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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____________ to _____________
Commission File Number 0-24752
Wave Systems Corp.
(Exact name of registrant as specified in its charter)
Delaware 3-3477246
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
480 Pleasant Street
Lee, Massachusetts 01238
(Address of principal executive offices)
(Zip code)
(413) 243-1600
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes [ X ] No [ ]
The number of shares outstanding of each of the issuer's classes of
common stock as of March 31, 1998: 23,065,419 shares of Class A Common Stock and
4,243,896 shares of Class B Common Stock.
<PAGE>
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Consolidated Balance Sheets
(Unaudited)
ASSETS March 31, 1998 December 31, 1997
(Unaudited)
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Current assets:
Cash and cash equivalents $ 2,267,908 $ 758,721
------------ -----------
Total current assets 2,267,908 758,721
Property, equipment, and leasehold
improvements less accumulated depreciation
and amortization of $1,046,731 in 1998 and
$964,184 in 1997 854,129 849,276
Other assets 73,049 70,216
------------ -----------
$ 3,195,086 $ 1,678,213
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
Current liabilities:
Accounts payable and accrued expenses $ 1,300,978 $ 1,427,762
Deferred revenue 797,025 -
Note payable 533,524 522,124
------------ -----------
Total current liabilities 2,631,527 1,949,886
------------ -----------
Series A Cumulative Redeemable Preferred Stock,
$.01 par value, 360 shares issued and outstanding
in 1998 and 1997; involuntary liquidation value,
$477,001 477,001 471,601
------------ -----------
Stockholders' equity (deficit):
Series A Cumulative Redeemable Preferred
Stock, $.01 par value, 360 shares issued
and outstanding - -
Series G Convertible Preferred Stock, $20 par value,
150,000 shares issued and outstanding in 1998 1,941,642 -
Common stock, $.01 par value. Authorized
50,000,000 shares as Class A; issued
and outstanding 23,065,419 in 1998 and
22,874,639 in 1997 230,655 228,747
Common stock, $.01 par value. Authorized
13,000,000 shares as Class B; issued
and outstanding 4,243,896 in 1998 and
4,421,953 in 1997 42,439 44,220
Capital in excess of par 45,365,577 44,520,246
Deficit accumulated during the development
stage (47,281,731) (45,324,463)
Less: note receivable from stockholder,
including accrued interest of $88,849 (212,024) (212,024)
------------ -----------
Total stockholders' equity (deficit) 86,558 (743,274)
------------ -----------
$ 3,195,086 $ 1,678,213
============== ==============
See accompanying notes to unaudited consolidated financial statements.
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<PAGE>
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Consolidated Statements of Operations
(Unaudited)
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Three months ended (inception) through
March 31, 1998 March 31, 1997 March 31, 1998
------------- ------------- --------------
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Revenues 8,613 415 20,783
------------- ------------- --------------
Operating expenses:
Selling, general, and administrative 1,420,875 1,686,743 28,857,381
Write-off of goodwill - - 769,886
Aladdin license and in-process research
and development expenses - - 3,889,000
Research and development 538,821 906,783 15,284,634
------------- ------------- --------------
1,959,696 2,593,526 48,800,901
------------- ------------- --------------
License fee - - 1,000,000
Interest income 5,215 25,882 1,063,547
Interest expense (11,400) (11,031) (577,880)
Other income - - 12,720
------------- ------------- --------------
(6,185) 14,851 1,498,387
------------- ------------- --------------
Net loss (1,957,268) (2,578,260) (47,281,731)
Accrued dividends on preferred stock
(including accretion of assured incremental
yield on preferred stock of $124,995 in 1998,
$721,476 in 1997, and $1,797,995 cumulative) 137,792 1,134,877 3,616,287
------------- ------------- --------------
Net loss to common stockholders (2,095,060) (3,713,137) (50,898,018)
------------- ------------- --------------
Weighted average number of common
shares outstanding during the period 27,358,558 17,893,011 10,205,205
Loss per common share (0.08) (0.21) (4.99)
------------- ------------- --------------
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
<PAGE>
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Consolidated Statements of Cash Flows
(Unaudited)
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Period from February 12, 1988
Three months ended (inception) through
March 31, 1998 March 31,1997 March 31, 1998
--------------- ---------------- ----------------
Cash flows from operating activities:
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Net loss (1,957,268) (2,578,260) (47,281,731)
Adjustments to reconcile net loss to
net cash used in operating activities:
Write-off of goodwill - - 769,886
Depreciation and amortization 82,547 132,418 1,269,915
Reserve for short-term loans to affiliates - - 1,672,934
Accrued interest on marketable securities - - (106,962)
Non-cash expenses:
Common stock issued in connection with
License and Cross-license Agreement - - 1,124,960
Accretion of assured incremental yield on
convertible debt - - 119,000
Common stock issued for services rendered
and interest on borrowings 15,000 168,750 2,692,058
Issuance of warrants to Aladdin - - 2,939,000
Accrued interest on note payable 11,400 11,031 77,524
Preferred stock issued for services rendered - - 265,600
Compensation associated with issuance of
stock options - - 399,740
Amortization of deferred compensation - - 398,660
Amortization of discount on notes payable - - 166,253
Common stock issued by principal stockholder
for services rendered - - 565,250
Changes in assets and liabilities
Increase in accrued interest on note receivable - (4,329) (88,850)
Decrease in prepaid expenses and other receivables - 1,806 -
Increase (decrease) in other assets (2,833) 22,430 (87,965)
Increase (decrease) in accounts
payable and accrued expenses (126,784) (50,694) 1,438,490
Increase in deferred revenue 797,025 - 797,025
--------------------------------------------------
Net cash used in operating activities (1,180,913) (2,296,848) (32,869,213)
--------------------------------------------------
Cash flows from investing activities:
Acquisition of property and equipment (87,400) (165,941) (1,894,518)
Short-term loans to affiliates - - (1,672,934)
Organizational costs - - (14,966)
Purchase of marketable securities-held to maturity - - (27,546,769)
Maturity of marketable securities-held to maturity - - 27,653,731
--------------------------------------------------
Net cash used in investing activities (87,400) (165,941) (3,475,456)
--------------------------------------------------
Cash flows from financing activities:
Net proceeds from issuance of common stock - 98,195 24,409,471
Net proceeds from issuance of preferred stock and warrants 2,777,500 - 12,283,027
Sale of warrants - - 4
Note receivable from stockholder - - (123,175)
Proceeds from notes payable and warants to stockholders - - 2,083,972
Repayments of notes payable to stockholders - - (1,069,972)
Proceeds from notes payable and warrants - - 1,284,250
Repayments of note payable - - (255,000)
Advances from stockholder - - 227,598
Repayments of advances from stockholder - - (227,598)
--------------------------------------------------
Net cash provided by financing activities 2,777,500 98,195 38,612,577
--------------------------------------------------
Net increase (decrease) in cash and cash equivalents 1,509,187 (2,364,594) 2,267,908
Cash and cash equivalents at beginning of period 758,721 4,064,324 -
--------------------------------------------------
Cash and cash equivalents at end of period $2,267,908 $1,699,730 $2,267,908
--------------------------------------------------
See accompanying notes to unaudited consolidated financial statements.
</TABLE>
<PAGE>
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Consolidated Statements of Stockholders' Equity (Deficit)
(Unaudited)
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Deficit
accumulated Note
Series G Class A Common Class B Common Capital in during the receivable
Convertible Stock Stock excess development from
Preferred Stock Shares Amount Shares Amount of par value stage stockholder Total
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<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1997 22,874,639 228,747 4,421,953 44,220 44,520,246 (45,324,463) (212,024) (743,274)
Exchange of Class B
stock for Class A stock 178,057 1,781 (178,057) (1,781)
Shares issued at
approximately $1 per
share as compensation
for services rendered 12,723 127 14,873 15,000
Accrued dividend
on preferred stock
including accretion
of assured incremental
yield 132,392 (137,792) (5,400)
Issuance of Series
G Convertible Preferred
stock and common stock
warrants, net of issuance
costs of $222,500 and
assured incremental yield
of $750,000 1,809,250 218,250 2,027,500
Assured incremental yield
on issuance of Series G
Convertible Preferred stock 750,000 750,000
Net loss
(1,957,268) (1,957,268)
--------------------------------------------------------------------------------------------------------
$ 1,941,642 23,065,419 230,655 4,243,896 42,439 45,365,577 (47,281,731) (212,024) 86,558
</TABLE>
<PAGE>
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes To Consolidated Financial Statements
March 31, 1998 and 1997
In the opinion of management, the accompanying unaudited condensed consolidated
financial statements contain all adjustments (consisting only of normal
recurring adjustments) necessary to present fairly the financial position of the
Company as of March 31, 1998 and the results of its operations and cash flows
for the three months ended March 31, 1998. Such financial statements have been
condensed in accordance with the applicable regulations of the Securities and
Exchange Commission.
Certain information and footnote disclosures normally included in financial
statements prepared in accordance with generally accepted accounting principles
have been omitted. It is suggested that these condensed consolidated financial
statements be read in conjunction with the Company's audited financial
statements and notes thereto for the year ended December 31, 1997, included in
its Form 10-K filed in March 1998. The results of operations for the three
months ended March 31, 1998 are not necessarily indicative of the operating
results for the full year.
1. Loss per Share:
Loss per share is computed based on the weighted average number of common shares
outstanding. The inclusion of common stock equivalents (warrants, options and
convertible preferred stock) in this computation would be antidilutive.
2. Going Concern:
The Company has incurred significant losses in current and prior periods.
Management intends to continue to devote resources toward the research,
development and marketing of its products in order to generate future revenues
from licensing and product sales. In addition, the Company is actively pursuing
additional short and long term financing sources, including debt and equity
financing. Although management believes that it can successfully research,
develop and market its products and obtain additional financing, there can be no
assurance that it will be able to do so.
The Company anticipates that its existing capital resources may be adequate to
satisfy its capital requirements into the second quarter of 1998. In order to
continue operations, however, the Company will need to raise additional funds
through public or private financings. The Company has no current commitment to
obtain additional funds and is unable to state the amount or source of such
additional funds. These uncertainties raise doubt about the Company's ability to
continue as a going concern.
3. Stock Options and Grants:
During the quarter ended March 31, 1998, the Company granted to employees
options to purchase a total of 736,450 shares of Class A Common Stock at prices
ranging from $1.09 to $1.90 per share (the market price on the date of the
grant). Such options are contingent upon the approval of the compensation
committee and the Board of Directors.
4. Capital Stock:
In March of 1998, the Company raised $2,777,500, net of cash issuance costs of
$222,500 in connection with the offering ($218,250 of the total $2,777,500
related to value ascribed to warrants issued), through the placement of 150,000
shares of Series G Convertible Preferred Stock ("the Stock") pursuant to
Regulation D promulgated under the Securities Act of 1933, as amended. The Stock
has a stated value of $20 per share, which accrues dividends payable quarterly
at 6% per annum. In addition to the Stock, the Company also issued warrants to
purchase 225,000 shares of Class A common stock as part of the aforementioned
transaction which were valued at $218,250. The Company anticipates that this
funding will satisfy its capital requirements through June 30, 1998.
Any unpaid dividends become due on the date conversion takes place. The Series G
Convertible Preferred Stock ranks senior to the Company's common stock and
junior to the Series A Cumulative Redeemable Preferred Stock. The Stock is
convertible by the holder into the Company's Class A common stock based on the
market price of the Company's Class A common stock at the time of conversion.
Conversion can occur at the earlier of 90 days after the original issue date or
the date the Securities and Exchange Commission declares a registration
statement, filed to register the Class A common stock received upon conversion,
effective.
The Stock is convertible at the lesser of (a) the average per share market value
for the five trading days immediately preceding the original issue date and (b)
80 percent of the average of the five (5) lowest trade prices during the
twenty-five calendar days immediately preceding the conversion date.
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations
Overview
Wave Systems Corp. ("Wave" or the "Company) has completed a 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
fees, royalties, and product sales as well as on continued product development.
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. During this
period, the Company designed and successfully developed its proprietary
integrated circuit technology, WaveMeter, WaveNet and other necessary components
of the Wave System. During 1996 the Company also devoted substantial efforts and
resources to designing and developing the technology required to make the Wave
System compatible with the distribution of electronic content on the Web.
Concurrent with its research and development activities, the Company has devoted
increased resources to market development and other related activities. From
inception through March 31, 1998, the Company has realized only minimal
operating revenues, and does not anticipate significant revenues in the near
future. There are numerous risks that could adversely affect the Company's
efforts to achieve profitability.
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 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 has commercialized this
technology through its Internet Commerce website, the Great Stuff Network. To
date, the Company has recognized a minimal amount of revenue from this
technology.
In order to seek to achieve broad market acceptance of the Wave System, the
Company pursues strategic relationships with major personal computer
manufacturers and promotes the use of the Wave System to electronic content
owners, particularly developers and distributors of entertainment and
educational software. The Company believes that the compatibility with the Web
provides the foundation for the broad acceptance of the Wave System.
Specifically, the Company believes that the WaveMeter can be the foundation for
a "client-side subscriber management system" that is independent of a delivery
network. 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. However, to date, the Company has not been successful in achieving any
significant market acceptance of the Wave System.
The Company also received a payment of $750,000 in January 1998 pursuant to a
modification of the joint venture agreement with Internet Technology Group,
PLC., a United Kingdom Company. Such amount was recorded as deferred revenue.
The Company intends to continue to pursue strategic relationships with hardware
manufactures, 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
financing options and may therefore elect to raise additional capital, from time
to time, through equity or debt financing 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 adequate financing will be available. Any available financing may
substantially dilute the existing shareholders' equity.
The Company presently has no material commitments for capital expenditures.
However, in order to bring the Wave System to market, the Company anticipates
spending additional amounts on inventory items such as computer chips and
boards, additional hardware, and related materials. Such spending will vary
based on the Company's performance.
Results of Operations
Three Months Ended March 31, 1998 and 1997
Research and development expenses for the three months ended March 31, 1998 were
$538,821, as compared to $906,783 for the comparable period of 1997. The
decrease in research and development expenses was primarily attributable to the
shift in the focus of the Company from research and development to
commercialization and marketing and personnel adjustments consequent thereto.
Selling, general and administrative expense for the three months ended March 31,
1998 were $1,420,875, as compared to $1,686,743 for the comparable period of
1997. The decrease in selling, general and administrative expenses was primarily
attributable to decreased costs associated with the development and marketing of
new applications of the Company's technology and a reduction in personnel. In
addition, the Company attempted to reduce cash flow requirements by using
consultants and compensating key employees, consultants, suppliers and other
vendors with Common Stock and options to purchase Common Stock.
Interest income for the three months ended March 31, 1998 was $5,215, as
compared to $25,882 for the comparable period of 1997. The decrease in interest
income is primarily attributable to a decrease in interest-bearing assets.
Interest expense for the three months ended March 31, 1998 was $11,400, as
compared to $11,031 for the comparable period of 1997. The slight increase in
interest expense is primarily attributable to the Company's $465,000 note
payable to Southeast Interactive Technology Fund I, LLC.
Due to the reasons set forth above, the Company's net loss for the three months
ended March 31, 1998 was $1,957,268, as compared to $2,578,260 for the
comparable period of 1997. The net loss for the three months ended March 31,
1998 to common stockholders was $2,095,060, as compared to $3,713,137 for the
comparable period of 1997.
Liquidity and Capital Resources
The Company has experienced net losses and negative cash flow from operations
since its inception, and, as of March 31, 1998, had a deficit accumulated during
the development stage of $47,281,731 and a stockholders' equity of $86,558. The
Company has financed its operations through March 31, 1998 principally through
the private placement of Class B Common Stock for an aggregate amount of
$6,201,931 (before deduction of expenses incurred in connection therewith), the
issuance of $2,873,250 in aggregate principal amount of its 10% Convertible
Notes and 15% Notes (of which $2,098,250 was converted into Class B Common
Stock), the sale of 3,728,200 shares of its Class A Common Stock in an initial
public offering raising approximately $15,711,000 after all expenses, the
private placement of 800,000 shares of Class A Common Stock raising $800,000
(before deduction of expenses incurred in connection therewith), and the
placements of convertible preferred stock for an aggregate of amount of
$13,350,000 (before deduction of expenses incurred in connection therewith).
At March 31, 1998, the Company had approximately $2,267,908 in cash and cash
equivalents. The Company held no marketable securities at March 31, 1998. At
December 31, 1997, the Company had approximately $758,721 in cash and cash
equivalents and held no marketable securities. The increase in cash and cash
equivalents is attributable to the issuance of preferred and common stock of the
Company. At March 31, 1998, the Company had working capital deficiency of
approximately $840,000. The Company expects to incur substantial additional
expenses resulting in significant losses at least through the period ending
December 31, 1998 due to minimal revenues associated with initial market entry,
continued research and development costs as well as increased sales and
marketing expenses associated with market testing and roll-out. On October 19,
1997 the Company's Series A Cumulative Redeemable Preferred Stock became
redeemable for a total amount of $468,000. As of May 20, 1998, no demand for
redemption has been made.
The Company anticipates that its existing capital resources may be adequate to
satisfy its capital requirements into the second quarter of 1998. In order to
continue operations, however, the Company will need to raise additional funds
through public or private financings. The Company has no current commitment to
obtain additional funds and is unable to state the amount or source of such
additional funds. These uncertainties raise doubt about the Company's ability to
continue as a going concern.
On March 6, 1998 the Company issued 150,000 shares of newly created Series G
Convertible Preferred Stock, par value $.01 ("Series G Convertible Preferred
Stock") at a price of $20 per share, for an aggregate purchase price of
$3,000,000. The shares were sold to one (1) accredited investor pursuant to
Regulation D promulgated under the Act. The Series G Convertible Preferred Stock
is convertible into Class A Common Stock, par value $.01 ("Class A Common
Stock") at an effective conversion price of the lower of (a) $1.12 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 twenty-five Trading Days immediately preceding the
Conversion Date, as defined in the Certificate of Designation of the Series G
Convertible Preferred Stock.
Significant uncertainty currently exists with respect to the adequacy of current
funds to support the Company's activities. This uncertainty will continue until
a positive cash flow from operations can be achieved. Additionally, the Company
is uncertain as to the availability of financing from other sources to fund any
cash deficiencies. These uncertainties raise doubt about the Company's ability
to continue as a going concern.
In order to reduce these uncertainties, the Company is currently evaluating
financing options and may therefore elect to raise additional capital, from time
to time, through equity or debt financing 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 adequate financing will be available. Any available financing may
substantially dilute the existing shareholders' equity.
As of December 31, 1997, the Company had available net operating loss
carryforwards for Federal income tax purposes of approximately $36.9 million.
Because of the "change in ownership" provisions of the Tax Reform Act of 1986,
the Company's net operating loss carryforwards may be subject to an annual
limitation on the utilization of these carryforwards against taxable income in
future periods if a cumulative change in ownership of more than 50 percent of
the Company occurs within any three-year period. The Company has made no
determination concerning whether there has been such a cumulative change in
ownership. However, the Company believes that it is likely that such a change in
ownership occurred prior to or following the completion of its initial public
offering.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable.
PART II - OTHER INFORMATION
Item 2. Changes in Securities
On March 6, 1998 the Company issued 150,000 shares of newly created Series G
Convertible Preferred Stock, par value $.01 ("Series G Convertible Preferred
Stock") at a price of $20 per share, for an aggregate purchase price of
$3,000,000. The shares were sold to one (1) accredited investor pursuant to
Regulation D promulgated under the Act. The Series G Convertible Preferred Stock
is convertible into Class A Common Stock, par value $.01 ("Class A Common
Stock") at an effective conversion price of the lower of (a) $1.12 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 twenty-five Trading Days immediately preceding the
Conversion Date, as defined in the Certificate of Designation of the Series G
Convertible Preferred Stock.
Item 3. Defaults Upon Senior Securities
On October 19, 1997 the Company's Series A Cumulative Redeemable Preferred Stock
became redeemable for a total amount of $468,000. As of May 20, 1998, no demand
for redemption has been made.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits:
Exhibit No. Description of Exhibit
- --------------------------------------------------------------------------------
4.1 Certificate of Designation of Series G Convertible Preferred Stock of Wave
Systems. Corp. as filed with the Delaware Secretary of State on March 5,
1998 (incorporated by reference to Exhibit 3.1 of the Registrant's Current
Report on Form 8-K filed on March 19, 1998, File No. 0-24752)
10.1 Purchase Agreement between Wave Systems Corp. and Combination Inc., dated
as of March 6, 1998 (incorporated by reference to Exhibit 4.1 of the
Registrant's Current Report on Form 8-K filed on March 19, 1998, File No.
0-24752)
10.2 Registration Rights Agreement between Wave Systems Corp. and Combination
Inc., dated as of March 6, 1998 (incorporated by reference to Exhibit 4.2
of the Registrant's Current Report on Form 8-K filed on March 19, 1998,
File No. 0-24752)
(b) Reports on Form 8-K
The Company filed a Form 8-K on March 19, 1998, reporting the sale of the Series
G Convertible Preferred Stock. The following items were reported in the Form 8-K
filed March 19, 1998:
Item 5. Other Events - The Company completed a $3 million private placement
of its Series G Convertible Preferred Stock to a qualified investor
under Regulation D of the Securities Act of 1933, as amended. No
financial statements were filed as part of such report.
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Dated: May 20, 1998
WAVE SYSTEMS CORP.
(Registrant)
By: /s/ Peter J. Sprague
----------------------
Name: Peter J. Sprague
Title: Chairman, Chief Executive Officer
(Principal Financial Officer and Duly
Authorized Officer of the Registrant)
THE ENCLOSED FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION
EXTRACTED FROM THE FINANCIAL STATEMENTS OF WAVE SYSTEMS CORP. FOR THE THREE
MONTHS ENDED MARCH 31, 1998 AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO
SUCH FINANCIAL STATEMENTS.
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<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
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<CASH> 2,267,908
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<BONDS> 499,327
477,001
1,941,642
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<INCOME-PRETAX> (2,095,060)
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