appropriate. No assurance can be given that
federal registration of any of these trademarks in the United States will be
granted. The Company has abandoned its prior applications for DataWave,
InfoWave, and WaveTrac.
CONFLICTS OF INTEREST
The Company's Board of Directors includes, and is expected to continue to
include, representatives of the Company's strategic partners. It is possible
that the corporations represented by such directors may be in direct or indirect
competition with the Company or among themselves, including competition with
respect to certain business strategies and transactions that the Company may
propose to undertake. Although the affected directors may abstain from voting on
matters in which the interests of the Company and the corporations they
represent are in conflict, the presence of potential or actual conflicts could
affect the process or outcome of Board deliberations and no policies, procedures
or practices have been adopted by the Company to reduce or avoid such conflicts.
There can be no assurance that such conflicts of interest will not materially
adversely affect the Company.
VOTING RIGHTS; CONTROL BY EXISTING STOCKHOLDERS
The Company's Common Stock is divided into two classes with different
voting rights, which allows for the maintenance of control of the Company by the
holders of the Class B Common Stock. Holders of Class A Common Stock are
entitled to one vote per share on all matters submitted to a vote of the
stockholders of the Company. Holders of Class B Common Stock are entitled to one
vote per share on all matters submitted to a vote of the stockholders, except
that holders of Class B Common Stock will have five votes per share in cases
where one or more directors are nominated for election by persons other than the
Company's Board of Directors and where there is a vote on any merger,
consolidation or other similar transaction which is not recommended by the
Company's Board of Directors. In addition, holders of the Class B Common Stock
will have five votes per share on all matters submitted to a vote of the
stockholders in the event that any person or group of persons acquires
beneficial ownership of 20% or more of the outstanding voting securities of the
Company. Both classes vote together as a single class on all matters, except
where class voting is required by the Delaware General Corporation Law ("DGCL"),
which would apply, among other situations, to a vote on any proposal to modify
the voting rights of the Class B Common Stock. Upon conversion of the Series F
Preferred Stock and upon the exercise of the warrants, the Company's executive
officers and directors and entities affiliated with them will have approximately
15% of the combined voting power of the outstanding capital stock (36% in those
circumstances where holders of Class B Common Stock have five votes per share).
The disproportionate voting rights of Class A Common Stock relative to the
Class B Common Stock could have an adverse effect on the market price of the
Class A Common Stock. Such disproportionate voting rights may make the Company a
less attractive target for a takeover than it otherwise might be, or render more
difficult or discourage a merger proposal, a
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tender offer or a proxy contest, even if such actions were favored by a majority
of the holders of the Class A Common Stock.
ANTI-TAKEOVER PROVISIONS
In addition to the voting rights granted to the holders of Class B Common
Stock, certain provisions of the Company's Restated Certificate of Incorporation
and Bylaws, as well as the ability of the Board of Directors to issue shares of
preferred stock without further vote or action by the stockholders, may have the
effect of delaying, deferring or preventing a change in control of the Company.
In addition, Section 203 of the DGCL restricts certain business combinations
with any "interested stockholder" as defined in such law. This statute may
delay, defer, or prevent a change in control of the Company.
VOLATILITY OF STOCK PRICE
Factors such as announcements of the introduction of new products by the
Company or its competitors, market conditions in the technology and emerging
growth company sectors and rumors relating to the Company or its competitors may
have a significant impact on the market price of the Class A Common Stock. In
addition, the stocks of many technology companies have experienced extreme price
and volume fluctuations which reflect market conditions for technology and
emerging growth stocks generally and have often been unrelated to the operating
performance of specific companies. These market fluctuations may adversely
affect the price of the Class A Common Stock.
ABSENCE OF DIVIDENDS
The Company has never declared or paid any cash dividends and does not
anticipate paying dividends on its Common Stock for the foreseeable future.
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BUSINESS
INTRODUCTION
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 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.
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Since the end of the second quarter of 1997, 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, Wave ITG
Limited, to promote the use of the Wave System in Europe.
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.
However, there can be no assurance that the Company can raise the additional
financing.
As of October 19, 1997, the Company became obligated to redeem for
approximately $465,000 all of the outstanding shares of the Series A Redeemable
Preferred Stock issued to a certain individual pursuant to the terms of the
Restated Certificate of Incorporation. The Company has not redeemed such shares
as of December 5, 1997.
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.
Effective from the close of trading on October 24, 1997 the Company was
delisted from The Nasdaq SmallCap Market. As a result, shares of the Company's
Class A Common Stock are now traded on the OTC Bulletin Board. Until October 3,
1997 the Company had been listed on The Nasdaq National Market. Because the
Company was unable to meet the minimum net tangible assets requirement of The
Nasdaq National Market, the Company was delisted from The Nasdaq National
Market. From October 3, 1997 to October 24, 1997, the Company was temporarily
listed on The Nasdaq SmallCap Market. Continued listing on The Nasdaq SmallCap
Market was dependent upon the Company meeting certain commercial objectives. The
Company was unable to meet these objectives within the prescribed time period.
The Company believes that not being listed on a national exchange or quotation
system will have a material adverse effect on the price and liquidity of its
securities and consequently its ability to raise capital in the future.
The Company was incorporated in Delaware under the name Indata Corp. on
August 12, 1988. The Company changed its name to Cryptologics International,
Inc. on December 4, 1989. The Company further changed its name to Wave
Systems Corp. on January 22, 1993.
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The Company's principal executive offices are located at 480 Pleasant Street,
Lee, Massachusetts 01238 and the telephone number of the Company is (413)
243-1600.
The Company is a development stage company and has realized minimal
operating revenues since its inception. At September 30 1997, the Company had an
accumulated deficit of approximately $41 million. There can be no assurance that
the Company will be successful in achieving commercial acceptance of the Wave
System.
THE WAVE SYSTEM
The Wave System is designed to create new revenue streams for owners of
electronic content by improving upon existing distribution systems for
electronic content. Using existing distribution systems such as CD-ROM and the
Internet, electronic content owners distribute their products to customers in
segmented and encrypted ("Wave-enabled") form so it can be offered for sale
through the Wave System. Customers are then able to purchase and decrypt the
electronic content on an as-needed basis. The Company believes that the Wave
System allows electronic content owners to deliver their products to a larger
market because the efficient and secure metering technology facilitates greater
flexibility in content distribution and pricing. The Company believes that
greater flexibility in electronic distribution and pricing makes the Wave System
particularly attractive to developers, distributors and consumers of
entertainment and educational software.
The Wave System consists of the WaveMeter, a subsystem that records and
communicates the usage of electronic content, and WaveNet, a central transaction
processing network. The WaveMeter controls and monitors the customer's access to
encrypted electronic information and software. Because the Wave System uses
asynchronous communication, it is well suited to low-cost processing of micro,
rental and rent-to-own transactions. The Company is currently attempting to
incorporate the rental and rent-to-own functionality into the Wave System.
Transactions are executed locally against a source of funds stored in the
WaveMeter. The WaveMeter retains pricing and tax information, downloaded from
WaveNet, for use in the execution of these transactions. Transactions are
securely stored in the usage log of the WaveMeter for eventual reporting to
WaveNet. The WaveMeters and WaveNet communicate using Wave's proprietary secure
communications protocol.
WaveNet is composed of the WaveNet Transaction Processing System ("TXP")
and the WaveNet Information Clearing House ("ICH"). TXP acts as the principal
interface with the WaveMeter and accumulates data pertaining to the consumer's
usage. ICH provides interfaces to the Wave System for partners, such as
third-party distributors of WaveMeters and electronic content owners. It
contains the WaveNet security server, which manages all the encryption and
decryption keys. ICH also does all the back-end processing of usage information
from the WaveMeter, calculating royalties, producing billing services, and
ensuring that all content owners are properly compensated. WaveNet is presently
in operation.
The WaveMeter is installed into the customer's stand-alone PC. It is based
on a semiconductor device that uses proprietary integrated circuit technology to
store decryption keys, credit information, and usage data. Presently, the
WaveMeter is packaged on a half-size ISA board with a battery and a clock and
can be installed in the ISA slot of a PC. In 1996 the Company also developed a
production software version of the WaveMeter which has been implemented as a
component of the WaveMeter server. The WaveMeter server is currently used to
facilitate WINPublish and WINPurchase transactions on the Web. The use of the
software version of the WaveMeter is compatible with the use of the hardware
version of the WaveMeter.
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The Company believes that the hardware version of the WaveMeter is the
most secure form of metering technology available today. Tampering with the
WaveMeter is easily detected by both the WaveMeter and WaveNet. The keys are
loaded at the time of manufacture and are unique and specific to each WaveMeter.
Every piece of electronic content is protected using a unique key. The value of
breaking an individual WaveMeter to ascertain the keys is low since the keys
have no system-wide use.
Wave supplies the tools that developers need to build and successfully
supply applications to end users. Electronic content must be Wave-enabled to be
available to end users on the Wave System. A data preparation tool kit
structures data packages, which are individual elements of electronic content
that are uniquely identified, encrypted, priced and formatted to use within the
Wave System. Once Wave-enabled, each data package can be delivered to the end
user in many electronic forms. Currently, the two primary mechanisms of delivery
of electronic content to the end user are the Internet and CD-ROM. The Wave
System, however, will work with point-to-multi-point data broadcasting via
satellite or FM sideband, magnetic media, cable modem, DVD and broadband.
MARKETS AND BUSINESS STRATEGY
The Company's long-term strategy is to achieve broad market acceptance of
the Wave System as a platform for commerce in electronic content. To achieve
this goal the Company pursues strategic relationships with hardware
manufacturers and companies involved in the development of commerce in
electronic content. In addition, the Company believes that, since the Wave
System permits greater flexibility in pricing and distribution of electronic
content, it is particularly well-suited for merchandising entertainment and
educational software. Therefore the Company is vigorously targeting this market
segment as a means of rapidly achieving the broad installed base of WaveMeters
and acceptance of the Wave System. The Company 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.
The Company has focused on forming agreements with strategic partners that
will help the Company promote the broad-based acceptance of the Wave System as a
platform for commerce in electronic content. Wave is currently in discussion
with major original equipment manufacturers regarding the incorporation of the
WaveMeter into their products.
Wave has also focused on pursuing strategic relationships with companies
seeking to distribute electronic content via the Internet. The compatibility of
the Wave System with the Web has provided the Company with a product that has
already attracted the attention of leaders in the development of electronic
commerce solutions and particularly commerce in electronic content. Wave has
executed a letter of intent with EarthLink Network, Inc. to jointly promote the
Wave System. Wave has also entered into a letter of intent with IBM to work on
the interoperability between the WaveMeter and Cryptolopes(R), a document
security system technology built by IBM infoMarket(R) Service. Wave will
continue to focus on developing other strategic relationships to achieve the
broad acceptance of the Wave System as a platform for electronic commerce.
As part of Wave's goal to achieve broad acceptance of the Wave System as a
platform for commerce in electronic content, the Company has made the Wave
System available to users of the Web through the WaveMeter server. The WaveMeter
server currently supports both WINPublish, a publishing service, and
WINPurchase, the purchasing component. WINPublish provides an easy-to-use system
so that anyone can publish electronic content on a
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Web site and offer it for sale. Since its inception, WINPublish has registered
over 400 publishers. WINPurchase permits consumers to purchase electronic
content that has been published through WINPublish. WINPublish and WINPurchase
transactions may be executed using the WaveMeter server without the need to
install a WaveMeter at the consumer's site. WINPublish and WINPurchase, however,
are fully compatible with the use of the hardware version of the WaveMeter. The
operation of the WaveMeter server demonstrates the viability of the Wave System
and therefore enhances the ability of Wave to market the Wave System to the
leading electronic content distributors on the Web by offering them a standard
platform for commerce in electronic content that is designed to be compatible
with the Internet, CD-ROM and developing distribution media such as broadband.
Wave has focused on promoting the acceptance of the Wave System by
electronic content owners. The initial target market is entertainment and
educational software developers and distributors. Wave believes that if it is
able to incorporate the rental or rent-to-own functionality into the Wave
System, that the Wave System will provide the home consumer with a new way of
acquiring interactive content and can offer electronic content developers and
distributors benefits similar to those provided by video rental in the film
industry. The Company has invested heavily in developing relationships with
major entertainment and educational software providers and approximately 20 of
such companies have executed content provider agreements and have expressed
their intention to distribute titles using the Wave System. No assurance can be
given that any or all of these companies will be successful in developing or
marketing products that apply the Wave System technology or that are
Wave-enabled.
COMPETITION
The Company operates in a highly competitive and fragmented environment
that is characterized by rapidly evolving technology. Many of the Company's
competitors and potential competitors have substantially greater financial and
technical resources than the Company. Also, many current and potential
competitors have greater name recognition and more extensive customer bases that
could be leveraged, thereby gaining market share or product acceptance to the
Company's detriment. The Wave System competes with conventional information
delivery systems, such as on-line services, subscription services on CD-ROM, and
services on the Internet. However, the Company believes that its metering
capability is competitive with other electronic content delivery systems in a
number of applications due to its superior protection against unauthorized
usage, accurate and detailed information on content usage, and transparent
operation. Further, provided that the Company is successful in incorporating the
rental and rent-to-own functionality into the Wave System, the Company believes
that it will be competitive with existing distribution systems, including
traditional retail outlets for entertainment and educational software, due to
its ability to offer these innovative merchandising mechanisms.
The Company is aware of other metering systems which compete directly with
Wave, and other current and evolving technologies that provide some of the
functionality of the Wave System. There are other companies that have developed
or are in the process of developing technologies that are, or in the future may
be, the basis for competitive products in the field of electronic content
distribution. Some of those technologies may have an entirely different approach
or means of accomplishing the desired effects of the products being developed by
the Company. There can be no assurance that either existing or new competitors
will not develop products that are superior to or that otherwise achieve greater
market acceptance than the Company's products.
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<PAGE> 22
The Wave System is subject to competition from producers of hardware-based
controllers such as dongles and software unlocking systems. The Company will
compete with well-established producers of dongle-based software unlocking
systems such as Rainbow Technologies, Inc. The Company also competes with
developers of software unlocking systems such as Portland Software. The Company
believes that the Wave System is superior to existing hardware-based and
software unlocking systems in several ways. These systems control the use of
electronic content but are very limited in their ability to measure and record
usage information. The Company believes that the Wave System offers superior
protection from unauthorized usage, low operating costs (because it does not
require constant communication with and authorization from a centralized
processor), and fast operation that is convenient and essentially transparent to
the end user. Both hardware controllers and software unlocking systems offer
only part of the functionality of the Wave System. Distinct from the existing
software unlocking systems, WaveNet provides centralized back-office support to
owners of electronic content.
Many large information industry players are forming alliances and
attempting to capitalize on the information delivery options offered by the
Internet. In electronic content delivery via the Internet, the Wave System
competes with electronic commerce payment technologies developed and offered by
IBM infoMarket(R) Service, Broadvision Inc., Connect, Inc., CyberCash, Inc.,
DigiCash and Open Market, Inc. However, the Company believes that many of the
electronic commerce payment technologies may be used as acceptable currency
through the Wave System and may be complementary to, rather than competitive
with, the Wave System. The Company is also aware of other companies, such as
TestDrive Corporation, Release Software Corporation and IBM Cryptolopes(R), that
provide electronic content encryption functionality for transmission of
electronic content over the Internet. The Company believes that the Wave System
is superior to currently available electronic content encryption technologies
due to the high level of security and usage reporting capabilities of the
WaveMeter.
The Company believes that the interoperability of the Wave System with
currently available and developing distribution media makes the Wave System
attractive to both distributors and consumers of electronic content. A consumer
with an installed WaveMeter will be able to purchase Wave-enabled content from
sources on CD-ROM and/or the Internet, as well as from sources distributing
electronic content on other developing media such as broadband. In addition,
with the incorporation of the rental and rent-to-own functionality, the Wave
System will offer greater merchandising flexibility than is possible using
currently available electronic commerce solutions. There can be no assurance
that the Wave System will achieve the broad-based acceptance necessary to make
the system a viable competitor with currently existing and developing electronic
commerce solutions.
INTERNATIONAL MARKET
The Company's technologies are controlled under various United States
export control laws and regulations and will require export licenses for certain
exports outside of the United States and Canada. The Company has received export
licenses from the U.S. Department of Commerce for the sale and export of the
Company's decrypt-only products. The Company is currently preparing to file for
additional licenses under the provisions of the 1996 Executive Order allowing
export of encryption systems providing key escrow capability. There can be no
assurance that such export license will be obtained. There can be no assurance
that the Company will have patent protection or that it will not infringe
patents of third parties in foreign jurisdictions. Because electronic monitoring
and the transmission of audited usage and financial information on end users or
payment instructions may be subject to varying statutory or regulatory controls
in foreign jurisdictions, there can be no assurance that the use of all portions
of the Wave
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<PAGE> 23
System will be permitted in any particular foreign jurisdiction.
PROPRIETARY RIGHTS AND LICENSES AND INTELLECTUAL PROPERTY
The Company's success depends, in part, on its ability to enjoy or obtain
protection for its products and technologies under United States and foreign
patent laws, copyright laws and other intellectual property laws, to preserve
its trade secrets and to operate without infringing the proprietary rights of
third parties. There can be no assurance that any issued patent owned or
licensed by the Company affords adequate protection to the Company or will not
be challenged, invalidated, infringed or circumvented. Furthermore, there can be
no assurance that the Company's activities will not infringe patents owned by
others.
In addition, the Company may be required to obtain licenses to patents or
other proprietary rights of third parties. No assurance can be given that any
licenses required under any such patents or proprietary rights would be made
available on terms acceptable to the Company, if at all. If the Company is
required to and does not obtain such licenses it would be prevented from, or
encounter delays in the development and marketing of, its products and
technologies while it attempted to design around such patents or other rights
and there can be no assurance that such attempts would be successful. Failure to
obtain such licenses or to design around such patents or other rights would have
a material adverse effect on the Company.
The Company holds non-exclusive patent rights relating to the metered use
of encrypted data in local memory under a limited license (the "License
Agreement") from Titan Corporation ("Titan") to a patent (the "Licensed Patent")
jointly held by Titan and a third party. This License Agreement restricts Wave
from metering information produced and used solely by a government entity or
producing products that meter this information. In addition, the License
Agreement is subject to the rights of the joint owner of the Licensed Patent,
who has the right to exploit, or to license to third parties, the Licensed
Patent, including in a manner competitive with the Company. There can be no
assurance that the joint owner of the Licensed Patent will not compete with the
Company or license the Licensed Patent to a competitor of the Company, or that
the Company's business will not exceed the scope of the License Agreement.
Pursuant to the License Agreement, the Company is obligated to pay certain
royalties to Titan. Pursuant to the License Agreement, the Company has granted
to Titan the exclusive right to use the Company's patents for products
distributed to government entities. On February 28, 1997 the Company and Titan
executed an addendum to the License Agreement whereby the Company received a
sole license to the Licensed Patent to develop and distribute products to the
in-home consumer microcomputer market segment. Under this addendum to the
License Agreement, Titan waived any and all defaults by Wave under the License
Agreement occurring prior to February 28, 1997.
The Company is aware of four United States patents (the "Third Party
Patents") each having some claims that are similar to some of the claims in the
Licensed Patent. Based upon information currently known to the Company, some of
the claims of both the Licensed Patent and the Third Party Patents cover certain
material aspects of the Company's technology. Therefore, the commercialization
of the Company's technology would be subject to the rights of the holder of the
Third Party Patents unless the Company is able to invalidate or license such
claims. Also, the holder of the Third Party Patents or a licensee of the Third
Party Patents could seek to invalidate such claims of the Licensed Patent and
therefore be able to commercialize a technology similar to the Company's
technology. In either case, in order to invalidate the other party's patent
rights, the party claiming invalidity might need to prove that it invented the
claimed subject matter prior to the other party. There can be no assurance that
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<PAGE> 24
the Company would be successful in invalidating such claims of the Third Party
Patents or that the holder of the Third Party Patents or a licensee of the Third
Party Patents would not be successful in invalidating such claims of the
Licensed Patent. There also can be no assurance that the Third Party Patents
could be proven to be invalid on any other basis. Any proceeding involving the
validity of the Licensed Patent and the Third Party Patents would be protracted
and costly. In any suit contesting the validity of a patent, the patent being
contested would be entitled to a presumption of validity and the contesting
party would be required to demonstrate invalidity of such patent by clear and
convincing evidence.
If the Third Party Patents are not invalid insofar as their claims relate
to the Company's technology, then the Company would require a license from the
holder of the Third Party Patents to commercialize its technology and make, use,
or sell products or practice methods, or license others to sell products or use
methods, utilizing the technology in the United States. Due to the uncertainty
as to whether the Third Party Patents could be proved to be invalid, the Company
has engaged in preliminary negotiations with the holder of the Third Party
Patents to obtain a license under the Third Party Patents. The negotiations have
so far not produced any agreement and there can be no assurance that a license
will be obtainable on acceptable terms, if at all. The inability to obtain a
license, if needed, on commercially reasonable terms would have a material
adverse effect on the Company's business and its future operations.
The Company has acquired patent rights to the metered use of encrypted
serial data streams under a United States patent and a corresponding patent
application in the European Patent Office (together, the "Wave Patents"), which
are material to protecting certain of the Company's technology. The Company's
rights to the Wave Patent derive from a license, amended and restated in
February 1994, from Mr. Peter J. Sprague, Chairman and Chief Executive Officer
of the Company, of his rights in the Wave Patents (the "Amended License
Agreement"), and several agreements with former officers of the Company
regarding their rights in the Wave Patents. The Amended License Agreement
provides for royalty payments to be made to Mr. Peter J. Sprague and Mr. John R.
Michener, a former officer of the Company, in the aggregate amount of two
percent of gross revenues less certain adjustments as defined in the Amended
License Agreement. The royalty payment is to be apportioned 75 percent to Mr.
Peter J. Sprague and 25 percent to Mr. John R. Michener. Payment of royalties is
secured by a security interest in and to the Wave Patents. The Company believes
that the agreements as a whole provide it with exclusive rights under the Wave
Patents. There can be no assurance that the Company will enjoy exclusive rights
to the Wave Patents under such agreements.
On January 26, 1996, the Company received notice from E-Data Corporation
(formerly Interactive Gift Express, Inc.), claiming that the Company's practice
of its technology infringes U.S. and foreign patents owned by E-Data
Corporation, and offering to license such patents to the Company. The Company is
currently obtaining information needed to investigate the merits of this claim.
The Company believes that there is a viable argument for non-infringement. The
patents owned by E-Data Corporation are currently being litigated by third
parties. The Company is not involved in these proceedings.
The Company relies on trade secrets and proprietary know-how, which it
protects, in part, by confidentiality agreements with its employees and contract
partners. However, there can be no assurance that the Company's confidentiality
agreements will not be breached or that the Company would have adequate remedies
for any breach. There can be no assurance that the Company's trade secrets will
not otherwise become known or be independently discovered by competitors.
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<PAGE> 25
The Company also relies on copyright to prevent the unauthorized
duplication of its software and hardware products. The Company has and will
continue to protect its software and its copyright interest therein through
agreements with its consultants. The Company also plans to seek protection for
its semiconductor integrated circuit designs under mask work laws. Existing
copyright and mask work laws afford only limited protection, particularly in
certain jurisdictions outside the United States where the Company may seek to
market its products and services. There can be no assurance that the copyright
laws or mask work laws will adequately protect the Company's technology.
The Company has registered trademark and service mark registrations with
the United States Patent and Trademark Office for the marks WaveMeter(R) and
WaveNet(R) and intends to apply for additional name and logo marks in the United
States and foreign jurisdictions as appropriate. No assurance can be given that
federal registration of any of these trademarks in the United States will be
granted. The Company has abandoned its prior applications for DataWave,
InfoWave, and WaveTrac.
RESEARCH AND DEVELOPMENT
The Wave System incorporates semiconductor, encryption/decryption,
software transaction processing and other technologies in which the Company has
made a substantial investment in research and development. The Company expects
that it will be required to continue to make substantial investments in the
design of the WaveMeter, WaveNet and software interfaces. For the years ended
December 31, 1996, 1995 and 1994, the Company expended $3,309,022, $3,324,735
and $1,761,366, respectively, on research and development activities (which
amounts include the value of stock issued). From its inception in February 1988
through December 1996, the Company expended $12,599,686.
The success of the Wave System depends to a large extent on the Company's
ability to adapt the Wave System for use with various methods for the
distribution of electronic content, the ability of the Wave technology to
interface with various platform environments, and the ability of the Wave System
to work in many application environments. The Company believes that a
significant portion of its future research and development expenditures will be
used to adapt the Wave System accordingly.
The Company will also continue to expend a significant amount of resources
on the development of new iterations of the WaveMeter. The Company believes that
by providing various means of linking the WaveMeter to the customer's computer
or network, the Company will be more likely to achieve broad acceptance of the
Wave System. The Company is currently developing other forms of the WaveMeter to
target other market needs.
Wave is now focusing increased resources on developing the operational
infrastructure of the Company. Greater emphasis is placed on developing internal
production and fulfillment systems and marketing infrastructure to distribute
WaveMeters. The Company will also increase the resources available to WaveNet to
adapt to changing market requirements. The Company plans to expand WaveNet to
handle more end users, to develop interfaces for new kinds of partners, to
implement more sophisticated pricing methodologies and to add greater financial
system flexibility.
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<PAGE> 26
EMPLOYEES
As of September 30, 1997, the Company employed 48 full-time employees, 23
of whom are involved in marketing and administration and 25 of whom are involved
in research and development. The Company believes its employee relations are
satisfactory.
PROPERTIES
The Company leases a 9,433 square foot facility for its executive offices
and to house the WaveNet installation, administration, and customer support
operations in Lee, Massachusetts at a monthly rent of $3,025 with a monthly
charge of $1,767 for common costs. The Lee, Massachusetts lease will expire
during July 1998. The Company leases offices in New York, New York, at a monthly
rent of $6,769. The lease is scheduled to expire in June 1999. The Company
leases a 6,400 square foot facility in Princeton, New Jersey at a monthly base
rent of $3,733 with a monthly payment for taxes, insurance and maintenance
reimbursements and improvements which currently totals approximately $1,653 per
month. This lease is scheduled to expire during January 2001. The Company's
principal research and development activities are conducted at the Princeton
facility. The Company leases a 2,730 square foot facility in San Jose,
California for $5,050 per month. The San Jose, California lease will expire
during January 1999.
LEGAL PROCEEDINGS
On June 27, 1997 a complaint alleging breach of contract, among other
related claims, was filed against the Company by Carl A. Artopeous and Artopeous
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. The action has been removed to the Federal
Court, Eastern District of California. A hearing has been set for January 1998.
USE OF PROCEEDS
The Selling Security Holders will receive all of the net proceeds from the
Class A Common Stock sold pursuant to this Prospectus.
SELLING SECURITY HOLDERS
The Selling Security Holders are (i) Combination Inc. ("Combination"), the
purchaser of the Series F Preferred Stock and 112,500 Placement Warrants (which
are exercisable at $1.26 per share) in connection with the placement of the
Series F Preferred Stock, (ii) Wharton Capital Partners, Ltd., who received
56,250 Placement Warrants in connection with the placement of the Series F
Preferred Stock, and (iii) Galapagos Software, Inc., who received 20,000 shares
of unregistered Class A Common Stock in connection with the GSI Agreement.
Except as otherwise disclosed herein, none of the Selling Security Holders has
had any position, office or other material relationship with the Company or its
predecessors or affiliates within the past three years.
The following table sets forth the names of the Selling Security Holders,
the number of shares of Class A Common Stock beneficially owned by each of the
Selling Security Holders, and the number of shares which may be offered for
resale pursuant to this Prospectus. For the
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<PAGE> 27
purpose of calculating the number of shares of Class A Common Stock beneficially
owned by the holder of the Series F Preferred Stock, the number of shares of
Class A Common Stock calculated to be issuable upon conversion is based on a
conversion price of $1.05 per share (without taking into account shares issuable
as dividends). The conversion price for the Series F Preferred Stock is the
lower of (a) $1.05 and (b) 80% of the average of the five (5) lowest trading
price of the Class A Common Stock during (x) a day on which the Class A Common
Stock is traded on The Nasdaq National Market or The Nasdaq SmallCap Market or
principal national securities exchange or market on which the Class A Common
Stock has been listed, or (y) if the Class A Common Stock is not listed on The
Nasdaq National Market or The Nasdaq SmallCap Market or any stock exchange or
market, a day on which the Class A Common Stock is traded in the
over-the-counter market, as reported by the OTC Bulletin Board, or (z) if the
Class A Common Stock is not quoted on the OTC Bulletin Board, a day on which the
Class A Common Stock is quoted in the over-the-counter market as reported by the
National Quotation Bureau Incorporated (or any similar organization or agency
succeeding its functions of reporting prices) ("Trading Days"), as reported by
Bloomberg Information Services, Inc. during the ten (10) Trading Days
immediately preceding the conversion date. Holders of the Series F Preferred
Stock are entitled to receive quarterly dividends at a rate of 6% per annum,
payable in cash or, subject to certain conditions, shares of Class A Common
Stock. The actual number of shares issuable upon conversion of the Series F
Preferred Stock and available for resale under this Prospectus could be
materially greater based upon the market price of the Class A Common Stock at
the time or times of conversion. The number of shares shown as being offered
hereunder by the holder of the Series F Preferred Stock is the number of shares
registered by the Registration Statement of which this Prospectus is a part with
respect to shares issuable upon conversion of and as dividends on the Series F
Preferred Stock, pursuant to the terms of the Registration Agreement.
The information included below is based upon information provided by the
Selling Security Holders. Because the Selling Security Holders may offer all,
some or none of their shares, no definitive estimate as to the number of shares
that will be held by the Selling Security Holders after such offering can be
provided.
<TABLE>
<CAPTION>
NUMBER OF SHARES OF
CLASS A COMMON STOCK NUMBER OF SHARES
BENEFICIALLY OWNED OF CLASS A
SELLING SECURITY PRIOR TO THE COMMON STOCK
HOLDER OFFERING BEING OFFERED
----------------------- -------------------- ----------------
<S> <C> <C>
Combination Inc................... 2,864,726(1) 5,782,090(4)(5)
Wharton Capital Partners, Ltd..... 118,750(2) 56,250
Galapagos Software, Inc........... 20,000(3) 20,000
--------- ---------
TOTAL................... 3,003,476 5,858,340
========= =========
</TABLE>
- ----------------
(1) Represents shares issuable upon a hypothetical conversion of 112,500 shares
of Series F Preferred Stock, with a stated value of $2,250,000 acquired on
October 9, 1997 and 112,500 shares issuable upon exercise of Purchase Warrants.
(2) Represents shares issuable upon exercise of warrants. 37,500 shares of Class
A Common Stock issuable upon the exercise of a warrant issued to Wharton Capital
Partners, Ltd. in connection with the placement of the Series C Preferred Stock,
par value $.01, which were registered pursuant to a registration statement filed
with the Commission on January 17,
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<PAGE> 28
1997, which was amended on March 7, 1997 and March 21, 1997. 25,000 shares of
Class A Common Stock issuable upon the exercise of a warrant issued to Wharton
Capital Partners, Ltd. in connection with the placement of the Series D
Preferred Stock, par value $.01, which were registered pursuant to a
registration statement filed with the Commission on June 9, 1997, which was
amended on June 16, 1997.
(3) Represents shares issued pursuant to a Software Development Agreement
between the Company and Galapagos Software, Inc., dated February 13, 1997 (the
"GSI Agreement"), whereby the Company issued 20,000 shares of unregistered Class
A Common Stock to Galapagos Software, Inc., which shares were entitled to
certain piggyback registration rights.
(4) The number of shares of Class A Common Stock registered pursuant to the
registration statement of which this Prospectus is a part and the number of
shares of Class A Common Stock offered hereby have been determined by agreement
between the Company and Combination. Because the number of shares of Class A
Common Stock that will ultimately be issued to Combination upon conversion of
the Series F Preferred Stock is dependent upon the conversion formula described
above, such number of shares (and therefore the number of shares of Class A
Common Stock offered hereby) cannot be determined at this time.
(5) Combination has contractually agreed not to use its conversion rights with
respect to the Series F Preferred Stock to obtain in excess of 4.9% of the total
outstanding shares of Class A Common Stock.
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<PAGE> 29
PLAN OF DISTRIBUTION
The shares of Class A Common Stock offered hereby may be offered for
resale by the Selling Security Holders (or their donees, transferees or
successors in interest) from time to time in transactions for their own account
(which may include block transactions) on any national securities exchange or
quotation service on which the Class A Common Stock may be listed or quoted at
the time of sale, in the over-the-counter market, in transactions otherwise than
on such exchanges (including privately negotiated transactions) or in the
over-the-counter market, through the writing of options, or a combination of
such methods of sale, at fixed prices (which may be changed), at market prices
prevailing at the time of sale, at prices related to such prevailing market
prices or at negotiated prices. The Selling Security Holders may effect such
transactions by selling the shares of Class A Common Stock to or through
broker-dealers, and such broker-dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Security Holders and/or
the purchasers of shares for whom such broker-dealers may act as agent or to
whom they sell as principal, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions). From time to time
the Selling Security Holder may engage in short sales, including short sales
against the box, puts and calls and other transactions in securities of the
Company or derivatives thereof, and may sell and deliver the Class A Common
Stock in connection therewith. Further, except as set forth herein, the Selling
Security Holders are not restricted as to the number of shares which may be sold
at any one time, and it is possible that a significant number of shares could be
sold at the same time, which may have a depressive effect on the market price of
the Company's Class A Common Stock. The Selling Security Holders may also pledge
shares of Class A Common Stock as collateral for margin accounts, and such
shares could be resold pursuant to the terms of such accounts. The Selling
Security Holders and any dealers or agents participating in the distribution of
the Class A Common Stock may be deemed to be "underwriters" as defined in the
Securities Act and any profit on the sale of the Class A Common Stock by them
and any discounts, commissions or concessions received by any such dealers or
agents might be deemed to be underwriting discounts and commissions under the
Securities Act. The Company will not receive any proceeds of the sales of the
Class A Common Stock by the Selling Security Holders.
To comply with the securities laws of certain jurisdictions, if
applicable, the Class A Common Stock will be offered or sold in such
jurisdictions only through registered or licensed brokers or dealers. In
addition, in certain jurisdictions the Class A Common Stock may not be offered
or sold unless they have been registered or qualified for sale in such
jurisdictions or an exemption from registration or qualification is available
and is complied with.
Under applicable rules and regulations under the Exchange Act, any person
engaged in a distribution of the Class A Common Stock may not simultaneously
engage in market-making activities with respect to such securities for a period
of two to nine business days prior to the commencement of such distribution. In
addition to and without limiting the foregoing, each Selling Security Holder and
any other person participating in a distribution will be subject to applicable
provisions of the Exchange Act and the rules and regulations thereunder,
including without limitation Regulation M, which may limit the timing of
purchases and sales of any of the securities by the Selling Security Holders or
any such other person. All of the foregoing may affect the marketability of the
Class A Common Stock and the brokers' and dealers' ability to engage in
market-making activities with respect to these securities.
Pursuant to the Registration Agreement, all expenses of the registration
of the Class A Common Stock will be paid by the Company, including, without
limitation, Commission filing fees and expenses of compliance with state
securities or "blue sky" laws; provided, however,
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<PAGE> 30
that the Selling Security Holders will pay all underwriting discounts and
selling commissions, if any. The Selling Security Holders will be indemnified by
the Company against certain civil liabilities, including certain liabilities
under the Securities Act, or will be entitled to contribution in connection
therewith. The Company will be indemnified by the Selling Security Holders
against certain civil liabilities, including certain liabilities under the
Securities Act, or will be entitled to contribution in connection therewith.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for the
Company by Curtis, Mallet-Prevost, Colt & Mosle, New York, New York.
EXPERTS
The consolidated financial statements and schedule of Wave Systems Corp.
and Subsidiaries as of December 31, 1996 and 1995, and for each of the years in
the three-year period ended December 31, 1996, and for the period from February
12, 1988 (inception) to December 31, 1996 have been incorporated by reference
herein and in the registration statement in reliance upon the report of KPMG
Peat Marwick LLP, independent certified public accountants, incorporated by
reference herein, and upon the authority of said firm as experts in accounting
and auditing. The report of KPMG Peat Marwick LLP covering the December 31, 1996
consolidated financial statements contains an explanatory paragraph that states
that the Company's recurring losses from operations since inception raise
substantial doubt about the Company's ability to continue as a going concern.
The consolidated financial statements and schedule do not include any
adjustments that might result from the outcome of that uncertainty.
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<PAGE> 31
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 14. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The following table sets forth the various expenses to be paid by the
Company in connection with the sale and distribution of the securities being
registered, other than underwriting discounts and commissions. All of the
amounts shown are estimated except the Commission registration fee and the
Nasdaq additional shares listing fee.
<TABLE>
<S> <C>
Commission registration fee............... $ 2,204
Nasdaq additional listing fee............. 7,500
Legal fees and expenses................... 20,000
Accounting fees and expenses.............. 10,000
Printing and engraving expenses........... 2,000
Miscellaneous expenses.................... 96
-------
Total.................................. $41,800
=======
</TABLE>
ITEM 15. INDEMNIFICATION OF DIRECTOR AND OFFICERS.
In accordance with Section 102(b)(7) of the Delaware General Corporation
Law (the "DGCL"), the Restated Certificate of Incorporation of the Company
contains a provision to limit the personal liability of the directors of the
Company for violations of their fiduciary duties. This provision eliminates each
director's liability to the Company or its stockholders for monetary damages
except (i) for any breach of the director's duty of loyalty to the Company or
its stockholders, (ii) for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the DGCL providing for liability of directors for unlawful payment of dividends
or unlawful stock purchases or redemptions, or (iv) for any transaction from
which the director derived an improper personal benefit. The effect of this
provision is to eliminate the personal liability of directors for monetary
damages for actions involving a breach of their fiduciary duty of care,
including any such actions involving gross negligence. Also, there may be
certain liabilities, such as those under the federal securities laws or other
state or federal laws, which a court may hold are unaffected by the Restated
Certificate of Incorporation.
The Restated Certificate of Incorporation also provides that if the DGCL
is amended to further eliminate or limit the liability of directors, then the
liability of a director of the Company shall be so eliminated or limited,
without further stockholder action, to the fullest extent permissible under the
DGCL as so amended.
Section 145 of the DGCL provides that a corporation may indemnify any
person, including officers and directors, who are, or are threatened to be made,
parties to any threatened, pending or completed legal action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of such corporation), by reason of the fact that
such person was an officer, director, employee or agent of such corporation, or
is or was serving at the request of such corporation as a director, officer,
employee or agent of another corporation. The indemnity may include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, provided such officer, director, employee or agent acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, for criminal proceedings, had no reasonable
cause to believe that his conduct was unlawful. A Delaware corporation may
indemnify officers and directors in an action by or in the right of the
corporation under the same
II-1
<PAGE> 32
conditions, except that no indemnification is permitted without judicial
approval if the officer or director is adjudged to be liable to the corporation.
Where an officer or director is successful on the merits or otherwise in defense
of any action referred to above, the corporation must indemnify him against the
expenses which such officer or director actually or reasonably incurred. The
Bylaws of the Company provide for indemnification of the officers and directors
to the fullest extent permitted by the DGCL. In addition, the Company maintains
officers' and directors' liability insurance which insures against liabilities
that officers and directors of the Company may incur in such capacities.
ITEM 16. EXHIBITS.
EXHIBIT NO. DESCRIPTION OF EXHIBIT
----------- ----------------------
4.1 Restated Certificate of Incorporation of Registrant
(incorporated by reference to Exhibit 3.1 of the
Registrant's Registration Statement on Form S-1, File No.
33-75286)
4.2 Bylaws of Registrant (incorporated by reference to
Exhibit 3.2 of the Registrant's Registration Statement on
Form S-1, File No. 33-75286)
4.3 Form of Stock Certificate of Class A Common Stock
(incorporated by reference to Exhibit 4.1 of the
Registrant's Registration Statement on Form S-1,
Registration No. 33-75286)
4.4 Certificate of Designation of Series F Convertible
Preferred Stock of Wave Systems Corp. as filed with the
Delaware Secretary of State on October 9, 1997
(incorporated by reference to Exhibit 3.1 of the
Registrant's Current Report on Form 8-K filed on October
15, 1997, File No. 0-24752)
4.5 Purchase Agreement between Wave Systems Corp. and
Combination Inc., dated as of October 9, 1997
(incorporated by reference to Exhibit 4.1 of the
Registrant's Current Report on Form 8-K filed on October
15, 1997, File No. 0-24752)
4.6 Registration Rights Agreement between Wave Systems Corp.
and Combination Inc., dated as of October 9, 1997
(incorporated by reference to Exhibit 4.2 of the
Registrant's Current Report on Form 8-K filed on October
15, 1997, File No. 0-24752)
5.1 Opinion of Curtis, Mallet-Prevost, Colt & Mosle
23.1 Consent of Curtis, Mallet-Prevost, Colt & Mosle (included
as part of Exhibit 5.1 hereto)
23.2 Consent of KPMG Peat Marwick LLP
*24.1 Power of Attorney (included on signature pages)
--------------
* Previously Filed.
II-2
<PAGE> 33
ITEM 17. UNDERTAKINGS.
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the aggregate,
represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or
decrease in the volume of securities offered (if the total dollar value of
securities offered would not exceed that which was registered) and any
deviation from the low or high end of the estimated maximum offering range
may be reflected in the form of a prospectus filed with the Commission
pursuant to Rule 424(b) if, in the aggregate, the changes in volume and
price represent no more than a 20% change in the maximum aggregate
offering price set forth in the "Calculation of Registration Fee" table in
the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or any
material change to such information in the registration statement;
Provided, however, that paragraphs (1)(i) and (1)(ii) do not apply
if the registration statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by those
paragraphs is contained in periodic reports filed by the registrant
pursuant to Section 13 or Section 15(d) of the Exchange Act that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to be a
new registration statement relating to the securities offered therein, and
the offering of such securities at that time shall be deemed to be the
initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination
of the offering.
The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act, each filing of the
registrant's annual report pursuant to Section 13(a) or Section 15(d) of
the Exchange Act (and, where applicable, each filing of an employee
benefit plan's annual report pursuant to Section 15(d) of the Exchange
Act) that is incorporated by reference in the registration statement shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, the Company has been advised that in the opinion of the
Commission such indemnification is against public policy as expressed in
the Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than payment by
the Company of expenses incurred or paid by a director, officer or
controlling person of the Company in the
II-3
<PAGE> 34
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities
being registered, the Company will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Securities Act and will be
governed by the final adjudication of such issue.
II-4
<PAGE> 35
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant
certifies that it has reasonable grounds to believe that it meets all of the
requirements for filing on Form S-3 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of New York, State of New York, on the 4th day of
December, 1997.
Wave Systems Corp.
By: /S/ PETER J. SPRAGUE
--------------------------------------
Name: Peter J. Sprague
Title: Chairman and
Chief Executive Officer
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ PETER J. SPRAGUE Chairman and Chief Executive December 4, 1997
- ------------------------- Officer (Chief Executive Officer,
Peter J. Sprague Principal Financial Officer and
Principal Accounting Officer)
/S/ STEVEN SPRAGUE President and Chief Operating Officer December 4, 1997
- -------------------------
Steven Sprague
* Director December 4, 1997
- -------------------------
John E. Bagalay, Jr.
</TABLE>
<PAGE> 36
<TABLE>
<S> <C> <C>
Director December 4, 1997
- -------------------------
Philippe Bertin
* Director December 4, 1997
- -------------------------
George Gilder
* Director December 4, 1997
- -------------------------
John E. McConnaughy, Jr.
* Director December 4, 1997
- -------------------------
Gene W. Ray
*By: /s/ Steven Sprague
---------------------
Steven Sprague
Attorney-In-Fact
</TABLE>
<PAGE> 37
INDEX TO EXHIBITS
EXHIBIT NO. DESCRIPTION OF EXHIBIT
4.1 Restated Certificate of Incorporation of Registrant (incorporated by
reference to Exhibit 3.1 of the Registrant's Registration Statement
on Form S-1, File No. 33-75286)
4.2 Bylaws of Registrant (incorporated by reference to Exhibit 3.2 of
the Registrant's Registration Statement on Form S-1, File No.
33-75286)
4.3 Form of Stock Certificate of Class A Common Stock (incorporated by
reference to Exhibit 4.1 of the Registrant's Registration Statement
on Form S-1, Registration No. 33-75286)
4.4 Certificate of Designation of Series F Convertible Preferred Stock
of Wave Systems Corp. as filed with the Delaware Secretary of State
on October 9, 1997 (incorporated by reference to Exhibit 3.1 of the
Registrant's Current Report on Form 8-K filed on October 15, 1997,
File No. 0-24752)
4.5 Purchase Agreement between Wave Systems Corp. and Combination Inc.,
dated as of October 9, 1997 (incorporated by reference to Exhibit
4.1 of the Registrant's Current Report on Form 8-K filed on October
15, 1997, File No. 0-24752)
4.6 Registration Rights Agreement between Wave Systems Corp. and
Combination Inc., dated as of October 9, 1997 (incorporated by
reference to Exhibit 4.2 of the Registrant's Current Report on Form
8-K filed on October 15, 1997, File No. 0-24752)
5.1 Opinion of Curtis, Mallet-Prevost, Colt & Mosle
23.1 Consent of Curtis, Mallet-Prevost, Colt & Mosle (included as part of
Exhibit 5.1 hereto)
23.2 Consent of KPMG Peat Marwick LLP
*24.1 Power of Attorney (included on signature pages)
- ------------------
*Previously Filed.
<PAGE> 1
Exhibit 5.1
Opinion of Curtis, Mallet-Prevost, Colt & Mosle
December 5, 1997
Wave Systems Corp.
480 Pleasant Street
Lee, MA 01238
Gentlemen:
We have acted as special counsel for Wave Systems Corp., a Delaware
corporation (the "Company"), with respect to the proposed registration by the
Company of shares of the Company's Class A Common Stock, $0.01 par value per
share (the "Shares"), covered by a Registration Statement on Form S-3
(Registration Statement No. 333-38265, hereinafter the "Registration Statement")
filed with the Securities and Exchange Commission (the "Commission") under the
Securities Act of 1933, as amended (the "Act"). The Shares consist of (i) up to
5,669,590 Shares issuable upon conversion of 112,500 shares of the Company's
Series F Convertible Preferred Stock, par value $.01 per share (the "Series F
Preferred Stock") and as dividends on the Series F Preferred Stock, (ii) 168,750
Shares issuable upon the exercise of warrants (the "Placement Warrants") issued
in connection with the placement of the Company's Series F Preferred Stock, and
(iii) 20,000 Shares issued pursuant to a Software License Agreement entered into
between the Company and Galapagos Software, Inc., dated February 13, 1997 (the
"License Agreement").
In connection herewith, we have examined the Restated Certificate of
Incorporation, the By-laws, and the Registration Statement and all exhibits
thereto (including those incorporated by reference), and such other documents as
we have considered necessary.
In rendering this opinion, we have assumed, without any independent
investigation or verification of any kind, the genuineness of all signatures,
the authenticity of all documents submitted to us as originals and the
conformity to authentic original documents of all documents submitted to us as
certified, conformed or photostatic or facsimile copies.
Based upon such examination, it is our opinion that (i) the Shares
issuable upon conversion of the Series F Preferred Stock and as dividends on the
Series F Preferred Stock, when issued in accordance with the terms of the Series
F Preferred Stock, (ii) the Shares issuable upon exercise of the Placement
Warrants, and (iii) 20,000 Shares issued pursuant to the License Agreement, when
issued in accordance with the terms of the Placement Warrants, are or will be,
as the case may be, legally issued, fully paid and non-assessable.
We hereby consent to the reference to our name in the Registration
Statement and in the related Prospectus under the caption "Legal Matters" and to
the use of the foregoing
<PAGE> 2
opinion as an exhibit to the Registration Statement. In giving this consent, we
do not hereby admit that we are within the category of persons whose consent is
required under Section 7 of the Act, or the rules and regulations of the
Commission thereunder.
We are giving this opinion to the Company, and no person other than
the Company may rely upon it.
Very truly yours,
/s/ Curtis, Mallet-Prevost, Colt & Mosle
-2-
<PAGE> 1
Exhibit 23.2
Consent of Independent Auditors
The Board of Directors
Wave Systems Corp.
We consent to the use of our report incorporated herein by reference and to the
reference to our firm under the heading "Experts" in the prospectus.
Our report dated March 14, 1997, contains an explanatory paragraph that states
that the Company has suffered recurring losses from operations since inception
that raise substantial doubt about its ability to continue as a going concern.
The consolidated financial statements do not include any adjustments that might
result from the outcome of that uncertainty.
/s/ KPMG Peat Marwick LLP
Boston, Massachusetts
December 4, 1997
