Proxy Statement Pursuant to Section 14(a) of the Securities Exchange Act of 1934
Filed by the Registrant [x]
Filed by a Party other than the Registrant [ ]
Check the appropriate box:
[ ] Preliminary Proxy Statement
[ ] Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
[x] Definitive Proxy Statement
[ ] Definitive Additional Materials
[ ] Soliciting Material Pursuant to ss.240.14a-11(c) or ss.240.14a-12
WAVE SYSTEMS CORP.
- --------------------------------------------------------------------------------
(Name of Registrant as Specified In Its Charter)
- --------------------------------------------------------------------------------
(Name of Person(s) Filing Proxy Statement if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
[x] No fee required.
[ ] Fee computed on table below per Exchange Act Rules 14a-6(i)(4) and 0-11.
1) Title of each class of securities to which transaction applies:
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2) Aggregate number of securities to which transaction applies:
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3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (Set forth the amount on which the filing fee
is calculated and state how it was determined):
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4) Proposed maximum aggregate value of transaction:
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[ ] Fee paid previously with preliminary materials.
[ ] Check box if any part of the fee is offset as provided by Exchange Act Rule
0-11(a)(2) and identify the filing for which the offsetting fee was paid
previously. Identify the previous filing by registration statement number, or
the Form or Schedule and the date of its filing.
1) Amount Previously Paid:
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<PAGE>
- --------------------------------------------------------------------------------
WAVE SYSTEMS CORP.
- --------------------------------------------------------------------------------
NOTICE OF ANNUAL MEETING OF STOCKHOLDERS
To Be Held July 17, 1997
TO THE STOCKHOLDERS:
The Annual Meeting of Stockholders of Wave Systems Corp. (the "Company")
will be held Thursday, July 17, 1997 at the offices of the Company, 540 Madison
Avenue, New York, New York, for the following purposes:
1. To elect six directors to hold office until the next Annual Meeting
and until their successors are duly elected and qualified;
2. To consider and act upon a proposal to approve an Amendment to the
Restated Certificate of Incorporation of the Company to increase the number
of shares of Class A Common Stock that the Company shall have authority to
issue from 25 million to 50 million shares;
3. To consider and act upon a proposal to amend the Company's 1994
Employee Stock Option Plan to increase the number of shares of Class A
Common Stock reserved for issuance thereunder by 1,000,000 shares;
4. To consider and act upon a proposal to approve the Company's 1996
Performance Stock Option Plan;
5. To consider and act upon a proposal to permit the issuance to the
holder of the outstanding shares of the Series C Convertible Preferred
Stock and the Series D Convertible Preferred Stock that number of shares of
Class A Common Stock that equals or exceeds 20% of that number of shares of
outstanding common stock of the Company as at December 27, 1996 or May 30,
1997, respectively;
6. To consider and act upon a proposal to ratify the appointment of
KPMG Peat Marwick LLP as the Company's independent auditors for the year
ending December 31, 1997; and
7. To transact such other business as may properly come before the
Annual Meeting or at any adjournments or postponements thereof.
The Board of Directors has fixed the close of business on Friday, June 13,
1997 as the record date for the determination of the stockholders entitled to
notice of and to vote at the Annual Meeting of Stockholders and at any
adjournments or postponements thereof.
By Order of the Board of Directors,
/s/ James Stokes Hatch
James Stokes Hatch
Secretary
Lee, Massachusetts
June 23, 1997
YOUR VOTE IS IMPORTANT
If you do not expect to attend the Annual Meeting, or if you do
plan to attend but wish to vote by proxy, please complete, sign,
date and return promptly the enclosed proxy card in the enclosed
postage-paid envelope.
<PAGE>
WAVE SYSTEMS CORP.
PROXY STATEMENT
ANNUAL MEETING OF STOCKHOLDERS
July 17, 1997
General
This Proxy Statement is being furnished in connection with the solicitation
by the Board of Directors of Wave Systems Corp., a Delaware corporation (the
"Company") of proxies for use at the Annual Meeting of Stockholders to be held
on Thursday, July 17, 1997, commencing at 4:00 P.M., at the offices of the
Company, 540 Madison Avenue, New York, New York, and at any adjournments or
postponements thereof. The matters to be considered and acted upon at the
meeting are described below in this Proxy Statement.
The principal executive offices of the Company are located at 480 Pleasant
Street, Lee, Massachusetts 01238. The approximate mailing date of this Proxy
Statement and the accompanying proxy is June 23, 1997.
Voting Rights and Votes Required
Only stockholders of record at the close of business on Friday, June 13,
1997 will be entitled to notice of and to vote at the Annual Meeting. As of such
record date, the Company had outstanding 14,337,525 shares of Class A Common
Stock and 5,512,255 shares of Class B Common Stock. Each stockholder is entitled
to one vote for each share of common stock held on the matters to be considered
at the Annual Meeting. The holders of a majority of the outstanding shares will
constitute a quorum for the transaction of business at the meeting. Shares of
common stock present in person or represented by proxy (including shares which
abstain or do not vote with respect to one or more of the matters presented for
stockholder approval) will be counted for purposes of determining whether a
quorum exists at the meeting.
The affirmative vote of the holders of a plurality of the shares of common
stock present or represented at the meeting is required for the election of
directors. The affirmative vote of the holders of a majority of the shares of
common stock present or represented at the meeting and entitled to vote is
required for the approval of the Amendment to the Restated Certificate of
Incorporation to increase the authorized amount of Class A Common Stock from 25
million to 50 million shares, for the approval of the Amendment to the 1994
Stock Option Plan, for the approval of the 1996 Performance Stock Option Plan,
for the approval of the proposal to permit the issuance of shares of Class A
Common Stock to the holder of the Series C Convertible Preferred Stock and the
Series D Convertible Preferred Stock, and for the ratification of the
appointment of KPMG Peat Marwick LLP as the Company's independent auditors for
the year ending December 31, 1997. Abstentions will be treated as shares that
are present and entitled to vote for purposes of determining the number of
shares present and entitled to vote with respect to any particular matter, but
will not be counted as a vote in favor of such matter. Accordingly, an
abstention from voting on a matter will have the same legal effect as a vote
against the matter. If a broker or nominee holding stock in "street name"
indicates on the proxy that it does not have discretionary authority to vote as
to a particular matter, those shares will not be considered as present and
entitled to vote with respect to such matter.
The accompanying proxy may be revoked at any time before it is exercised by
giving a later proxy, notifying the Secretary of the Company in writing, or
voting in person at the meeting.
Security Ownership of Certain Beneficial Owners and Management
The following table sets forth certain information concerning the
beneficial ownership of the Company's Class A and Class B Common Stock as of
March 31, 1997 (except as otherwise noted) by (i) each stockholder who is known
by the Company to own beneficially more than five percent of the outstanding
Class A or Class B Common Stock, (ii) each director of the Company, (iii) each
of the executive officers of the Company named in the Summary Compensation Table
below, and (iv) all directors and executive officers of the Company as a group.
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 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. Shares of Class B Common Stock are convertible into shares of Class A
Common Stock on a one-for-one basis at the option of the holder.
<TABLE>
<CAPTION>
Percent
of All
Number of Shares Number of Shares Percent Outstanding
of Class A Common Percent of of Class B Common of Common
Beneficial Owner(1) Stock Owned(2) Class Stock Owned Class Stock(3)
- ------------------------- ----------------- ---------- ----------------- ------- -----------
<S> <C> <C> <C> <C> <C>
Peter J. Sprague(4) 1,330 * 1,898,834 31.5 10.4
Steven Sprague(5) 89,830 * 272,757 4.7 2.0
John E. Bagalay, Jr.(6) 36,000 * 637,804 11.0 3.7
Philippe Bertin(7) 36,000 * 16,000 * *
George Gilder(8) 52,667 * 2,000 * *
John E. McConnaughy, Jr.(9) 36,000 * 545,000 9.6 3.2
Gene W. Ray(10) 36,000 * 426,576 7.5 2.6
The Titan Corporation(11) 0 - 426,576 7.5 2.4
Boston University(12) 0 - 637,804 11.0 3.5
All executive officers and
directors as a group
(8 persons)(13) 304,494 2.4 3,798,971 59.7 21.8
<FN>
- ---------------------------
*Less than one percent.
(1) Each individual or entity has sole voting and investment power, except as
otherwise indicated.
(2) Does not include shares of Class A Common Stock issuable upon the
conversion of Class B Common Stock.
(3) In circumstances where the Class B Common Stock has five votes per share,
the percentages of total voting power would be as follows: Peter J.
Sprague, 22.4%; Steven Sprague, 3.5%; John E. Bagalay, Jr., 7.7%; Philippe
Bertin, less than 1%; George Gilder, less than 1%; John E. McConnaughy,
Jr., 6.8%; Gene W. Ray, 5.3%; The Titan Corporation, 5.2%; Boston
University, 7.7%; and all Executive Officers and Directors as a group,
43.6%.
(4) Includes 331,330 shares which are subject to options presently exercisable
or exercisable within 60 days. Also includes 320,000 shares held in trust
for the benefit of Mr. Sprague's adult children, and for which Mr. Sprague
is a trustee.
(5) Includes 94,530 shares which are subject to options presently exercisable
or exercisable within 60 days.
(6) Includes 32,000 shares which are subject to options presently exercisable
or exercisable within 60 days. Also includes 637,804 shares beneficially
owned by Boston University, comprised of: (a) 542,856 shares and (b) 94,948
shares subject to warrants presently exercisable. Mr. Bagalay is Managing
Director of Community Technology Fund, the venture capital affiliate of
Boston University, which holds and manages the venture capital investments
of Boston University. Mr. Bagalay disclaims beneficial ownership of the
shares held by Boston University. The mailing address of Mr. Bagalay is 147
Bay State Road, Boston, Massachusetts.
(7) Includes 32,000 shares which are subject to options presently exercisable
or exercisable within 60 days and 16,000 shares subject to warrants
presently exercisable. Excludes 464,286 shares beneficially owned by
Financiere Wagram Poncelet comprised of: (a) 442,857 shares, and (b) 21,429
shares subject to warrants presently exercisable. Mr. Bertin serves as
Manager of Financiere Wagram Poncelet. Mr. Bertin disclaims beneficial
ownership of the shares held by Financiere Wagram Poncelet, other than
16,000 shares subject to warrants granted to Mr. Bertin by Financiere
Wagram Poncelet.
(8) Includes 48,667 shares which are subject to options presently exercisable
or exercisable within 60 days.
(9) Includes 32,000 shares which are subject to options presently exercisable
or exercisable within 60 days.
(10) Includes 32,000 shares which are subject to options presently exercisable
or exercisable within 60 days. Also includes 415,776 shares beneficially
owned by The Titan Corporation for which Mr. Ray serves as a director,
President and Chief Executive Officer and 10,800 shares subject to warrants
presently exercisable which are owned by The Titan Corporation. Mr. Ray
disclaims beneficial ownership of the shares held by The Titan Corporation.
The mailing address of Mr. Ray is c/o The Titan Corporation, 3033 Science
Park Road, San Diego, California 92121.
(11) Includes 10,800 shares subject to warrants presently exercisable. The
business address of The Titan Corporation is 3033 Science Park Road, San
Diego, California 92121.
(12) Includes 94,948 shares subject to warrants presently exercisable. The
business address of Boston University is 147 Bay State Road, Boston,
Massachusetts.
(13) Includes 913,798 shares which are subject to options and warrants presently
exercisable or exercisable within 60 days.
</FN>
</TABLE>
1. ELECTION OF DIRECTORS
At the Annual Meeting, six directors are to be elected, each to hold office
until the next annual meeting of stockholders and until his respective successor
has been duly elected and qualified. If no direction is given to the contrary,
all proxies received by the Board of Directors will be voted "FOR" the election
as directors of each of the following nominees. In the event that any nominee
declines or is unable to serve, the proxy solicited herewith may be voted for
the election of another person in his stead at the discretion of the proxies.
The Board of Directors has no reason to believe that any of the nominees will
not be available to serve. Set forth below is certain information concerning
each nominee. Each nominee is currently a director of the Company.
<TABLE>
<CAPTION>
Business Experience and Principal Occupation or Director
Name and Age Employment During Past 5 Years; Other Directorships Since
- ------------ ------------------------------------------------------- --------
<S> <C> <C>
Peter J. Sprague(1)(4).............. Chairman of the Company since 1988 and Chief Executive 1988
57 Officer of the Company since July 1991; Chairman of
National Semiconductor Corporation from 1965 until May
1995; Director of Software Professionals, Inc. and
Pantepec International, Inc.; Trustee of the Strang
Clinic; Member of Academy of Distinguished
Entrepreneurs, Babson College.
John E. Bagalay, Jr., Ph.D.(1)(2)(4) Managing Director of Community Technology Fund, a 1993
63 venture capital affiliate of Boston University, since
September 1989; General Counsel of Lower Colorado
River Authority from October 1984 to September 1988;
former General Counsel of Texas Commerce Bancshares,
Inc. and Houston First Financial Group; Director of
Seragen, Inc., Cytogen, Inc., Hymedix, Inc. and
several privately-held corporations.
Philippe Bertin(3).................. Manager of Financiere Wagram Poncelet (direct 1993
47 marketing; media) since December 1991; Manager of
Midial S.A. (consumer goods) from 1984 until 1991.
George Gilder(4).................... Senior Fellow at the Discovery Institute in Seattle, 1993
57 Washington; author of nine books, including Life After
Television, Microcosm, The Spirit of Enterprise and
Wealth and Poverty; contributing editor to Forbes
Magazine; former chairman of the Lehrman Institute
Economic Roundtable; former Program Director for the
Manhattan Institute; recipient of White House award
for Entrepreneurial Excellence from President Reagan.
John E. McConnaughy, Jr.(1)(2)(3)(4) Chairman and Chief Executive Officer of JEMC 1988
67 Corporation (private investments); Chairman and Chief
Executive Officer of Peabody International Corporation
(an environmental services company) from 1969 through
1985; Chairman and Chief Executive Officer of GEO
International Corporation (a nondestructive testing,
screen printing and oil field services company which
was spun-off from Peabody) from February 1981 to
October 1992; Director of Riddell Sports, Inc., Pantepec
International, Inc., Commonwealth Snack Co., Transact
International, Inc., De-Vlieg Bullard, Inc., Enviropur
Waste Refining & Technologies, Inc., Oxigene, Inc.
and Mego Financial Corp. Mr. McConnaughy is also a
member of the Board of Trustees of the Strang Clinic
and the Chairman of the Board of the Harlem School of
the Arts.
Gene W. Ray, Ph.D.(3)............... President and Chief Executive Officer and Director of 1993
58 The Titan Corporation (electronic equipment and
communications systems manufacturer) since 1985.
<FN>
- --------------------------
(1) Member of Nominating Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee
(4) Member of Executive Committee
</FN>
</TABLE>
Dr. Gene W. Ray, a director, President and Chief Executive Officer of The
Titan Corporation, serves as a director of the Company pursuant to a
stockholders agreement between the Company and Titan.
Board and Committee Meetings; Directors' Compensation
The Board of Directors met seven times during 1996. No director attended
fewer than 75 percent of the aggregate number of meetings of the Board and the
Board Committees on which such director served, except that Mr. Bertin attended
72% of such meetings. The Board Committees include an Audit Committee, a
Compensation Committee, a Nominating Committee and an Executive Committee.
The members of the Audit Committee are Messrs. Bertin, McConnaughy and Ray.
The Audit Committee reviews the services provided by the Company's independent
auditors, consults with the independent auditors on audits and proposed audits
of the Company, and reviews the need for internal auditing procedures and the
adequacy of the Company's internal control systems. In 1996, the Audit Committee
held one meeting.
The members of the Compensation Committee are Messrs. Bagalay and
McConnaughy. The Compensation Committee administers the Company's stock option
plans, and reviews and recommends compensation levels of the Company's executive
officers. In 1996, the Compensation Committee held seven meetings.
The members of the Nominating Committee are Messrs. Bagalay, McConnaughy
and Sprague. The Nominating Committee establishes procedures for identifying
potential candidates for appointment or election as directors, reviews and makes
recommendations regarding the criteria for Board membership, and proposes
nominees for election at the annual meeting and candidates to fill Board
vacancies. The Nominating Committee will consider recommendations from any
stockholder who is entitled to vote for the election of directors. Stockholders
should send recommendations of candidates for nomination, in writing, no later
than December 31, 1997 to the Company's Secretary, 480 Pleasant Street, Lee,
Massachusetts 01238. Recommendations must be accompanied by the consent of the
individual being recommended to be nominated, to be elected and to serve. The
submission also should include a statement of the candidate's business
experience and other business affiliations. In 1996, the Nominating Committee
held no meetings.
At an organizational meeting of the Board of Directors on May 23, 1996, the
Board of Directors provided for an Executive Committee. The members of the
Executive Committee are Messrs. Bagalay, Gilder, McConnaughy and Sprague. The
Executive Committee assists the Chairman of the Company in the absence of a
meeting of all members of the Board of Directors. The Executive Committee brings
material matters to the attention of the Board of Directors and prepares the
deliberation process of the Board of Directors, thus accelerating vital
decisions for the Company. However, the Board of Directors did not delegate its
full power to the Executive Committee and asked that the Executive Committee
include all members of the Board of Directors in major decisions affecting the
Company. In 1996, the Executive Committee held no meetings.
Directors presently receive no cash compensation for serving on the Board
of Directors. Under the Company's Non-Employee Directors Stock Option Plan, each
director who is not an employee of the Company receives an annual grant of
options to purchase 10,000 shares of Class A Common Stock at fair market value.
The options are granted upon re-election after the annual meeting of the
stockholders and vest 25% after each three-month period following grant. Options
terminate upon the earliest to occur of (i) subject to (ii) below, three months
after the optionee ceases to be a director of the Company, (ii) one year after
the death or disability of the optionee, and (iii) ten years after the date of
grant. If there is a change of control of the Company, all outstanding stock
options will become immediately exercisable.
<PAGE>
Executive Compensation
Summary Compensation Table
The following table sets forth information with respect to the compensation
paid or awarded by the Company to the Chief Executive Officer and the only other
executive officers whose cash compensation exceeded $100,000 (collectively, the
"Named Executive Officers") for services rendered in all capacities during 1994,
1995 and 1996.
<TABLE>
<CAPTION>
Long Term
Compensation Awards
-------------------
Annual Compensation Number of Shares
--------------------------- Underlying
Name and Principal Position Year Salary($) Bonus($) Options(#)
- --------------------------- ---- ---------- ---------- -------------------
<S> <C> <C> <C> <C>
Peter J. Sprague 1996 $160,000 $ 50,000 -0-
Chairman and Chief 1995 $160,000 $ -0- 1,995
Executive Officer 1994 $125,200 $100,000 -0-
Steven Sprague(1) 1996 $131,666 $ -0- 150,000
President and 1995 $110,000 $ -0- 1,995
Chief Operating Officer 1994 $ 88,750 $ -0- -0-
<FN>
- ---------------------------
(1) Mr. Steven Sprague was elected President and Chief Operating Officer on May
23, 1996 and was not previously an executive officer during 1996. Prior to
that, Mr. Steven Sprague was Vice President of Operations of the Company
from April 1994 to June 1995 and an employee of the Company in the areas of
operations and strategic planning from November 1992 to April 1994.
</FN>
</TABLE>
Option Grants Table
The following table sets forth certain information regarding options
granted during the fiscal year ended December 31, 1996 by the Company to the
Named Executive Officers.
<TABLE>
<CAPTION>
-----------------------------
Potential Realizable Value
at Assumed Annual Rates of
Number of % of Total Stock Price Appreciation For
Shares Options Option Term (1)
Underlying Granted to Exercise -----------------------------
Options Employees Price Expiration
Name Granted (#) Fiscal Year ($/Share) Date 5% ($) 10% ($)
- ---- ----------- ----------- --------- ---------- ------ -------
<S> <C> <C> <C> <C> <C> <C>
Peter J. Sprague -0- -0- - - -0- -0-
Steven Sprague 150,000(2) 12% $3.09 5/23/06 $291,493 $738,700
<FN>
- --------------
(1) The potential realizable value of the options reported above was calculated
by assuming 5% and 10% compounded annual rates of appreciation of the
common stock from the date of grant of the options until the expiration of
the options, based upon the market price on the date of grant. These
assumed annual rates of appreciation were used in compliance with the rules
of the Securities and Exchange Commission and are not intended to forecast
future price appreciation of the common stock.
(2) These options vest in three installments on May 23, 1997, May 23, 1998 and
May 23, 1999 and may become fully vested upon certain sales of assets,
mergers and consolidations involving the Company.
</FN>
</TABLE>
Fiscal Year End Option Value Table
The following table sets forth information regarding the aggregate number
and value of options held by the Named Executive Officers as at December 31,
1996. No options were exercised by the Named Executive Officers during 1996.
<TABLE>
<CAPTION>
Number of Shares Value of Unexercised
Underlying Unexercised Options In-The-Money Options
at December 31, 1996 (#) at December 31, 1996 ($)(1)
-------------------------------- ---------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- -------------------------------- ------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Peter J. Sprague................. 330,665 1,330 $ 20,011 $ 1,623
Steven Sprague................... 43,865 151,330 $ 811 $ 1,623
<FN>
- --------------------------------
(1) The last reported sale price for the Company's Class A Common Stock on the
NASDAQ National Market System on December 31, 1996 was $2.31 per share.
Value is calculated on the basis of the difference between the respective
option exercise prices and $2.31, multiplied by the number of shares of
common stock underlying the respective options.
</FN>
</TABLE>
Certain Relationships and Related Transactions
Note Receivable from Director/Officer
On November 16, 1992, the Company made a personal loan to Mr. Peter J.
Sprague, Chairman and Chief Executive Officer of the Company, as evidenced by a
note for $150,000, which sum was due and payable to the Company on January 16,
1993 and which bore interest at the rate of 10% per annum. On the due date, the
note was canceled and the total amount owed was "rolled-over" into a subsequent
note, dated May 12, 1993 for $150,000, plus accrued interest. The note is due on
demand by the Company and accrues interest at the rate of 10% per annum. On
April 22, 1993, the Company made an additional loan to Mr. Sprague for $23,175
as evidenced by a subsequent note, which is due on demand by the Company and
which bears interest at a rate of 10% per annum. All of these loans were made to
Mr. Sprague for personal reasons. As of December 31, 1996, Mr. Sprague's
aggregate indebtedness (including accrued interest) to the Company under the
notes totaled $244,705. No demand has been made as of the date hereof. The notes
are secured by a pledge of 67,000 shares of Class B Common Stock.
Wave Interactive Network, Inc.
Wave Interactive Network, Inc. ("WIN") was incorporated as a separate
subsidiary of the Company in June 1995 and spun out in November 1995, when
shares in the subsidiary were transferred in exchange for a demand note of
$668,000 accruing interest at a rate of Prime plus 1% (the "Note"). The amount
of the Note was based on the level of funding provided in 1995 to WIN by the
Company. In this transaction, the Company retained a 1% ownership in WIN and
transferred the remaining ownership to certain individuals, including former
employees (approximately 65% was transferred to Steven Sprague, President and
CEO of WIN, and three other children of Mr. Peter J. Sprague, Chairman and CEO
of the Company). Subject to certain limitations associated with WIN's ability to
raise additional capital, the note was convertible into an undiluted 20% of the
common shares of WIN at the option of Wave. The note was fully reserved as its
collectibility was dependent upon WIN's ability to raise additional capital.
On December 30, 1996 WIN was merged with and into the Company. Pursuant to
the Plan and Agreement of Merger between Wave and WIN, dated as of October 18,
1996 (the "Merger Agreement"), the Company issued to the shareholders of WIN,
other than the Company (the "WIN Shareholders"), a total of 375,000 unregistered
shares of the Company's Class B Common Stock based upon a conversion ratio of
37.88 shares of the Company's Class B Common Stock for each share of common
stock, par value $.01, of WIN held by the WIN Shareholders. Under the Merger
Agreement, the Company also agreed to issue to the WIN Shareholders 325,000
shares of the Company's Class B Common Stock contingent upon the achievement of
a specified operating milestone prior to December 30, 1999. On October 18, 1996,
as part of the merger the Company assumed a debt obligation of WIN owed to a
third party by issuing a convertible note in the principal amount of $455,911
due on April 18, 1998 bearing interest at a rate equal to ten percent per annum
(the "Convertible Note"). The Convertible Note is convertible into a number of
the Company's unregistered Class A Common Stock for a period beginning on April
1, 1997 and ending April 18, 1998 calculated as the greater of (a) the number of
shares that would be acquired at 80% of the fair market value of the Class A
Common Stock or (b) 250,000 shares plus 2,000 shares for each month the note is
outstanding. Also, as part of the merger, the Company issued a warrant for the
purchase of unregistered shares of the Company's Class A Common Stock to such
third party at a price of $1.25 per share. The exercise period of such warrant
is defined as the period commencing on the earlier date of the conversion of the
Convertible Note or April 18, 1998 and ending five years from the date of
issuance of such warrant. The number of shares able to be purchased under this
warrant is based on a formula of $170,000 divided by 80% of the fair market
value of the Class A Common Stock at the time of conversion.
Compensation to Steven Sprague
Steven Sprague received aggregate compensation of $131,666 and $110,000 for
services rendered to the Company in 1996 and 1995, respectively. Steven Sprague
is the son of Mr. Peter J. Sprague, the Chairman and Chief Executive Officer of
the Company.
Amended and Restated License Agreement and Assignment
Pursuant to an Amended and Restated License Agreement, dated February 14,
1994, and related Patent Assignment and Security Agreement, Mr. Peter J. Sprague
assigned his interest in a patent for the metering and usage of serial data
information to the Company in exchange for a non-terminable royalty interest.
The Company has agreed to payment of royalties to Mr. Sprague of 2% of the gross
revenues (less actual amounts paid to information, database and content
providers, hardware manufacturers and suppliers, search and retrieval software
suppliers, consolidators of information and network providers) derived from the
Company's technology based on the patent. The royalty payments are allocated 75%
to Mr. Sprague and 25% to a former officer of the Company, and are secured by a
security interest in and to the patent.
License and Cross-License Agreement
On May 1, 1992, the Company entered into a Joint Technology Development
Agreement and License and Cross-License Agreement with The Titan Corporation
whereby Titan granted to the Company license rights to the use of certain
patents which are co-owned by Titan. Dr. Gene W. Ray, a director of the Company,
is a director, President and Chief Executive Officer of Titan. The Company
granted to Titan the exclusive right to make for, sell in, and lease in a
"Retained Market," as defined in the agreement, the subject matter described in
any Company patent. The Retained Market is defined generally as the market for
"Government Information," as defined in the agreement, used solely by a
government entity, and the market for products used to access such information.
On February 28, 1997 the Company and Titan executed an addendum to the License
and Cross-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 and
Cross-License Agreement, Titan waived any and all defaults by the Company under
the License and Cross-License Agreement occurring prior to February 28, 1997.
Report of the Compensation Committee
General
The Compensation Committee of the Board of Directors (the "Committee") is
comprised of non-employee directors. The current members of the Committee are
Messrs. John E. Bagalay, Jr. and John E. McConnaughy, Jr. The Committee reviews
and recommends to the Board of Directors compensation levels for the Company's
executive officers, and administers the Company's stock option plans, including
the awarding of grants thereunder.
Compensation Philosophy
Executive compensation is heavily tied to corporate performance through the
granting of stock options. As a development stage company, the Company has
sought to contain costs with low cash salaries and bonuses.
The Company has not established a policy with regard to Section 162(m) of
the Internal Revenue Code of 1986, as amended (the "Code") since the Company has
not and does not currently anticipate paying cash compensation in excess of $1
million per annum to any employee. The Company intends to administer its stock
option plans in accordance with Section 162(m) of the Code.
Base Salaries and Bonuses for 1996
Base salaries for 1996 remained substantially lower than levels in the
competitive marketplace for executives with comparable experience, consistent
with the Company's position as a development stage company. A bonus of $50,000
was awarded to Mr. Peter J. Sprague, Chairman and Chief Executive Officer, in
recognition of corporate and individual performance.
Compensation of the Chief Executive Officer
Compensation of the Chief Executive Officer was determined in accordance
with the criteria set forth above. The Committee believes that CEO compensation
was appropriately based upon the Company's financial position and performance.
John E. Bagalay, Jr. John E. McConnaughy, Jr.
Performance Graph
The following line graph compares the Company's cumulative total return to
stockholders with the cumulative total return of the Nasdaq Market Value Index
and the Computer Related Services SIC Code Index from August 31, 1994 (the date
on which the Company's Class A Common Stock was first publicly traded) through
December 31, 1996. These comparisons assume the investment of $100 on August 31,
1994 and the reinvestment of dividends.
<PAGE>
<TABLE>
<CAPTION>
Wave Systems Corp.
Comparison of Cumulative Total Return to Stockholders
August 31, 1994 through December 31, 1996
COMPARISON OF CUMULATIVE TOTAL RETURN TO STOCKHOLDERS AMONG WAVE
SYSTEMS CORP., NASDAQ MARKET VALUE INDEX, AND COMPUTER RELATED
SERVICES INDEX FROM AUGUST 31, 1994 THROUGH DECEMBER 31, 1996.
Wave Systems Computer Related NASDAQ Market
Date Corp. Services Peer Group Value Index
- ---- ------------ ------------------- -------------
<C> <C> <C> <C>
9/30/94 100.00 98.24 98.90
12/30/94 60.00 93.67 96.91
3/31/95 26.25 79.56 99.77
6/30/95 67.50 76.44 109.15
9/29/95 65.00 90.51 121.61
12/29/95 55.00 79.09 120.64
3/29/96 68.75 105.08 126.21
6/28/96 40.00 112.77 135.56
9/30/96 30.00 152.55 139.30
12/31/96 43.75 122.40 145.85
</TABLE>
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act") requires the Company's directors and executive officers, and
persons owning more than ten percent of a registered class of the Company's
equity securities, to file with the Securities and Exchange Commission reports
of ownership and changes in ownership of equity securities of the Company. Such
persons are also required to furnish the Company with copies of all such forms.
Based solely upon a review of the copies of such forms furnished to the
Company and, in certain cases, written representations that no Form 5 filings
were required, the Company believes that, with respect to the 1996 fiscal year,
all required Section 16(a) filings were made, except that a Form 4 for John E.
McConnaughy, Jr., a director of the Company, was filed late in connection with
the sale of 30,000 shares of Class A Common Stock.
2. AMENDMENT TO THE RESTATED CERTIFICATE OF INCORPORATION TO INCREASE NUMBER OF
AUTHORIZED SHARES OF CLASS A COMMON STOCK
The Board of Directors recommends that the shareholders approve the
proposal to amend the Restated Certificate of Incorporation of the Company to
increase the number of authorized shares of Class A Common Stock from 25 million
to 50 million shares. At June 13, 1997, 14,337,525 shares of Class A Common
Stock and 5,512,255 shares of Class B Common Stock were outstanding. Thus,
including the number of shares of Class A Common Stock reserved for the
conversion of the Company's Class B Common Stock, the conversion of outstanding
shares of the Company's convertible preferred securities, and the exercise of
outstanding warrants and options, there were less that one thousand shares of
Class A Common Stock available for issuance (or delivery from the treasury of
the Company), and if the current proposal is adopted, this amount will be
increased to approximately 25 million shares. If the proposed amendment is
adopted, the first paragraph of Article Fourth of the Company's Restated
Certificate of Incorporation will be amended to read as follows:
FOURTH. (1) The total number of shares of stock which the Corporation shall
have authority to issue is Sixty Five Million (65,000,000) shares divided into
the following classes:
(a) Fifty Million (50,000,000) shares of Class A Common stock
with a par value of one cent ($0.01) per share;
(b) Thirteen Million (13,000,000) shares of Class B Common Stock
with a par value of one cent ($0.01) per share; and
(c) Two Million (2,000,000) shares of Preferred Stock with a par
value of one cent ($0.01) per share.
The increase in authorized shares of Class A Common Stock would permit the
Company to (i) sell shares for cash, (ii) continue the issuance of shares in
connection with the Company's 1994 Stock Option Plan, (iii) issue shares in
connection with the Company's 1996 Performance Stock Option Plan, (iv) issue
shares in connection with a proposed license and software development agreement
whereby the Company will receive a license to proprietary technology owned by a
third party in consideration for 500,000 shares of Class A Common Stock and
warrants to purchase up to 15% of the outstanding shares of the Company, (v)
reserve approximately 2,600,000 shares of Class A Common Stock shares in
connection with an agreement with certain holders of the Company's Class B
Common Stock who undertook not to convert their shares of Class B Common Stock
into shares of Class A Common Stock in order that the Company had a sufficient
number of shares of Class A Common Stock to reserve against the conversion of
convertible preferred stock that was issued on May 30, 1997, and (iv) use the
Class A Common Stock for other purposes, without the delay and expense of
calling a special meeting of shareholders for such purpose. If the proposed
increase in the amount of authorized shares of Class A Common Stock is approved,
the shares could be issued by action of the Board of Directors, at any time and
for any purpose, without further approval or action by the shareholders, subject
to the provisions of the Restated Certificate of Incorporation and other
applicable legal requirements. The Company currently plans to issue shares in
connection with the Company's stock option plans and upon conversion of the
Company's outstanding convertible securities.
The issuance of additional shares of Class A Common Stock in certain
transactions and under certain circumstances could have the effect of
discouraging or impeding an unfriendly attempt to acquire control of the
Company. Shares of Class A Common Stock could be issued to persons, firms or
entities known to be more favorable to management, thus creating possible voting
impediments and assisting management to retain their positions. The Board of
Directors is unaware of any pending or proposed effort to take control of the
Company or to change management and there have been no contacts or negotiations
with the Board of Directors in this connection.
Shareholders have no preemptive rights to purchase any additional
shares of Class A Common Stock which may be issued. Accordingly, the issuance of
additional shares would likely reduce the percentage interest of current
shareholders in the total outstanding shares. The terms of the additional shares
of Class A Common Stock will be identical to those of the currently outstanding
Class A Common Stock.
An affirmative vote of the holders of the majority of shares of common
stock present in person or by proxy and entitled to vote at the Annual Meeting
is required for the approval of the proposal to amend the Restated Certificate
of Incorporation of the Company to increase the number of authorized shares of
Class A Common Stock from 25 million to 50 million shares.
The Board of Directors recommends that the shareholders vote "FOR" this
proposed amendment to the Restated Certificate of Incorporation.
3. AMENDMENT TO THE 1994 EMPLOYEE STOCK OPTION PLAN
The Board of Directors adopted on March 6, 1997, subject to approval by the
stockholders, an amendment (the "1997 Amendment") to the Company's 1994 Employee
Stock Option Plan (the "1994 Employee Plan"). The 1997 Amendment increases by a
total of 1,000,000 the number of shares of the Company's Class A Common Stock
reserved for issuance under the 1994 Employee Plan. The Company has in the past
used, and intends in the future to use, stock options as an incentive device to
motivate and compensate its salaried officers and other key employees, and
believes that equity incentives represented by stock options enhance the
Company's ability to attract and retain needed personnel. As of March 31, 1997,
options to purchase an aggregate of 121,554 shares of Class A Common Stock had
been exercised under the 1994 Employee Plan, and options to purchase 1,518,930
shares of Class A Common Stock were outstanding under the 1994 Employee Plan.
Accordingly, a limited number of shares remained available for future grants
under the 1994 Employee Plan as of such date.
Under the terms of the 1994 Employee Plan, the Company is authorized to
grant stock options that qualify as incentive stock options ("ISOs") under
Section 422 of the Code and non-qualified stock options ("NQSOs") to salaried
officers and other key employees of the Company and its subsidiaries who are in
a position to affect materially the profitability and growth of the Company and
its subsidiaries, for up to an aggregate of 2,000,000 shares of Class A Common
Stock. The following summary of certain features of the 1994 Employee Plan is
qualified in its entirety by reference to the full text of the 1994 Employee
Plan, a copy of which will be furnished to any stockholder, upon written request
of such stockholder directed to Mr. James Stokes Hatch, Secretary, 480 Pleasant
Street, Lee, Massachusetts 01238.
Summary of the 1994 Employee Plan and the 1997 Amendment
General. The 1994 Employee Plan, as currently in effect, permits the
Company to grant ISOs and NQSOs to salaried officers and other key employees.
The 1994 Employee Plan terminates on January 1, 2004 and no options may be
granted after the termination date. The 1994 Employee Plan covers a maximum of
2,000,000 shares of Class A Common Stock, which will be increased to a total of
3,000,000 shares if the 1997 Amendment is approved (subject to share adjustments
as described below), which may be either authorized and unissued shares of Class
A Common Stock or shares held in the Company's treasury. When an option lapses,
expires, terminates or is forfeited, the related shares of Class A Common Stock
may be available for distribution in connection with future options. Adjustments
may be made in the number of shares reserved under the 1994 Employee Plan, in
the option price and in the number of shares subject to stock options, in the
event of a merger, reorganization, consolidation, recapitalization or stock
dividend, and in the event of certain other changes described in the 1994
Employee Plan or any other changes in the Company's corporate structure that
affect the Class A Common Stock or has an effect similar to any of the
foregoing. No employee may be granted options covering, in the aggregate, more
than 100,000 shares of Class A Common Stock in any fiscal year of the Company
(subject to adjustment as provided above).
Because grants under the 1994 Employee Plan are discretionary, the Company
cannot now determine the number of options to be received by any particular
current executive officer, by all current executive officers as a group or by
non-executive officer employees or directors as a group. The number of such
options and awards shall be determined by the Compensation Committee, pursuant
to the terms of the 1994 Employee Plan. It is currently estimated that there are
40 employees eligible to participate in the 1994 Employee Plan. For information
concerning the ownership of options by the Named Executive Officers, see
"Executive Compensation" above.
Administration. The 1994 Employee Plan is administered by the Compensation
Committee. The Compensation Committee is comprised of directors who are
non-employee directors within the meaning of Rule 16b-3 promulgated under the
Exchange Act. The Compensation Committee has the sole and complete discretion,
subject to the terms of the 1994 Employee Plan, to (i) select the individuals
from among the eligible employees of the Company and its subsidiaries to whom
options may be granted, (ii) determine the type of options to be granted and the
terms and conditions of any options granted, and (iii) determine the number of
shares of common stock subject to each option granted. In addition, the
Compensation Committee is authorized to interpret the 1994 Employee Plan, to
make and rescind rules and regulations related thereto, and to make all
determinations necessary or advisable for the administration of the 1994
Employee Plan.
Stock Options. Stock options granted under the 1994 Employee Plan may be
either ISOs or NQSOs. The aggregate fair market value (determined as of the time
of the grant of an ISO) of the Class A Common Stock with respect to which ISOs
are exercisable for the first time by a single optionee during any calendar year
under the Plan and any other stock option plan of the Company may not exceed
$100,000.
The exercise price for stock options shall be determined by the
Compensation Committee and shall be set forth in an option agreement entered
into with the optionee, provided, however, that the exercise price for an option
shall not be less than the fair market value of a share of Class A Common Stock
on the date of grant (110% in the case of an ISO granted to a 10% or more
stockholder). On June 13, 1997, the closing sale price of the Class A Common
Stock, as reported by Nasdaq, was $1.375 per share.
The Compensation Committee is to specify the time or times at which such
options will be exercisable, except that the termination date for any stock
option shall not exceed 10 years from the date of grant (five years in the case
of an ISO granted to a 10% or more stockholder). Options may be exercised within
three months following the retirement of an optionee and within twelve months
following the death or disability of an optionee; provided, that no option may
be exercised following the period of exercisability set forth in the agreement
related thereto.
Stock options may be exercised by an optionee in whole or in part by giving
notice to the Company and the exercise price therefor may be paid by delivering
cash or shares of unrestricted common stock having a fair market value equal to
the cash exercise price of the options being exercised. Optionees may also
utilize a cashless exercise feature which will enable them to exercise their
options without a concurrent payment of the option price, provided that the
purchased option shares are immediately sold by a designated broker and the
option price is paid directly to the Company out of the sale proceeds. Options
granted under the 1994 Employee Plan may also provide for the option holder to
receive an additional option (the "Reload Option") to purchase the number of
shares tendered by an optionee in exercising a stock option. The exercise price
of the Reload Option shall equal the fair market value of the Class A Common
Stock on the date of the grant of the Reload Option.
Stock options are nontransferable other than by will or by the laws of
descent and distribution, and stock options are exercisable during the
optionee's lifetime only by the optionee.
Change of Control. In the event of a "Change of Control," as defined in the
1994 Employee Plan, all options outstanding shall be immediately and fully
exercisable and shall become fully vested.
Amendments. The Board of Directors may terminate, suspend or amend the 1994
Employee Plan, provided that such amendment, suspension, or termination may not
affect the validity of the then outstanding options, and provided further that
the Board may not, without the approval of stockholders (i) increase the maximum
number of shares which may be issued pursuant to the provisions of the 1994
Employee Plan, (ii) change the class of individuals eligible to receive options
under the 1994 Employee Plan, (iii) materially increase the benefits accruing to
participants under the 1994 Employee Plan, or (iv) extend the term of the 1994
Employee Plan.
Withholding Taxes. The 1994 Employee Plan provides that the Company may
deduct from any distribution to an employee an amount equal to all federal,
state and local income taxes or other amounts as may be required by law to be
withheld.
Federal Income Tax Consequences
The following general description of federal income tax consequences is
based upon current statutes, regulations and interpretations. This description
is not intended to address specific tax consequences applicable to individual
participants.
Incentive Stock Options. No regular income tax consequences result from the
grant of an ISO or the exercise of an ISO by the employee, provided the employee
continues to hold the stock acquired on the exercise of an ISO for the requisite
holding periods described below. The employee will be taxed only upon the sale
or disposition of the stock acquired under an ISO and the gain recognized at
that time will be long-term capital gain. The holding period requirements
necessary for ISO treatment are as follows: (i) such shares may not be disposed
of within two years from the date the ISO is granted, and (ii) such shares must
be held for at least one year from the date the shares are transferred to the
employee upon the exercise of the ISO. In addition, to receive ISO treatment,
the option holder generally must be an employee of the Company or a subsidiary
of the Company from the date the stock option is granted until three months
before the date of exercise.
If an employee disposes of stock acquired upon exercise of an ISO before
expiration of the applicable holding periods, the employee will be taxed at
ordinary income tax rates on the date of disposition measured by the lesser of:
(i) the fair market value of the stock on the date of exercise of the ISO minus
the option price or (ii) the amount realized on disposition minus the option
price, and the Company will receive a corresponding income tax deduction. In the
case of a sale where a loss, if sustained, would be recognized, the amount of
the optionee's income, and the amount of the Company's corresponding expense
deduction, will not exceed the difference between the sale price and the
adjusted basis of the shares.
The amount by which the fair market value of shares received upon exercise
of an ISO exceeds the option price constitutes an item of tax preference that
may be subject to the alternative minimum tax. If an employee is subject to the
alternative minimum tax as a result of the exercise of an ISO, for purposes of
calculating the gain on a disposition of the stock solely for purposes of the
alternative minimum tax, the amount treated as a preference item will be added
to his tax basis for the stock. Gain realized by an employee upon the
disposition of stock acquired through the exercise of an ISO is taxable in the
year of disposition, but such income is not subject to income tax withholding if
the requisite holding periods have been satisfied. If either of the holding
periods is not satisfied, however, the disposition of the stock may result in
taxable income to the employee as additional compensation which is subject to
withholding.
Non-Qualified Stock Options. With regard to NQSOs, the employee will
recognize ordinary income at the time of the exercise of the option in an amount
equal to the difference between the exercise price and the fair market value of
the shares received on the date of exercise. Such income will be subject to
withholding. When the employee disposes of shares acquired upon the exercise of
the option, any amount received in excess of the fair market value of the shares
on the date of exercise will be treated as long-term or short-term capital gain,
depending upon the holding period of the shares. If the amount received upon
sale is less than the fair market value of the shares on the date of exercise,
the loss will be treated as long-term or short-term capital loss, depending upon
the holding period of the shares.
Section 162(m) of the Code generally prohibits the Company from deducting
compensation of a "covered employee" to the extent the compensation exceeds
$1,000,000 per year. For this purpose, "covered employee" means the chief
executive officer of the Company and the four other highest compensated officers
of the Company. Certain performance-based compensation (including, under certain
circumstances, stock option compensation) will not be subject to, and will be
disregarded in applying, the $1,000,000 deduction limitation. It is the
Company's intention that options granted under the 1994 Employee Plan qualify as
"performance-based" compensation under Section 162(m).
Recommendation and Vote
An affirmative vote of the holders of a majority of shares of common stock
present in person or by proxy and entitled to vote at the Annual Meeting is
required to approve the 1997 Amendment. If no direction is given to the
contrary, all proxies received by the Board of Directors will be voted "FOR"
approval of the 1997 Amendment.
The Board of Directors recommends that the stockholders vote "FOR" approval
of the 1997 Amendment.
4. APPROVAL OF THE 1996 PERFORMANCE STOCK OPTION PLAN
The Board of Directors adopted on September 5, 1996, subject to approval by
the stockholders, the 1996 Performance Stock Option Plan (the "Performance
Plan"). The Performance Plan reserves 800,000 shares of Class A Common Stock to
be granted to employees of the Company or any of its subsidiaries, consultants
and others to purchase shares of the Company's Class A Common Stock. The
Performance Plan is designed to enable the Company to attract and retain the
best available personnel, to provide additional incentive to employees,
consultants and others, to promote the success of the Company and reward those
who are contributing to the success of the Company as it commercializes its
technology.
Under the terms of the Performance Plan, the Company is authorized to grant
options that qualify as incentive stock options or ISOs under Section 422 of the
Internal Revenue Code and non-qualified options or NQSOs to employees of the
Company or any of its subsidiaries, to consultants and others to purchase shares
of the Company's capital stock. The options pursuant to the Performance Plan are
a matter of separate inducement and are not in lieu of any salary or other
compensation for services. The following summary of certain features of the
Performance Plan is qualified in its entirety by reference to the full text of
the Performance Plan, a copy of which will be furnished to any stockholder, upon
written request of such stockholder directed to Mr. James Stokes Hatch,
Secretary, 480 Pleasant Street, Lee, Massachusetts 01238.
Summary of the Performance Plan
General. The Performance Plan permits the Company to grant ISOs and NQSOs
to employees, consultants and others. The Performance Plan is designed to create
specific incentives to achieve specifically defined performance benchmarks by
providing certain key personnel with options that will vest upon the occurrence
of such specifically defined performance benchmarks. The Performance Plan
terminates at the close of business on September 5, 1996, unless sooner
terminated by action of the Compensation Committee, or the Board of Directors if
there is no Compensation Committee. The Performance Plan covers a maximum of
800,000 shares of the authorized Class A Common Stock, which may be either
authorized and unissued shares of Class A Common Stock or shares of Class A
Common Stock held in the Company's treasury, or both, at the discretion of the
Company. When any outstanding option or portion thereof expires, is canceled, is
forfeited or is otherwise terminated for any reason without having been
exercised or payment having been made in respect of the entire option, the
related shares of Class A Common Stock may be available for distribution in
connection with other options granted under the Performance Plan. Adjustments
may be made in the number of shares reserved under the Performance Plan, in the
option price and in the number of shares subject to stock options and shares of
the Company may be appropriately substituted for new shares in the event of any
stock dividend, stock split, combination or exchange of shares, recapitalization
or other change in the capital structure of the Company, corporate separation or
division, sale by the Company of all or a substantial portion of its assets,
rights offering, merger, consolidation, reorganization or partial complete
liquidation, or any other corporate transaction or event having an effect
similar to any of the foregoing.
Because grants under the Performance Plan are discretionary, the Company
cannot now determine the number of options to be received by any particular
person. The number of such options shall be determined by the Compensation
Committee, or the Board of Directors if there is no Compensation Committee,
pursuant to the terms of the Performance Plan. It is currently estimated that 10
employees are eligible to participate in the Performance Plan.
Administration. The Performance Plan is administered by the Compensation
Committee, or the Board of Directors if there is no Compensation Committee. The
Compensation Committee is comprised of no fewer than two members of the Board of
Directors, who are non-employee directors within the meaning of Rule 16b-3
promulgated under the Exchange Act. The Compensation Committee has the sole and
complete discretion, subject to the terms of the Performance Plan, to (i) select
employees of the Company, consultants, and others as recipients of options; (ii)
determine the number and type of options to be granted; (iii) determine the
terms and conditions of any options granted; (iv) adopt, alter and repeal such
administrative rules, guidelines and practices governing the Performance Plan as
it shall deem advisable; (v) interpret the terms and provisions of the
Performance Plan and any option granted and any agreements relating thereto; and
(vi) otherwise supervise the administration of the Performance Plan.
Stock Options. Stock options granted under the Performance Plan may be
either ISOs or NQSOs. If the aggregate fair market value (determined as of the
time of the grant of an ISO) of shares with respect to which ISOs are
exercisable for the first time by a single optionee during any calendar year
under the Performance Plan and any other stock option plan of the Company and
any parent or any subsidiary of the Company exceeds $100,000, any options which
otherwise qualify as Incentive Options, to the extent of the excess, will be
treated as NQSOs.
The exercise price for stock options shall be determined by the
Compensation Committee, or the Board of Directors if there is no Compensation
Committee, and shall be set forth in an option agreement entered into with the
optionee, provided, however, that the exercise price for an option shall not be
less than the fair market value of a share of Class A Common Stock on the date
of grant (110% in the case of an ISO granted to a 10% or more stockholder). On
June 13, 1997, the closing sale price of the Class A Common Stock, as reported
by Nasdaq, was $1.375 per share.
The Compensation Committee is to specify the time or times at which such
options will be exercisable, except that the termination date for any stock
option shall not exceed 10 years from the date of grant (five years in the case
of an ISO granted to a 10% or more stockholder). Options may be exercised within
three months following the retirement of an optionee and within twelve months
following the death or disability of an optionee, provided, that no option may
be exercised following the period of exercisability set forth in the agreement
related thereto. Except as otherwise determined by the Compensation Committee if
an optionee voluntarily terminates his or her employment, or is discharged, any
option granted under the Performance Plan shall be canceled and the optionee
shall have no further rights to exercise any such option and all of the
optionee's rights shall terminate as of the effective date of such termination
of employment.
Stock options may be exercised by an optionee in whole or in part by giving
written notice to the Secretary of the Company and the exercise price therefor
may be paid by delivering cash or shares of unrestricted Class A Common Stock
having a fair market value equal to the cash exercise price of the options being
exercised. If the Company in its sole discretion establishes other cashless
exercise features optionees may also exercise their options without a concurrent
payment of the option price, provided that the purchased option shares are
immediately sold by a designated broker and the option price is paid directly to
the Company out of the sale proceeds.
Stock options are nontransferable other than by will or by the laws of
descent and distribution, and stock options are exercisable during the
optionee's lifetime only by the optionee.
Change of Control. In the event of a "Change of Control," as defined in the
Performance Plan, all options outstanding shall be immediately and fully
exercisable during the remaining term thereof, shall become fully vested and
shall remain so, whether or not the optionee to whom such options have been
granted remains an employee of the company or its subsidiaries.
Amendments. The Compensation Committee may terminate, suspend or amend the
Performance Plan, provided that such amendment, suspension, or termination may
not affect the validity of the then outstanding options, and provided further
that the Compensation Committee may not, without the approval of stockholders
(i) increase the total number of shares which may be issued under the
Performance Plan, (ii) modify the provisions of the Performance Plan relating to
eligibility, (iii) materially increase the benefits accruing to participants
under the Performance Plan, or (iv) extend the maximum period of the Performance
Plan.
Withholding Taxes. The Performance Plan provides that the Company may
deduct from any distribution to an employee, consultant or other an amount equal
to all federal, state and local income taxes or other amounts as may be required
by law to be withheld.
Federal Income Tax Consequences
The following general description of federal income tax consequences is
based upon current statutes, regulations and interpretations. This description
is not intended to address specific tax consequences applicable to individual
participants.
Incentive Stock Options. No regular income tax consequences result from the
grant of an ISO or the exercise of an ISO by the employee, provided the employee
continues to hold the stock acquired on the exercise of an ISO for the requisite
holding periods described below. The employee will be taxed only upon the sale
or disposition of the stock acquired under an ISO and the gain recognized at
that time will be long-term capital gain. The holding period requirements
necessary for ISO treatment are as follows: (i) such shares may not be disposed
of within two years from the date the ISO is granted, and (ii) such shares must
be held for at least one year from the date the shares are transferred to the
employee upon the exercise of the ISO. In addition, to receive ISO treatment,
the option holder generally must be an employee of the Company or a subsidiary
of the Company from the date the stock option is granted until three months
before the date of exercise.
If an employee disposes of stock acquired upon exercise of an ISO before
expiration of the applicable holding periods, the employee will be taxed at
ordinary income tax rates on the date of disposition measured by the lesser of:
(i) the fair market value of the stock on the date of exercise of the ISO minus
the option price or (ii) the amount realized on disposition minus the option
price, and the Company will receive a corresponding income tax deduction. In the
case of a sale where a loss, if sustained, would be recognized, the amount of
the optionee's income, and the amount of the Company's corresponding expense
deduction, will not exceed the difference between the sale price and the
adjusted basis of the shares.
The amount by which the fair market value of shares received upon exercise
of an ISO exceeds the option price constitutes an item of tax preference that
may be subject to the alternative minimum tax. If an employee is subject to the
alternative minimum tax as a result of the exercise of an ISO, for purposes of
calculating the gain on a disposition of the stock solely for purposes of the
alternative minimum tax, the amount treated as a preference item will be added
to his tax basis for the stock. Gain realized by an employee upon the
disposition of stock acquired through the exercise of an ISO is taxable in the
year of disposition, but such income is not subject to income tax withholding if
the requisite holding periods have been satisfied. If either of the holding
periods is not satisfied, however, the disposition of the stock may result in
taxable income to the employee as additional compensation which is subject to
withholding.
Non-Qualified Stock Options. With regard to NQSOs, the employee will
recognize ordinary income at the time of the exercise of the option in an amount
equal to the difference between the exercise price and the fair market value of
the shares received on the date of exercise. Such income will be subject to
withholding. When the employee disposes of shares acquired upon the exercise of
the option, any amount received in excess of the fair market value of the shares
on the date of exercise will be treated as long-term or short-term capital gain,
depending upon the holding period of the shares. If the amount received upon
sale is less than the fair market value of the shares on the date of exercise,
the loss will be treated as long-term or short-term capital loss, depending upon
the holding period of the shares
Section 162(m) of the Code generally prohibits the Company from deducting
compensation of a "covered employee" to the extent the compensation exceeds
$1,000,000 per year. For this purpose, "covered employee" means the chief
executive officer of the Company and the four other highest compensated officers
of the Company. Certain performance-based compensation (including, under certain
circumstances, stock option compensation) will not be subject to, and will be
disregarded in applying, the $1,000,000 deduction limitation. It is the
Company's intention that options granted under the Performance Plan qualify as
"performance-based" compensation under Section 162(m).
Recommendation and Vote
An affirmative vote of the holders of a majority of shares of common stock
present in person or by proxy and entitled to vote at the Annual Meeting is
required to approve the Performance Plan. Grants made prior to such stockholder
approval shall be contingent on such approval. If no direction is given to the
contrary, all proxies received by the Board of Directors will be voted "FOR"
approval of the Performance Plan.
The Board of Directors recommends that the stockholders vote "FOR" approval
of the Performance Plan.
5. APPROVAL TO PERMIT THE ISSUANCE TO THE HOLDER OF THE OUTSTANDING SHARES OF
SERIES C CONVERTIBLE PREFERRED STOCK AND SERIES D CONVERTIBLE PREFERRED STOCK
THAT NUMBER OF SHARES OF CLASS A COMMON STOCK THAT EQUALS OR EXCEEDS 20% OF THE
NUMBER OF OUTSTANDING COMMON STOCK OF THE COMPANY AS AT DECEMBER 27, 1996 OR MAY
30, 1997, RESPECTIVELY.
The Board of Directors recommends that the stockholders approve a proposal
to permit the issuance of that number of shares of Class A Common Stock, which
shall constitute 20% or more of the Company's outstanding common stock, to the
holders of certain convertible preferred stock issued by the Company.
On December 27, 1996 the Company issued 150,000 shares of Series C
Convertible Preferred Stock, at a price of $20 per share (the "Series C
Preferred Stock"), for an aggregate of $3,000,000. The shares were sold to one
accredited investor (the "Preferred Shareholder") pursuant to Regulation D
promulgated under the Securities Act of 1933 (the "Act"). The Series C
Convertible Preferred Stock is convertible into the Class A Common Stock of the
Company at an effective conversion price of the lower of (i) $2.31, or (ii) 80%
of the average closing bid price on the Nasdaq National Market System of the
Company's Class A Common Stock for the five trading days immediately preceding
the Date of Conversion, defined in the certificate of designation filed on
December 27, 1996 to designate the Series C Preferred Stock (the "Series C
Certificate of Designation").
On May 30, 1997 the Company issued 80,000 shares of Series D Convertible
Preferred Stock, at a price of $20 per share (the "Series D Preferred Stock"),
for an aggregate of $1,600,000. The shares were sold to the Preferred
Shareholder pursuant to Regulation D promulgated under the Act. The Series D
Convertible Preferred Stock is convertible into the Class A Common Stock of the
Company at an effective conversion price of the lower of (i) $1.35, or (ii) 80%
of the average closing bid price on the Nasdaq National Market System of the
Company's Class A Common Stock for the five trading days immediately preceding
the Date of Conversion, defined in the certificate of designation filed on May
30, 1997, which is materially the same as the Series C Certificate of
Designation, to designate the Series D Preferred Stock (collectively with the
Series C Certificate of Designation, the "Certificates of Designation").
Pursuant to the Certificates of Designation and subject to the requirements
of Rule 4460(i) of the NASDAQ National Market shareholder approval is required
if the total number of shares of the Class A Common Stock issuable upon
conversion of either the Series C Preferred Stock or the Series D Preferred
Stock equals or exceeds 20% of the outstanding common stock as at either
December 27, 1996 or May 30, 1997, respectively. Pursuant to the Certificates of
Designation, if shareholder approval is not granted prior to such time when the
Preferred Shareholder shall be able to convert its Series C Preferred Stock and
Series D Preferred Stock into that number of shares of Class A Common Stock
equal to, or greater than, 20% of the number of shares of common stock
outstanding at either December 27, 1996 or May 30, 1997, respectively, the
Company may be required to redeem that number of unconverted shares of Series C
Preferred Stock and Series D Preferred Stock at a premium from legally available
capital (the "Redemption"). The Certificates of Designation provide that the
Preferred Stockholder has the option to demand either the Redemption or that the
Company submit a proposal to the shareholders to approve the issuance of that
number of shares of Class A Common Stock to the Preferred Stockholder upon
conversion of the remaining shares of Series C Preferred Stock and Series D
Preferred Stock that would equal or exceed 20% of the number of shares of common
stock outstanding as at either December 27, 1996 or May 30, 1997, respectively.
An affirmative vote of a majority of the total votes cast on this proposal
by the holders of the shares of common stock present in person or by proxy and
entitled to vote at the Annual Meeting is required for the approval of the
proposal to permit the issuance of that number of shares of Class A Common Stock
issuable upon the conversion of Series C Preferred Stock or Series D Preferred
Stock that would equal or exceed 20% of the number of Shares of Common Stock
outstanding as at either December 27, 1996 or May 30, 1997, respectively, to the
Preferred Stockholder.
The Board of Directors recommends that the shareholders vote "FOR" this
proposal.
6. RATIFICATION OF APPOINTMENT OF INDEPENDENT AUDITORS
The Board of Directors has appointed KPMG Peat Marwick LLP to act as the
Company's independent auditors for the year ending December 31, 1997, subject to
the ratification of such appointment by the stockholders at the Annual Meeting.
If no direction is given to the contrary, all proxies received by the Board of
Directors will be voted "FOR" ratification of the appointment of KPMG Peat
Marwick LLP as the Company's independent auditors for the year ending December
31, 1997.
Representatives of KPMG Peat Marwick LLP are expected to be present at the
Annual Meeting and will be available to respond to appropriate questions from
stockholders and to make a statement if they desire to do so.
The Board of Directors recommends that the stockholders vote "FOR"
ratification of the appointment of KPMG Peat Marwick LLP as the Company's
independent auditors for the current fiscal year.
OTHER MATTERS
As of the date of this Proxy Statement, the Board of Directors does not
know of any other matters which may come before the Annual Meeting. If any other
matters properly come before the meeting, the accompanying proxy confers
discretionary authority with respect to any such matters, and the persons named
in the accompanying proxy intend to vote in accordance with their best judgment
on such matters.
All expenses in connection with the solicitation of proxies will be borne
by the Company. In addition to this solicitation, officers, directors and
regular employees of the Company, without any additional compensation, may
solicit proxies by mail, telephone or personal contact. Kissel-Blake Inc. has
been retained to assist in the solicitation of proxies for a fee of
approximately $12,000 plus reasonable out-of-pocket expenses. The Company will,
upon request, reimburse brokerage houses and other nominees for their reasonable
expenses in sending proxy materials to their principals.
<PAGE>
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed by the Company with the Securities and
Exchange Commission are incorporated by reference in this Proxy Statement:
(a) Annual Report on Form 10-K, as amended, of the Company for the year
ended December 31, 1997; and
(b) Quarterly Report on Form 10-Q of the Company for the quarter ended
March 31, 1997.
Any statement contained in a document incorporated or deemed incorporated
by reference herein shall be deemed to be modified or superseded for purposes of
this Proxy Statement to the extent that a statement contained herein, or in any
subsequently filed document that also is 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 the Proxy Statement.
This Proxy Statement incorporates by reference documents which are not
presented herein or delivered herewith. Copies of these documents (other than
certain exhibits to such documents) are available to each person, including any
beneficial owner, to whom a copy of this Proxy Statement is delivered, without
charge, upon written or oral request. Requests should be directed to Wave
Systems Corp., James Stokes Hatch, Secretary, 480 Pleasant Street, Lee,
Massachusetts 01238.
STOCKHOLDER PROPOSALS
Stockholder proposals for inclusion in the proxy materials for the 1997
Annual Meeting should be addressed to the Company's Secretary, 480 Pleasant
Street, Lee, Massachusetts 01238 and must be received no later than December 31,
1997.
By Order of the Board of Directors,
/s/ James Stokes Hatch
James Stokes Hatch
Secretary
New York, New York
June 23, 1997
<PAGE>
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PROXY
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Wave Systems Corp.
For Annual Meeting of the Shareholders of Wave Systems Corp.
This proxy is solicited on behalf of the Board of Directors
The undersigned hereby appoints Peter J. Sprague, and John E. McConnaughy,
Jr., and each of them, with full power of substitution, as proxies to vote the
shares which the undersigned is entitled to vote at the Annual Meeting of the
Company to be held at the offices of the Company, 540 Madison Avenue, New York,
New York, on Thursday, July 17, 1997 commencing at 4:00 PM and at any
adjournments thereof.
(Continued and to be signed on Reverse Side)
Please date, sign and mail your proxy card
back as soon as possible!
AnnualMeeting of Shareholders
WAVE SYSTEMS CORP.
July 17, 1997
Please Detach and mail in the Envelope Provided
[X] Please mark your votes and in this example.
1. Election of directors: VOTE FOR VOTE WITHHELD FOR Peter J. Sprague,
John E. Bagalay, Jr., Philippe Bertin, George Gilder, John E. McConnaughy, Jr.
and Gene W. Ray.
FOR all nominees listed at right, excpet vote withheld from following nominees
(if any):
- --------------------------------------------------------------------------------
2. FOR AGAINST ABSTAIN Proposal to approve an Amendment to the Restated
Certificate of Incorporation of the Company to increase the number of shares of
Class A Common Stock that the Company shall have authority to issue from 25
million to 50 million shares.
3. FOR AGAINST ABSTAIN Proposal to amend the Company's 1994 Employee Stock
Option Plan to increase the number of shares of Class A Common Stock reserved
for issuance thereunder by 1,000,000 shares.
4. FOR AGAINST ABSTAIN Proposal to approve the Company's 1996 Performance Stock
Option Plan;
5. FOR AGAINST ABSTAIN Proposal to permit the issuance to the holder of the
outstanding shares of the Series C Convertible Preferred Stock and the Series D
Convertible Preferred Stock that number of shares of Class A Common Stock that
equals or exceeds 20 % of that number of shares of outstanding common stock of
the Company as at December 27, 1996 or May 30, 1997, respectively.
6. FOR AGAINST ABSTAIN Proposal to ratify the appointment of KPMG Peat Marwick
LLP as the Company's independent auditors for the year ending December 31, 1997.
7. In their discretion, the proxies are authorized to vote upon such other
business as may properly come before the meeting.
This proxy when properly executed will be valid in the manner directed herein by
the undersigned stockholder. If no direction is made, this proxy will be voted
FOR Proposals 1,2,3,4,5 and 6.
Dated: ____________, 1997
----------------------------------
Signature
NOTE: This proxy must be signed exactly as name appears hereon. Executors,
administrators, trustees, etc. should give full title as such. For joint
accounts, each owner should sign. If the signer is a corporation, please sign
full corporate name by duly authorized officer.
