As filed with the Securities and Exchange Commission on April 12, 1999
Registration No. 333-
================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form S-1
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
--------------------------
Wave Systems Corp.
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C> <C>
Delaware 7379 13-3477246
(State or other (Primary standard (I.R.S. Employer
jurisdiction of industrial Identification No.)
Incorporation classification
or organization) code number)
</TABLE>
480 Pleasant Street
Lee, Massachusetts 01238
(413) 243-1600
(Address, including zip code, and telephone
number, including area code, of registrant's
principal executive offices)
--------------------------
Steven Sprague
President and Chief Operating Officer
Wave Systems Corp.
480 Pleasant Street
Lee, Massachusetts 01238
(413) 243-1600
(Name, address, including zip code, and telephone
number, including area code, of agent for service)
Copy to:
Neil W. Townsend, Esq.
Bingham Dana LLP
399 Park Avenue
New York, New York 10022-4689
(212) 318 7700
Approximate date of commencement of proposed sale to public: At such time
or times after the Registration Statement becomes effective as the Selling
Holders may determine.
If any of the securities being registered on this Form are to be offered on
a delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, check the following box and
list the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If the delivery of the prospectus is expected to be made pursuant to Rule
434 under the Securities Act, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
====================================================================================================================
Proposed Maximum Proposed Maximum
Title of Each Class of Amount to be Offering Price Aggregate Amount of
Securities to be Registered Registered Per Share(1) Offering Price (1) Registration Fee
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Class A Common Stock,
$.01 par value---------- 4,449,479 Shares $19.75 $87,877,210 $24,430
====================================================================================================================
</TABLE>
(1) Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457(c), based on the average of the high and low prices
reported on the Over-the-Counter Bulletin Board on April 7, 1999.
---------
The Registrant hereby amends this Registration Statement on such date or
dates as may be necessary to delay its effective date until the Registrant shall
file a further amendment which specifically states that this Registration
Statement shall thereafter become effective in accordance with Section 8(a) of
the Securities Act of 1933 or until the Registration Statement shall become
effective on such date as the Commission, acting pursuant to said Section 8(a),
may determine.
- --------------------------------------------------------------------------------
<PAGE>
SUBJECT TO COMPLETION, DATED APRIL 12, 1999
PROSPECTUS
The information in this prospectus is not complete and may be changed. The
Selling Security Holders may not sell these securities until the Registration
Statement filed with the Securities and Exchange Commission is effective. This
prospectus is not an offer to sell these securities and it is not soliciting an
offer to buy these securities in any state where the offer or sale is not
permitted.
4,449,479 Shares
WAVE SYSTEMS CORP.
Class A Common Stock
This prospectus relates to 4,449,479 shares of Class A Common Stock,
par value $.01 per share of Wave Systems Corp. (the "Company" or "Wave"). We are
registering these shares on behalf of certain Wave stockholders ("the Selling
Security Holders"), to be offered and sold by them from time to time. We are not
selling any of these shares and will not receive any proceeds from the sale of
these shares. Our Class A common stock trades on the Over-the-Counter Bulletin
Board tier of the Nasdaq Stock Market under the Symbol "WAVX". The last reported
sales price of our Stock on April 7, 1999 was $19.31 per share.
The shares of Class A common stock offered by the Selling Security
Holders under this prospectus consist of shares issued, or issuable upon
conversion of warrants, in a series of private sale or exchange transactions or
as compensation for services rendered. All of the transactions involved were
exempt from the registration requirements of the Securities Act of 1933, as
amended (the "Securities Act").
Our principal executive offices are located at 480 Pleasant Street,
Lee, Massachusetts 01238 and our telephone number is (413) 243-1600.
------------------------
Investing in the Class A Common Stock involves a high degree of risk.
See "Risk Factors" beginning on Page 8
------------------------
Neither the Securities and Exchange Commission nor any state securities
commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any
representation to the contrary is a criminal offense.
-------------------------
The date of this prospectus is April 12, 1999.
<PAGE>
- 2 -
TABLE OF CONTENTS
<TABLE>
<S> <C>
WHERE YOU CAN FIND MORE INFORMATION....................................... 3
PROSPECTUS SUMMARY........................................................ 4
RISK FACTORS.............................................................. 8
PRICE RANGE OF COMMON STOCK............................................... 19
USE OF PROCEEDS........................................................... 19
SELECTED CONSOLIDATED FINANCIAL DATA...................................... 20
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS........................... 22
BUSINESS.................................................................. 28
MANAGEMENT................................................................ 38
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT................................................... 41
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 42
DESCRIPTION OF SECURITIES................................................. 44
SELLING SECURITY HOLDERS.................................................. 48
PLAN OF DISTRIBUTION...................................................... 51
LEGAL MATTERS............................................................. 52
EXPERTS................................................................... 52
FINANCIAL STATEMENTS...................................................... F-1
</TABLE>
You should rely only upon the information contained in this document or
that to which we have referred you. We have not authorized anyone to provide you
with additional information or information that is different. This prospectus is
not an offer to sell or an invitation of an offer to buy any of the securities
offered hereby to any person in any jurisdiction in which it is unlawful to do
so. The information contained in this prospectus is accurate as of its date,
regardless of the time of the delivery of this prospectus or of any sale of the
Class A common stock; changes may have occurred since.
We own or have rights to trademarks or tradenames that we use in
conjunction with the sale of our products. Embassy(TM), WaveMeter(R),
WaveNet(R), Great Stuff Network(TM), Second Shift(TM) (the Wave juggler logo),
WaveCommerce(TM), Wave Interactive Network(TM), WINPublish(TM), WINPurchase(TM)
and CablePC(TM) are trademarks or registered trademarks used by us. All other
trademarks and tradenames referred to in this prospectus are the property of
their respective owners.
<PAGE>
- 3 -
WHERE YOU CAN FIND MORE INFORMATION
We are subject to the periodic filing requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"). Further to our obligations under the
Exchange Act, we file reports, proxy and information statements and other
information with the Commission. These reports, proxy and information statements
and other information may be inspected and copied at the Commission's public
reference facilities at Room 1024, Judiciary Plaza, 450 Fifth Street, N.W.,
Washington, D.C. 20549 and at the Commission's Regional Offices located at Seven
World Trade Center, 13th Floor, New York, New York 10048 and at 500 West Madison
Street, Suite 1400, Chicago, Illinois 60661. Copies of such materials also can
be obtained from the Public Reference Section of the Commission at 450 Fifth
Street, N.W., Washington, D.C. 20549, upon payment of prescribed fees. The
Commission also maintains a site on the World Wide Web (the "Web") that contains
reports, proxy and information statements and other information regarding
registrants that file electronically with the Commission (including Wave). The
address of this site is http://www.sec.gov.
We have filed a registration statement on Form S-1 with the Commission
(which, together with all amendments and exhibits thereto, we call the
"Registration Statement") to register under the Securities Act the securities
that this prospectus offers. In accordance with the Commission's rules and
regulations, portions of the Registration Statement have been omitted from this
prospectus. Therefore, this prospectus contains only some of the information in
(or incorporated by reference into) the Registration Statement. If you would
like more information about Wave and the securities this prospectus offers,
please refer to the Registration Statement, which is on file at the offices of
the Commission. You may obtain copies of these documents upon payment of the
Commission's fee, or you may examine them without charge at the Commission's
offices or via the Commission's Web site. In this prospectus, when we discuss
other documents we may not provide all of the information about or contained in
those other documents. We urge you not to rely upon this prospectus to provide a
complete discussion of the contents of other documents, but to refer to those
other documents yourself. Whenever we discuss the contents of other documents,
we qualify our statements in all respects by reference to the applicable
documents on file with the Commission.
In addition to historical information, this Registration Statement
contains "forward-looking statements" within the meaning of the U.S. Securities
Litigation Reform Act of 1995 -- statements and projections about the future.
These statements obviously involve risks and uncertainties, some known and some
unknown. As a result, we cannot necessarily accurately predict the future and
our actual results may turn out to be materially different from what we
anticipate and discuss herein. In addition, we operate in an industry segment
where securities prices may fluctuate dramatically and can be influenced by
regulatory and other factors beyond our control. We discuss some of the factors
which we believe to be important in the cautionary statements that accompany the
forward-looking statements and in the Risk Factors section of this prospectus,
as well as in the risk factors detailed in the other filings we have made with
the Commission during the past 12 months. Whenever you assess a forward-looking
statement in this prospectus, we urge you to read carefully all of the Risk
Factors and cautionary statements in this prospectus, as well as those in our
other filings with the Commission.
<PAGE>
- 4 -
PROSPECTUS SUMMARY
The following is a summary, and should be read as such. This summary is
qualified in its entirety by, and should be read in conjunction with, the more
detailed information and financial information and statements incorporated by
reference in this prospectus. You should carefully consider the factors set
forth under the caption "Risk Factors". Any capitalized terms in this summary
that are not accompanied by a definition have been defined elsewhere in the
document.
<TABLE>
<S> <C>
Our Business........Wave is creating a new, pay-per use electronic commerce
model for the delivery of digital information and services.
We are involved in the research, development, and market
testing of the Wave System, designed to meter the consumer's
usage of electronic content and services. Electronic content
and services refers to any data, graphic, software, video or
audio sequence that can be digitally transmitted or stored.
Under this model, electronic content and service providers
use the Wave System to allow consumers to purchase use of
their e-content on a pay-for-use basis, much like a phone
card or a pay-per-view cable system. We believe that the
Wave System can fundamentally change today's centralized
e-commerce model by creating a distributed trust and
security system, under which consumers will be able to make
individual purchases of images, text, music or video, or
make use of software, all from the consumer's desktop, by
payment of a small fee for each purchase or use. This means
that e-content can be consumed with more efficient and
flexible pricing, broader distribution opportunities,
greater protection against unauthorized usage and more
secure, low-cost, and accurate collection of consumer usage
data.
Our Market..........Our long-term strategy is to achieve broad market acceptance
of the Wave System as a standard platform for electronic
commerce. The growth of e-commerce is creating consumer
demand for a powerful merchandising interface at the point
of purchase, whether in the office or at home. E-content
providers seek a system that will allow consumers to pay
royalties easily and quickly for usage while allowing both
customized and broad, inexpensive distribution. Consumers in
turn seek enhanced control of their individual privacy and
secure storage of sensitive information. We believe that
there are three major weaknesses in the current e-content
transaction market: inflexible pricing, weak security and
lack of demographic feedback. The Inflexible pricing problem
occurs when customers subscribe to an electronic content
delivery system (an on-line news service, for example), and
are required to pay an up-front fee for access to all of the
content offered by the system, even though a subscriber may
only use a small portion of the content. Weak security is a
deterrent to consumer usage of e-commerce, as many
electronic content delivery systems do not have sufficiently
sophisticated cryptography and security systems in place to
afford confidence to content providers with respect to
unauthorized usage and piracy of their e-content. Lastly,
existing e-content delivery systems provide very limited
feedback data about customers' usage. We believe that by
addressing these problems, we will be able to achieve
widespread adoption of the Wave System as a standard for
e-commerce.
<PAGE>
- 5 -
Our Product.........The Wave System consists of an EMBedded Application Security
SYstem ("EMBASSY") in consumer devices that provides a core
hardware and software foundation for consumers to purchase
e-content and use software on a pay-per use basis. The
EMBASSY system is a programmable, low cost "system within a
system" that can perform independent transactions such as
meter pay-per-use of e-content, store sensitive information
such as identities, credit information and account balances,
and run secure applications for pay-per-use access to
software. The EMBASSY system is an open model based on
secure smart card hardware technology that can be integrated
into PCs, peripherals, set top boxes or used as an
independent component. The WaveMeter application running in
the EMBASSY system allows e-commerce transactions to occur
without the expense of a real-time network connection for
every transaction. We have started production of a software
version of the WaveMeter application that offers many of the
features of the hardware version, and we have implemented it
as part of our Internet commerce server. The WaveMeter
server enables e-content owners to securely sell usage of
their intellectual property from a Web site. This secure
e-content delivery service, offered through the Wave Meter
server, does not require either the consumer or the
publisher to install any additional hardware or software.
The EMBASSY securely stores electronic funds and transaction
information about the usage of electronic content to be
transmitted securely to a central transaction processing
center ("WaveNet") periodically. The WaveNet application
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 e- content owners. The Wave System is designed
to be compatible with existing content delivery system such
as CD-ROM, the Internet, and broadband services. Using these
distribution systems, e-content providers can distribute
their products in an encrypted or otherwise secured
("Wave-enabled") form, so it can be offered for sale through
the EMBASSY system, which in turn allows consumers to
purchase and access the e-content on an as-desired basis.
Our Partners........We are pursuing strategic relationships with software
developers and hardware manufacturers developing e-content
delivery. We have attracted other companies to port their
applications and services to the Wave System and its EMBASSY
platform, which we believe will in turn increase the value
of the system to other potential deployment partners. During
1998, we established relationships with RSA Data Security,
NEC Technologies, Pollex Technology, Hewlett-Packard's
VerSecure division, Sun Microsystems, SMSC, ITE, IGST,
Sarnoff Corp., Hauppauge Computer Systems and WavePhore. In
1999, we hope to expand the number of commitments from
hardware manufacturers, including personal computer
manufacturers, peripheral companies and other companies
involved in e-commerce.
</TABLE>
We are incorporated in Delaware, and was known previously as Indata
Corp. and Cryptologics International, Inc. We changed our name to Wave Systems
Corp. in January 1993. Our principal executive offices are located at 480
Pleasant Street, Lee, Massachusetts 01238, and our telephone number is (413)
243-1600.
<PAGE>
- 6 -
THE OFFERING
<TABLE>
<S> <C>
Issuer..........................................Wave Systems Corp.
Shares of Class A Common Stock
offered by the Selling Security Holders.......4,449,479
Class A Common Stock outstanding
as of March 31, 1999..........................31,546,539
Voting Rights...................................One vote per share
Use of Proceeds.................................Wave will not receive any proceeds
from sales made hereunder
Listing.........................................OTC Bulletin Board of the
Nasdaq Stock Market
Trading Symbol..................................WAVX
</TABLE>
<PAGE>
- 7 -
SUMMARY CONSOLIDATED FINANCIAL INFORMATION
Statement of Operations Data:
<TABLE>
<CAPTION>
Period from
February 12,
1988
(inception)
Year ended December 31 through
------------------------------------------------------------------------------------ December 31
1998 1997 1996 1995 1994 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Revenues $ 10,193 $ 10,712 $ 1,458 $ - $ - $ 22,363
------------- ------------- ------------ ------------ ------------ -------------
Operating expenses: 13,383,134 14,788,164 8,869,642 7,404,920 4,193,649 60,224,339
License Fee 2,750,000 1,000,000 - - - 3,750,000
License Warrant Cost (1,100,000) - - - - (1,100,000)
Net loss (11,895,944) (13,897,794) (8,683,815) (6,832,866) (4,271,501) (57,220,407)
Accrued dividends on
preferred stock 858,863 2,482,982 870,579 40,600 39,484 4,337,358
(including accretion
of assured
incremental yield on
preferred stock of
$750,000 in 1998,
$1,673,000 in 1997
and $670,965 in 1996
and $3,093,965 since
inception)
Net loss to common
stockholders $(12,754,807) $(16,380,776) $(9,554,394) $(6,873,466) $(4,310,985) $(61,557,765)
============= ============= ============ ============ ============ =============
Weighted average
number of common
shares outstanding
during the period 29,299,844 20,943,748 14,956,584 13,794,373 10,503,621 11,570,172
Loss per common share $ (.44) $ (.78) $ (.64) $ (.50) $ (.41) $ (5.32)
========== ========== ========== ========== ========== ==========
</TABLE>
Balance Sheet Data:
<TABLE>
<CAPTION>
Pro Forma
December 31, 1998 December 31, 1998 (1)
----------------- ---------------------
<S> <C> <C>
Working Capital (Deficiency) $(3,778,895) $19,621,105
Total Assets $2,057,812 $25,457,812
Series A Cumulative Redeemable Preferred Stock $493,201 $493,201
Deficit Accumulated During Development $(57,220,407) $(57,220,407)
------------ ------------
Total Stockholders' Equity (Deficiency) $(3,276,378) $20,123,622
============ ===========
</TABLE>
(1) Adjusted to reflect the sale on March 23, 1999 of 2,090,954 shares of Class
A Common Stock, at a price of $11.00 per share, for an aggregate purchase
price of $23,000,494, to a group of accredited investors, and the issuance
on March 30, 1999 of 181,818 shares of Class A Common Stock, at a price of
$11.00 per share, in satisfaction of a $2,000,000 note. After deductions of
commissions and expenses, our net proceeds from these two transactions were
approximately $23,400,000.
<PAGE>
- 8 -
RISK FACTORS
An investment in our Class A common stock involves the following risks,
which, together with other matters set forth in this prospectus and in the
documents referred to in this prospectus, you should consider carefully prior to
any purchase of our Class A common stock. Any of the following risks could
materially adversely affect our business, operating results and financial
condition and result in a complete loss of your investment.
Minimal Revenues; We may Continue to Experience Net Losses; We Have A Limited
Operating History and Have Not Yet Operated Profitably.
We have recognized minimal revenues to date, and have experienced
significant losses and negative cash flow from operations since our inception.
We have not realized a net operating profit in any quarter since we began our
operations. As of December 31, 1998 we had a deficit accumulated during the
development stage of approximately $57 million and a working capital deficit of
approximately $3.8 million. Our limited operating history offers little
information to serve as a basis for evaluating us and our long-term prospects.
You should consider our prospects in light of the risks, expenses and
difficulties that companies in their earlier stage of development encounter,
particularly companies in new and rapidly evolving markets, such as online
commerce. Our success depends upon our ability to address those risks
successfully, which include, among other things:
o Whether we can continue to build and maintain a strong management structure
that can develop and execute our business strategy, and respond effectively
to changes in the markets for our services and products;
o Whether we can respond quickly and effectively to technological changes and
competitive forces in our markets;
o Whether electronic content owners and providers and PC manufacturers will
be willing to modify their offerings to be used with our products and
service and to charge end-users for use of their offerings on a per-use
basis;
o Whether consumers will, in turn, choose to order, purchase and accept
electronic content on a per-use basis;
o Whether we will be able to assemble and maintain the necessary resources,
especially talented software programmers;
o Whether we can continue to develop and upgrade our technology and
transaction-processing systems to meet evolving market demands;
o Whether we will be successful in continuing to evolve and successfully
implement a sales and marketing strategy;
o Whether we will be able to develop and manage strategic relationships to
maximize widespread acceptance of our products and services; and
o Whether the effect of the volatility of the market price of our stock will
adversely affect our ability to sell our products and services, develop
strategic relationships, attract and maintain qualified employees, and
raise additional capital if necessary.
<PAGE>
- 9 -
If we do not succeed in addressing these risks, our business likely
will be materially and adversely affected. We may never achieve, or be able to
sustain, profitability. We believe that we will incur substantial operating
losses for the foreseeable future and that such losses will increase over the
near term. There can be no assurance that we will be able to increase revenues,
achieve or maintain profitability or generate cash from operations in the
future.
We may not be Able to Generate or Maintain Sufficient Cash to Fund our
Operations; Uncertainty of Additional Funding
Since we began our operations, we have incurred net losses and
experienced significant negative cash flow from operations. Our operations to
date have consumed substantial amounts of capital. Based on our current
operating plan, we believe we have adequate cash to fund our operations through
at least September 2000. However, our actual cash requirements may exceed what
we have anticipated and there can be no assurance that we will not have
additional capital needs prior to then. We would then have to seek additional
sources of cash to fund our operations. We do not have any investors committed
to provide additional funds and we do not know the amount or potential source of
such additional funds. We do not know if additional financing will be available
or that, if available, it will be available on favorable terms. If we issue
additional shares of our stock, our stockholders' ownership may be diluted, or
the shares issued may have rights, preferences or privileges senior to those of
our common stock. If we do not have the money available to satisfy either short-
or long-term capital requirements, we may be required to curtail our operations
significantly or to obtain funds by selling or licensing our technology or our
rights to certain markets. We may, as a consequence, be unable to continue our
operations, develop or enhance our products, take advantage of future
opportunities or respond to competitive pressures.
We May Not be Able to Effect or Maintain a Listing on the Nasdaq National Market
or SmallCap Market.
Our Class A Common Stock was traded on the Nasdaq National Market from
the inception of public trading until October 3, 1997, when we became listed on
the Nasdaq SmallCap Market, due to our inability to meet certain listing
criteria. Later that month we were delisted from the Nasdaq SmallCap Market, and
our stock is currently traded on the Over-the-Counter Bulletin Board. We applied
for a new listing on the Nasdaq National Market on January 29, 1999 because we
met all of the quantitative criteria for the listing at that time. While we
believe that our Class A Common Stock will be again listed on the Nasdaq
National Market shortly, we cannot assure you that Nasdaq will indeed approve
this new listing, nor can we assure you that we will not in the future be unable
again to satisfy Nasdaq's listing criteria. Nevertheless, in order for us to
maintain a listing on The Nasdaq National Market, we must continue to meet the
Nasdaq continuing listing criteria on an ongoing basis. The failure to achieve,
or the future removal of our Class A Common Stock from, listing on The Nasdaq
National Market may have a negative effect on the market price of our common
stock and on the ability of stockholders and investors to buy and sell shares of
the Class A Common Stock in the public markets, and consequently our ability to
raise capital in the future.
We are a Development Stage Company and the Development of a Market for Our
Products and Services Is Uncertain.
The market for our services is still immature and is evolving rapidly.
We are a company in a development stage and we are subject to all of the risks
inherent in establishing a new business enterprise. Accordingly, you should
consider our business in light of the risks, expenses and problems
<PAGE>
- 10 -
frequently encountered by companies in an early stage of development,
particularly companies in new and rapidly evolving markets such as the Internet
and e-commerce. These risks include:
o failure by electronic content owners and providers and PC manufacturers to
modify their offerings so that they may be used with our products and
service;
o failure by electronic content owners and providers to change their business
model to allow end-users to use their offerings on a per-use basis;
o reluctance by consumers to order, purchase and accept electronic content on
a per-use basis;
o development of equal or superior products or services by competitors;
o failure of Internet-based electronic commerce and delivery of electronic
content; and
o our inability to develop and enhance competitive products and services or
to successfully market these products and services.
To address these risks, we must, among other things, prove that our
technology works and complete its development, respond to any competitive
developments, continue to attract, retain and motivate qualified personnel, and
market our technology successfully. We have only recently begun introducing our
technology to the market.
Broad acceptance of our products and services and their use in large
numbers is critical to our success, because a large portion of our revenues will
likely be derived from fees paid by end-users to order electronic content on a
pay-per-use basis. In addition, our ability to earn significant revenues from
end-users via our pay-per-use service will depend in large part on its
acceptance by a substantial number of prominent electronic content providers.
Furthermore, a large number of PC manufacturers must accept our technologies as
a growing industry standard and in turn agree to provide or embed our software
in their offerings. Our technologies have not been accepted as standards. To be
successful, we must obtain widespread acceptance of our technologies, or modify
our products and services to meet whatever industry standards do ultimately
develop. It is not certain that we will be able to do either.
An increasing number of market entrants have introduced or are
developing competing products and services to enable electronic content delivery
and payment transactions over the Internet. Critical issues concerning the
Internet (including security, reliability, cost, ease of use and quality of
service) remain unresolved and may limit the growth of electronic commerce.
Delays in the deployment of improvements to the infrastructure for Internet
access, including higher speed modems and other access devices, adequate
capacity and a reliable network backbone, also could hinder the development of
the Internet as a viable commercial marketplace.
For all of these reasons, it remains uncertain whether commerce over
the Internet will continue to grow, our technologies will be generally accepted
as a standard model of e-commerce, or a significant market for our products and
services will emerge. Even if such a market does develop, competitive pressures
may make it difficult, or impossible, for us to operate profitably.
Our Target Market Is Undergoing Rapid Technological Change and Experiences
Frequent New Product Introductions
<PAGE>
- 11 -
The market in which we operate is characterized by rapidly changing
technology and frequent new product introductions. Even if our technology gains
initial market acceptance, our success will depend, among other things, upon our
ability to improve our products, to develop and introduce new products and
services that keep pace with technological developments, to respond to evolving
customer requirements and to achieve market acceptance. There can be no
assurance that we will be able to identify, develop, manufacture, market or
support new products or deploy new services successfully, that such new products
or services will gain market acceptance, or that we will be able to respond
effectively to technological changes or competitors' products. If we fail to
anticipate or respond adequately to technological developments and customer
requirements or if we suffer any significant delays in product development or
introductions, we could lose market share or revenues.
The e-commerce industry in which we operate is characterized by rapid
technological change, changes in user and customer requirements and preferences,
frequent new product and service introductions embodying new technologies and
the emergence of new industry standards and practices that could render our
proprietary technology and systems obsolete. Our success will depend, in part,
on our ability to license leading technologies useful in our business, enhance
our existing services, develop new services and technology that address the
increasingly sophisticated and varied needs of our customers, and respond to
technological advances and emerging industry standards and practices on a
cost-effective and timely basis. The development of proprietary technology
entails significant technical and business risks. We cannot assure you that we
will use new technologies effectively or adapt our proprietary technology and
transaction-processing systems to customer requirements or emerging industry
standards.
We Have Significant Dependence on the CD-ROM, Internet and Broadband Markets
We believe that our system is adaptable to all significant present
modes for the delivery of electronic content (CD-ROM, Internet and broadband
markets). We believe that growth in these markets will facilitate and enhance
the acceptance of our technology. However, the CD-ROM, Internet and broadband
markets may not continue to grow, and these technologies may be replaced by
other information and software distribution and access technologies that are not
as easily compatible with our technology.
Our services and products facilitate online commerce over the Internet.
The Internet, and online commerce over the Internet, are at an early stage of
development and are rapidly evolving. While the Internet is expected to
experience substantial growth in the number of users and amount of traffic,
Internet infrastructure may not continue to support the increasing demands
placed on it by this growth. Break-downs and slow-downs in Internet traffic may
slow expansion of its use. The infrastructure or complementary services
necessary to make the Internet a viable commercial marketplace may not develop
or may not develop in a timely manner.
Demand and market acceptance for online commerce over the Internet is
subject to a high level of uncertainty. This uncertainty is compounded for us
since adequate Internet infrastructure development is necessary in order to
support increased online commerce, which in turn is necessary in order for us to
succeed. If the Internet infrastructure is unable to support our current growth,
our performance may be negatively impacted. In addition, the Internet could lose
its viability due to delays in the development or adoption of new standards and
protocols to handle increased levels of Internet activity, or due to increased
governmental regulation. Further, the costs of use of the Internet could
increase to a degree that reduces its attraction as a platform for electronic
commerce. As a result, the infrastructure or complementary services necessary to
make the Internet a viable commercial marketplace may not develop into a viable
commercial marketplace for our products and services.
<PAGE>
- 12 -
Problems relating to Security, System Disruptions and Computer Infrastructure
could Negatively Affect our Business and the Business of our Customers.
Although one highlighted feature we offer to electronic content
providers is the secure distribution of their offering, and we have implemented
in our products various security mechanisms, our products and services may
nevertheless be vulnerable to break-ins, piracy and similar disruptive problems
caused by Internet users. Advances in computer capabilities, new discoveries in
the field of cryptography, or other events or developments may result in a
compromise or breach of the algorithms we use to protect the pay-per-use of
electronic content data. Computer break-ins and other disruptions would
jeopardize the security of information stored in and transmitted through the
computer systems of users of our products, which may result in significant
liability to us and may also deter potential customers. The development of a
successful method of improperly copying electronic content delivered via our
technology may also result in liability to us and deter electronic content
providers from adopting our technologies.
The security, piracy and privacy concerns of existing and potential
customers and electronic content providers, as well as concerns related to
computer viruses, may inhibit the growth of the Internet marketplace generally,
and our customer base and revenues in particular. A party who is able to
circumvent our security measures could misappropriate proprietary electronic
content or cause interruptions in our operations and those of our strategic
partners. We may be required to expend significant capital and other resources
to protect against such security breaches or to alleviate problems caused by
such breaches. Our attempts to implement contracts which limit our liability to
our customers, including liability arising from a failure of security features
contained in our products and services, may not be enforceable. We currently do
not have product liability insurance to protect against these risks.
Competition
We operate in a highly competitive and fragmented market environment
that is characterized by rapidly evolving technology. Many of our competitors
and potential competitors have substantially greater financial and technical
resources. Also, many of our current and potential competitors have greater name
recognition and more extensive customer bases that could be used to gain market
share or product acceptance to our detriment.
The Wave System competes with conventional information delivery
systems, such as on-line services, subscription services on CD-ROM, and services
on the Internet. However, we believe that our metering capability is competitive
with other electronic content delivery systems in a number of applications due
to its superior protection against unauthorized usage, accurate and detailed
information on content usage, and transparent operation. Further, provided that
we successfully incorporate the rental and rent-to-own functionality into the
Wave System, we believe that it will be competitive with existing distribution
systems, including traditional retail outlets for entertainment and educational
software, due to its ability to offer these innovative merchandising mechanisms.
We are aware of other metering systems which compete directly with the
Wave System, and other current and evolving technologies that provide some of
its functionality. The Wave System is subject to competition from producers of
hardware-based controllers such as dongles and software unlocking systems. We
compete with well-established producers of dongle-based software unlocking
systems such as Rainbow Technologies, Inc. We also compete with software
unlocking systems developers such as Portland Software. In addition to small
companies dedicated to specific solutions, many large information industry
players are forming alliances and attempting to take advantage of the
information delivery options offered by the Internet. In electronic content
delivery via the Internet, the
<PAGE>
- 13 -
Wave System competes with electronic commerce payment technologies developed and
offered by IBM infoMarket Service, Broadvision Inc., Connect, Inc., CyberCash,
Inc., DigiCash and Open Market, Inc.
Other companies have developed or are developing technologies that are,
or may become, the basis for competitive products in the field of electronic
content distribution. Some of those technologies may have an approach or means
of processing that is entirely different from ours. Existing or new competitors
may develop products that are superior to ours or that otherwise achieve greater
market acceptance than ours.
We Have Significant Dependence on Strategic Partnerships
We depend upon strategic partners in our efforts to establish an
installed base of WaveMeters sufficient to convince content providers to use the
Wave System. We are dependent upon semiconductor companies to manufacture
functioning WaveMeters in sufficient numbers and at a low enough cost to enable
us to convince hardware manufacturers to incorporate the WaveMeters into
hardware they manufacture or retrofit. We are dependent upon electronic content
owners to modify their products to be used with the WaveMeters and to charge for
their products on a per-use basis. Such companies may choose not to use our
technology and could develop or market products or technologies that compete
directly with us. Moreover, there can be no assurance that these third parties
will commit the resources necessary to achieve broad-based commercial acceptance
of our technology. We expect that these strategic partners will develop their
products on schedule. However, any delay could have a material adverse impact on
our ability to introduce and achieve broad-based commercial acceptance of our
systems. We have not concluded definitive agreements with many of our strategic
partners, and there can be no assurance that we will enter into definitive
agreements or that the terms of such agreements will be satisfactory. We expect
that most agreements with strategic partners will provide for revenue sharing.
We May Experience Software Defects and Development Delays, Damaging Customer
Relations.
Services based on sophisticated software and computing systems often
encounter development delays, and the underlying software may contain undetected
errors or failures when introduced or when the volume of services provided
increases. We may experience delays in the development of our software products
or the software and computing systems underlying our services. In addition,
despite testing by us and potential customers, it is possible that our software
may nevertheless contain errors, and this could have a material adverse effect
on our business.
We Need to Attract and Retain Key Personnel
We believe that our future success depends upon the continued service
of our key technical and management personnel and on our ability to attract and
retain highly skilled technical, management, sales and marketing personnel. We
are particularly dependent on the skills and contributions of several key
individuals, including Peter J. Sprague and Steven Sprague, each of whom may
voluntarily terminate their employment with Wave at any time and whose departure
would have a material adverse effect on our business. We do not have "key
person" life insurance policies on any of our employees. Our industry is
characterized by a high level of employee mobility and aggressive recruiting of
skilled personnel. There can be no assurance that our current employees will
continue to work for us or that we will be able to hire any additional personnel
necessary for our growth. Our future success also depends on our continuing
ability to identify, hire, train and retain other highly qualified technical and
managerial personnel. Competition for these employees is intense and increasing.
We may not be
<PAGE>
- 14 -
able to attract, assimilate or retain qualified technical and managerial
personnel in the future, and the failure of us to do so would have a material
adverse effect on our business.
Proprietary Rights and Licenses and Intellectual Property
Our success depends, in part, on our ability to enjoy or obtain
protection for our products and technologies under United States and foreign
patent laws, copyright laws and other intellectual property laws, to preserve
our trade secrets and to operate without infringing the proprietary rights of
third parties. We cannot assure you that issued patent owned or licensed by us
will provide us with adequate protection or will not be challenged, invalidated,
infringed or circumvented. Furthermore, you should understand that our
activities may infringe upon patents owned by others.
In addition, we may be required to obtain licenses to patents or other
proprietary rights of third parties, and we may not be able to obtain these
required licenses on acceptable terms, if at all. If we are required to and do
not obtain such licenses, we would be prevented from, or encounter delays in the
development and marketing of, our products and technologies while we attempted
to design around such patents or other rights, which we may not be able to do
successfully. Failure to obtain such licenses or to design around such patents
or other rights would have a material adverse effect on our business.
We hold non-exclusive patent rights relating to the metered use of
encrypted data in local memory under a limited license to a patent jointly held
by two parties, which includes an exclusive license to develop and distribute
products to the in-home consumer microcomputer market segment. This license
restricts us from metering information produced and used solely by a government
entity or producing products that meter this information. In addition, this
license is subject to the rights of one of those two parties, who has the right
to exploit the patent or to license the patent to other, competitive parties.
You should understand that this joint owner of the patent may compete with us
directly or license the patent to a competitor, and that our business will not
exceed the scope of the license on this patent. Pursuant to this license, we are
obligated to pay certain royalties and we have granted to the licensors the
exclusive right to use our patents for products distributed to government
entities.
We are aware of four United States patents, each of which has some
claim that is similar to some of the claims we have licensed under the patent
discussed above. Based upon what we currently know, some of the claims of each
of these patents cover certain material aspects of our technology. Therefore,
the commercialization of our technology is subject to the rights of the holder
of these patents unless we are able to invalidate or license such claims. Also,
the holder of these patents or its licensees could seek to invalidate the claims
of the patent which we have licensed and therefore be able to commercialize a
technology similar to our technology. In either case, in order to invalidate the
other party's patent rights, the party claiming invalidity might need to prove
that it invented the claimed subject matter prior to the other party. We can
give no assurance that we would be successful in invalidating such claims or, in
turn, avoid having our claims invalidated. Any proceeding involving the validity
of these patents would be protracted and costly. If these other four patents are
not invalid insofar as their claims relate to our technology, then we would
require a license from the holder of these patents to commercialize our
technology. Due to the uncertainty as to whether these other patents could be
proved to be invalid, we have engaged in preliminary negotiations with the
patents holder to obtain a license thereunder. The negotiations have so far not
produced any agreement and we cannot assure you that we will be able to obtain a
license on acceptable terms, if at all. Our inability to obtain a license, if
needed, on commercially reasonable terms would have a material adverse effect on
our business and our future operations.
<PAGE>
- 15 -
In January 1996, we received notice from a third party that claimed
that our technology infringes upon U.S. and foreign patents it owned. These
patents are also currently being litigated by third parties. We are not involved
in these proceedings. This company offered to license its patents to us. We are
currently obtaining information needed to investigate the merits of this claim.
While we believe that there is a viable argument for non-infringement, if we are
not able to show non-infringement, then we would require a license from this
company to commercialize our technology. We cannot assure you that we would be
able to obtain a license on acceptable terms, if at all. Our inability to obtain
a license, if needed, on commercially reasonable terms would have a material
adverse effect on our business and our future operations.
We rely on trade secrets and proprietary know-how, which we protect, in
part, by confidentiality agreements with our employees and contract partners.
However, you should understand that our confidentiality agreements may be
breached and that we may not have adequate remedies for these breaches. Our
trade secrets may also otherwise become known or be independently discovered by
competitors. We also rely on copyright to prevent the unauthorized duplication
of our software and hardware products. While we have and will continue to
protect our software and our copyright interests, copyright laws may not
adequately protect our technology. We have submitted three trademark
registrations and intend to apply for additional name and logo marks in the
United States and foreign jurisdictions, as appropriate, but we cannot assure
you that federal registration of any of these trademarks will be granted.
International Market
A variety of U.S. export control laws apply to our technology. We will
require export licenses to export certain of our technology outside North
America. While we have received full export license from the U.S. Department of
Commerce for the sale and export of our single-key DES products, and an export
license for our triple-key DES products under the provisions of a License
Exception KMI granted by the Bureau of Export Administration of the U.S.
Department of Commerce, we cannot assure you that we will be able to obtain
licenses for future products. We may not have patent protection, and we may
unknowingly infringe patents of third parties in foreign jurisdictions. In
addition, the regulation of electronic monitoring, transmitting payment
instructions or audited usage and financial information varies from country to
country. We may be subject to different statutory or regulatory controls in
different foreign jurisdictions. You should be aware that the use of all or some
portions of the Wave System may not be permitted in any particular foreign
jurisdiction.
Our Stock Price Is Volatile.
The price of our Class A Common Stock has been and likely will continue
to be subject to wide fluctuations in response to a number of events and
factors, such as:
o quarterly variations in operating results;
o variances of our quarterly results of operations from securities analyst
estimates;
o announcements of technological innovations, new products, acquisitions,
capital commitments or strategic alliances by us or our competitors;
o changes in financial estimates and recommendations by securities analysts;
o the operating and stock price performance of other companies that investors
may deem comparable to us; and
<PAGE>
- 16 -
o news reports relating to trends in our markets.
In addition, the stock market in general, and the market prices for
Internet-related companies in particular, have experienced significant price and
volume fluctuations that often have been unrelated to the operating performance
of the companies affected by these fluctuations. These broad market fluctuations
may adversely affect the market price of our common stock, regardless of our
operating performance. Securities class action litigation has often been
instituted against companies that have experienced periods of volatility in the
market price for their securities. If we were to become the target of this kind
of litigation, the cost in dollars and management attention could be
substantial, and the diversion of management's attention and resources could
have a material adverse affect on our business.
We May Be Subject to Conflicts of Interest
Our Board of Directors has included, and is likely to include in the
future, representatives of our strategic partners. It is possible that those
corporations may be competing against us or each other, directly or indirectly.
A director who also represents another company may voluntarily abstain from
voting on matters where there could be conflicts of interest. However, even if
such a director does abstain, his presence on the Board could affect the process
or the results of the Board's deliberations. We have adopted no policies or
procedures to reduce or avoid such conflicts. If such conflicts of interest
arise, they may have materially adverse effects on our business.
Voting Rights; Control by Existing Stockholders
Our common stock is divided into two classes. Each class has different
voting rights, which allows holders of Class B common stock to maintain control.
Holders of Class A common stock are entitled to one vote per share on all
matters submitted to a vote of the stockholders of record. 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:
o where a director has been nominated for election by someone other than
Wave's board of directors;
o where there is a vote on any merger, consolidation or other similar
transaction which our Board of Directors does not recommend;
o on all matters submitted to a vote of the stockholders in the event that
any person or group of persons has acquired beneficial ownership of 20% or
more of Wave's outstanding voting securities.
Both classes vote together as a single class on all matters, except
where class voting is required by law. For example, the two classes of stock are
required to vote separately on any proposal to modify the voting rights of the
Class B Common Stock. The difference in the voting rights of Class A Common
Stock and Class B Common Stock could depress the market price of the Class A
Common Stock. The disproportionate voting power enjoyed by the Class B Common
Stock holders when voting on questions of control, may dissuade a potential
merger partner or acquirer, even if the majority of the Class A Common Stock
holders wanted the merger or acquisition to occur.
Our Business is Subject to Governmental Regulation and Legal Uncertainties.
We believe that we are not currently subject to direct regulation by
any domestic or foreign governmental agency, other than regulations applicable
to businesses generally and laws or regulations
<PAGE>
- 17 -
directly applicable to access to online commerce. However, due to the increasing
popularity and use of online services, it is possible that a number of domestic
and foreign laws and regulations covering issues such as user privacy, pricing,
content, copyrights, distribution and characteristics and quality of products
and services may be enacted. The growth and development of the market for online
commerce may prompt calls for more stringent consumer protection laws that may
impose additional burdens on those companies conducting business online. The
adoption of any additional domestic and foreign laws or regulations may decrease
the growth in use of the Internet, which could, in turn, decrease the demand for
our products and services and increase our cost of doing business, or otherwise
have an adverse effect on our business, prospects, financial condition and
results of operations. Moreover, the applicability to online services of
existing domestic and foreign laws in various jurisdictions governing issues
such as intellectual property ownership, sales and other taxes, libel and
personal privacy is uncertain and may take years to resolve. Any such new
legislation or regulation, the application of laws and regulations from
jurisdictions whose laws do not currently apply to our business, or the
application of existing laws and regulations to online services could have a
material adverse effect on our business, prospects, financial condition and
results of operations.
Our Anti-takeover Provisions May Discourage Future Acquisitions
In addition to the anti-takeover effect of the voting rights granted to
the holders of Class B Common Stock, a change of control may be delayed,
deferred or prevented by certain provisions of our charter documents, as well as
the Board's ability to issue shares of preferred stock without further vote or
action by the stockholders. In addition, Delaware law restricts certain business
combinations with any "interested stockholder", as defined. This statute may
delay, defer, or prevent a change in control of our company. These provisions
are intended to encourage any person interested in acquiring us to negotiate
with and obtain the approval of our Board of Directors. Certain of these
provisions may discourage a future acquisition not approved by our Board in
which you might receive an attractive value for your shares or that a
substantial number or even a majority of our stockholders might believe to be in
their best interest. As a result, stockholders who desire to participate in such
a transaction may not have the opportunity to do so.
We Have Never Paid Cash Dividends
We have never declared or paid any cash dividends on our common stock.
We currently anticipate retaining all future cash earnings, if any, to fund the
development and growth of our business and we do not anticipate paying dividends
on our common stock for the foreseeable future.
Year 2000 Issues
The Year 2000 issue results from computer programs written using two
digits rather than four to define the applicable year. Any of our computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
We have made an assessment with regard to whether our internal
information systems are Year 2000 compliant. Since January 1998, in addition to
updating employee computers and workstations, we have upgraded various
accounting, telecommunications, customer care systems and transaction systems at
an aggregate cost of approximately $400,000, with systems that are warranted by
the vendors to be Year 2000 compliant. To the extent we purchase additional
systems, we require that such systems are warranted by the vendors to be Year
2000 compliant. We continue to seek assurances from our existing vendors whose
systems are not warranted to be Year 2000 compliant that
<PAGE>
- 18 -
such systems will be Year 2000 compliant. We employ a manager of management
information systems, whose responsibilities include oversight of Year 2000
compliance. We do not separately track the internal costs incurred for Year 2000
projects, which are principally the related payroll costs for its information
systems personnel. We cannot assure you that costs we may incur to address
unanticipated issues would not have a material adverse effect on our business,
operating results and financial conditions. Any failure of third-party equipment
or software comprising any part of our systems to operate properly with regard
to Year 2000 and thereafter could require us to incur unanticipated expenses to
address associated problems, which could have a material adverse effect on our
business, operating results and financial condition.
We have no plan to ascertain whether the internal systems and products
of its potential future customers are Year 2000 compliant. We may in the future
be subject to claims based on Year 2000 problems in others' products or issues
arising from the integration of multiple products within an overall system. We
cannot assure that we will not in the future be required to defend our products
or services or to negotiate resolutions of claims based on Year 2000 issues. The
costs of defending and resolving Year 2000-related disputes, and any of our
liabilities for Year 2000-related damages, including consequential damages,
could have a material adverse effect on our business, operating results and
financial condition.
We do not have any specific contingency plans if any Year 2000 problems
develop with respect to our embedded systems or systems acquired from vendors.
We will develop contingency plans if we identify instances of noncompliance, and
we expect such noncompliance to have a material adverse impact on our
operations. The cost of developing and implementing such plans may itself be
material.
Year 2000 issues may affect the purchasing patterns of customers and
potential customers in a variety of ways. Many companies are expending
significant resources to replace or remedy their current hardware and software
systems for Year 2000 compliance. These expenditures may result in reduced funds
available to purchase products such as those offered by us. We do not believe
that there is any practical way to ascertain the extent of, and have no plan to
address problems associated with such a reduction in purchasing resources of its
customers. Any such reduction could, however, result in a material adverse
effect on our business, operating results and financial condition. The Year 2000
problem is pervasive and complex, as virtually every computer operation will be
affected in some way. Consequently, no assurance can be given that Year 2000
compliance can be achieved without significant additional costs.
<PAGE>
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PRICE RANGE OF COMMON STOCK
The Class A Common Stock trades on The OTC Bulletin Board of the Nasdaq
Stock Market under the symbol "WAVX". The following table sets forth, for the
periods indicated, the high and low closing sales prices per share for the Class
A Common Stock. There is no established trading market for our Class B Common
Stock.
<TABLE>
<CAPTION>
High Low
---- ---
Year Ended December 31, 1998
<S> <C> <C>
First Quarter (January 1, 1998-March 31, 1998) $1.68 $0.97
Second Quarter (April 1, 1998-June 30, 1998) 4.75 1.56
Third Quarter (July 1, 1998-September 30, 1998) 4.56 2.25
Fourth Quarter (October 1, 1998-December 31, 1998) 5.63 2.44
High Low
---- ---
Year Ended December 31, 1997
First Quarter (January 1, 1997-March 31, 1997) $3.00 1.56
Second Quarter (April 1, 1997-June 30, 1997) 1.81 1.25
Third Quarter (July 1, 1997-September 30, 1997) 2.00 0.94
Fourth Quarter (October 1, 1997-October 23, 1997) 1.94 1.06
Fourth Quarter (October 24, 1997-December 31, 1997) 2.00 0.63
</TABLE>
As of March 5, 1999, there were approximately 394 holders of our Class
A Common Stock. As of such date, there were 57 holders of our Class B Common
Stock.
On April 7, 1999, the last sale price reported on The OTC Bulletin
Board for the Class A Common Stock was $19.31.
We have never declared or paid any cash dividends on our capital stock.
We currently anticipate that we will retain all future earnings, if any, to fund
the development and growth of our business and do not anticipate paying any cash
dividends on its capital stock in the foreseeable future.
USE OF PROCEEDS
The Selling Security Holders will receive all of the net proceeds from
sales of the Class A Common Stock sold pursuant to this prospectus.
<PAGE>
- 20 -
SELECTED CONSOLIDATED FINANCIAL DATA
The following table sets forth our selected consolidated financial data
as of the end of, and for each of the years in the five-year period ended,
December 31, 1998, and for the period from February 12, 1988 (inception) through
December 31, 1998. The selected consolidated financial data as of December 31,
1998 and 1997 and for each of the years in the three-year period ended December
31, 1998 and for the period February 12, 1988 (inception) through December 31,
1998 have been derived from and should be read in conjunction with the
consolidated financial statements of the Company which have been audited by KPMG
Peat Marwick LLP, independent certified public accountants, whose report appears
elsewhere in this prospectus.
Statement of Operations Data
<TABLE>
<CAPTION>
Period from
February 12,
1988
(inception)
through
December 31
Year ended December 31
1998 1997 1996 1995 1994 1998
---- ---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C> <C>
Net Revenues $ 10,193 $ 10,712 $ 1,458 $ - $ - $ 22,363
------------- ------------- ------------ ----------- ----------- -------------
Operating expenses:
Selling, general and
administrative 9,874,166 7,983,151 5,560,620 4,080,185 2,432,283 37,310,672
Write-off of Goodwill - 769,886 - - - 769,886
Aladdin Technology
License Expense - 3,889,000 - - - 3,889,000
Research and
development 3,508,968 2,146,127 3,309,022 3,324,735 1,761,366 18,254,781
------------- ------------- ------------ ------------ ----------- -------------
13,383,134 14,788,164 8,869,642 7,404,920 4,193,649 60,224,339
------------- ------------- ------------ ------------ ----------- -------------
Other income (expense):
License Fee 2,750,000 1,000,000 - - - 3,750,000
License Warrant Cost (1,100,000) - - - - (1,100,000)
Net interest and other
income (expense) (173,003) (120,342) 184,369 572,054 (77,852) 331,569
------------- ------------- ------------ ------------ ----------- -------------
Net loss (11,895,944) (13,897,794) (8,683,815) (6,832,866) (4,271,501) ( 57,220,407)
Accrued dividends on
preferred stock 108,863 809,982 199,614 40,600 39,484 1,243,393
------------- ------------- ------------ ------------ ----------- -------------
Assured incremental
yield 750,000 1,673,000 670,965 - - 3,093,965
------------- ------------- ------------ ------------ ----------- -------------
Net loss to common
stockholders $(12,754,807) $(16,380,776) $(9,554,394) $(6,873,466) $(4,310,985) $(61,557,765)
============= ============= ============ ============ =========== =============
Weighted average
number of common
shares outstanding
during the period 29,299,844 20,943,748 14,956,584 13,794,373 10,503,621 11,570,172
Loss per common share $(.44) $(.78) $(.64) $(.50) $(.41) $(5.32)
====== ====== ====== ====== ====== ========
</TABLE>
<PAGE>
- 21 -
Balance Sheet Data
Year ended December 31
<TABLE>
<CAPTION>
Pro Forma
December 31
1998 1997 1996 1995 1994 1998(1)
---- ---- ---- ---- ---- -------
<S> <C> <C> <C> <C> <C>
Working capital
(deficiency) $(3,778,895) $(669,041) $3,197,519 $5,458,512 $12,463,502 $19,621,105
Total assets 2,057,812 1,678,213 6,237,219 7,754,042 13,766,864 25,457,812
Current liabilities 4,840,989 1,949,886 937,163 1,210,778 867,145 4,840,989
Long-term liabilities - 522,124 465,500 - - -
Series A Cumulative
Redeemable Preferred
Stock 493,201 471,601 432,334 390,534 349,934 493,201
Series B Cumulative
Convertible Preferred
Stock - - 195,520 - -
Series C Cumulative
Convertible Preferred
Stock - - 2,647,742 - -
Deficit accumulated
during the development
stage (57,220,407) (45,324,463) (31,426,669) (22,742,854) (15,909,988) (57,220,407)
------------ ------------ ------------ ------------ ------------ -----------
Total stockholders'
equity (deficiency) $(3,276,378) $(743,274) $1,558,960 $6,152,730 $12,549,785 $20,123,622
============ ============ ============ ============ ============ ===========
</TABLE>
(1) Adjusted to reflect the sale on March 23, 1999 of 2,090,954 shares of Class
A Common Stock, at a price of $11.00 per share, for an aggregate purchase
price of $23,000,494, to a group of accredited investors, and the issuance
on March 30, 1999 of 181,818 shares of Class A Common Stock, at a price of
$11.00 per share, in satisfaction of a $2,000,000 note. After deductions of
commissions and expenses, our net proceeds from these two transactions were
approximately $23,400,000.
<PAGE>
- 22 -
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
Overview
Wave Systems Corp. ("Wave") is creating a new electronic commerce model
for digital information and services based on client-side security, transactions
and trust. Since our inception in February of 1988, we have devoted
substantially all of our efforts and resources to research, feasibility studies,
design, development, and market testing of a distributed trust system that
enables client based transactions, including the metered usage of electronic
content and services (the "Wave System"). Electronic content and services refers
to any data, graphic software, video or audio sequence that can be digitally
transmitted and/or stored. As our research and development activities matured,
we were able to devote increased resources to the creation of content
distribution services, market development and the application of the Wave System
to end-user services. During 1998 we established relationships with RSA Data
Security, NEC Technologies, Pollex Technology, Hewlett-Packard's VerSecure
division, Sun Microsystems, SMSC, ITE, IGST, Sarnoff, Hauppauge Computer Systems
and WavePhore. We received payments of $1 million and $4 million pursuant to a
joint venture agreement with Internet Technology Group, PLC ("ITG"), a United
Kingdom company, and have recognized $3.75 million to date as license fees. We
also recorded a net cost of $1.1 million for an exchange of warrants between us
and ITG for 1,000,000 shares of common stock in each of the companies, which is
to occur upon attainment of the final milestones and payment of the final
installment of the license fee. From inception through December 31, 1998, we
have realized only minimal operating revenues, and do not anticipate significant
revenues in the near future. There are numerous risks that could adversely
affect our efforts to achieve profitability.
Results of Operations
Years Ended December 31, 1998 and 1997
For the years ended December 31, 1998 and December 31, 1997 we had only
minimal operating revenues.
Selling, general and administrative expenses for the year ended
December 31, 1998 were $9,874,166 as compared with $7,983,151 for 1997. The
increase in selling, general and administrative expenses was primarily
attributable to increased headcount, as well as trade-show related expenses.
In the third quarter of 1997 we wrote off approximately $770,000 of
Goodwill recorded for the Win acquisition because we were uncertain as to
whether the anticipated future operations of the business would be sufficient to
justify the carrying value.
Research and development expenses for the year ended December 31, 1998
were $3,508,968 as compared with $2,146,127 for 1997. The increase in research
and development expenses is attributable to increased headcount and
consulting-related expenses.
License fee income for the year ended December 31, 1998 was $2,750,000,
as compared with $1,000,000 for 1997. The $2,750,000 for the year ended December
31, 1998 is before a charge of $1.1 million related to our net cost of a warrant
we are obligated to issue to ITG as part of the technology licensing agreement.
The $1.1 million charge includes the estimated fair value of the ITG warrant
that we will receive as part of the warrant exchange. The license fee for both
1998 and 1997 were portions of a $5 million fee paid by ITG to us as part of a
joint venture agreement under which ITG receives the right to market the Wave
technology in European and Middle Eastern markets.
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Net interest expense for the year ended December 31, 1998 was $173,003
as compared with net interest expense of $120,342 for 1997. The increase in
interest expense for the year ended December 31, 1998 was primarily attributable
to the restated and amended note for Southeast Interactive Technologies Fund I
(see Note 5), offset by an increase in interest-bearing assets. Interest income
of $55,282 for the year ended December 31, 1997 was attributable to the interest
earned on marketable securities purchased with proceeds from the issuance our
convertible preferred stock in May 1996. We held no marketable securities at
December 31, 1998.
Due to the reasons set forth above, our net loss was $11,895,944 for
the year ended December 31, 1998, as compared with $13,897,794 for 1997.
Years Ended December 31, 1997 and 1996
For the years ended December 31, 1997 and December 31, 1996 we had only
minimal operating revenues.
Selling, general and administrative expenses for the year ended
December 31, 1997 were $7,983,151 as compared with $5,560,620 for 1996. The
increase in selling, general and administrative expenses was primarily
attributable to development and marketing of new applications of our technology
as well as accrued expenses related to the ITG Joint Venture Agreement, and
bonuses and salary increases.
In the third quarter of 1997 we wrote off approximately $770,000 of
Goodwill recorded for the Win acquisition because we were uncertain as to
whether the anticipated future operations of the business would be sufficient to
justify the carrying value.
Research and development expenses for the year ended December 31, 1997
were $2,146,127 as compared with $3,309,022 for 1996. The decrease in research
and development expenses is attributable in part to a license agreement with
Aladdin Knowledge System, whereby we licensed Aladdin's Hasp technology for a
share in content revenues as well as cash and warrants totaling $3,889,600. More
generally, the decrease in research and development is attributable to the shift
in our focus from research and development to commercialization and marketing
and personnel adjustments consequent thereto.
In July of 1997, we entered into a joint-venture with Internet
Technology Group, PLC (ITG), a United Kingdom Internet service provider.
Pursuant to the joint venture agreement, we will receive a license fee of up to
$5 million in exchange for the joint venture's right to market our technology in
European and Middle Eastern markets. During the third quarter of 1997, we
received $1.0 million from the joint-venture representing partial payment of the
license fee, with the remaining payment to be made upon our attaining certain
milestones related to the number of Wave Meters distributed. The amount received
was recorded as deferred license fee income in the third quarter as it was
uncertain whether we had met the contractual requirements required in order to
have earned the first payment. During the fourth quarter of 1997, we met these
requirements and recorded the $1 million as a license fee. Also, we accrued
$490,000 in the fourth quarter for expenses related to our obligation to assist
the joint-venture in setting up the Wave system in the designated markets. These
costs are included in selling, general and administrative expense. Additionally,
upon attainment of the final milestones and final cash payment by ITG, we and
ITG will exchange warrants for 1 million shares of the other company.
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Net interest expense for the year ended December 31, 1997 was $120,342
as compared with net interest income of $184,369 for 1996. Interest income of
$55,282 for the year ended December 31, 1997 was attributable to the interest
earned on proceeds from the issuance of our convertible preferred stock in May
of 1996. Interest income of $194,766 for the year ended December 31, 1996 was
attributable to the interest earned on proceeds from the issuance of our
convertible preferred stock in May of 1996. We held no marketable securities at
December 31, 1997.
Due to the reasons set forth above, our net loss was $13,897,794 for
the year ended December 31, 1997, as compared with $8,683,815 for 1996.
Liquidity and Capital Resources
We have experienced net losses and negative cash flow from operations
since our inception, and, as of December 31, 1998 had a deficit accumulated
during the development stage of approximately $57.2 million. We have financed
our operations through December 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 our 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 our 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 and warrants raising $800,000 (before
deduction of expenses incurred in connection therewith), and the private
placements of convertible preferred stock for an aggregate amount of $13,350,000
(before deduction of expenses incurred in connection therewith). In addition, we
have attempted to reduce cash flow requirements by compensating key employees,
consultants, suppliers and other vendors with Common Stock and options to
purchase Common Stock.
At December 31, 1998, we had approximately $1.1 million in cash and
cash equivalents. We held no marketable securities at December 31, 1998. At
December 31, 1997, we had approximately $759,000 in cash and cash equivalents.
We held no marketable securities at December 31, 1997. The increase in cash and
cash equivalents is attributable to cash proceeds of approximately $2.8 million
from the issuance of Series G Convertible Preferred Stock, the last two
licensing payments of $750,000 and $3.25 million from ITG, and Aladdin Knowledge
System's exercise of its warrant for 1 million shares for $2.55 million, less
cash used for operating expenses. At December 31, 1998, we had working capital
deficiency of approximately $3.8 million. In January, 1999 we issued a
convertible promissory note in aggregate principal amount of $2 million, which
was subsequently converted into Class A common stock in March, 1999, following
our completion of an additional $23 million private placement with
institutional, strategic and accredited investors.
We expect to incur substantial additional expenses resulting in
significant losses at least through the period ending December 31, 1999, 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. However, considering the funds received from
this latest common stock offering and our projected operating cash requirements,
we anticipate that our existing capital resources will be adequate to satisfy
our capital requirements through the end of the third quarter of 2000.
However, as we have not yet attained commercial acceptance of our
products and have not generated any significant operating revenue, considerable
uncertainty currently exists with respect to the adequacy of current funds to
support our activities. This uncertainty will continue until a positive
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cash flow from operations can be achieved. Additionally, we are uncertain as to
the availability of financing from other sources to fund any cash deficiencies.
In order to reduce this uncertainty, we continue to evaluate additional
financing options and may therefore elect to raise capital, from time to time,
through equity or debt financings in order to capitalize on business
opportunities and market conditions and to insure the continued development of
our technology, products and services. There can, however, be no assurance that
we can raise additional financing in the future.
We presently have no material commitments for capital expenditures.
As of December 31, 1998, we had available net operating loss
carryforwards for Federal income tax purposes of approximately $47.6 million.
Because of the "change in ownership" provisions of the Tax Reform Act of 1986,
our 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 our company
occurs within any three-year period. We have made no determination concerning
whether there has been such a cumulative change in ownership. However, we
believe that it is likely that such a change in ownership occurred prior to or
following the completion of our initial public offering.
In June 1997, the FASB issued SFAS 130, "Reporting Comprehensive
Income," which establishes standards for reporting and display of comprehensive
income and its components in a full set of general-purpose financial statements.
Under this concept, all revenues, expenses, gains and losses recognized during
the period are included in income, regardless of whether they are considered to
be results of operations of the period. SFAS 130, which we adopted effective
January 1, 1998, did not impact our consolidated financial statements.
In June 1997, the FASB issued SFAS 131, "Disclosures about Segments of
an Enterprise and Related Information," which establishes standards for the way
that public business enterprises report selected information about operating
segments in annual financial statements and requires that those enterprises
report selected information about operating segments in interim financial
reports to shareholders. It also establishes standards for related disclosures
about products and services, geographic areas and major customers. SFAS 131,
which we adopted effective January 1, 1998, did not impact our consolidated
financial statements and footnote disclosures, as we operate in one segment.
The Financial Accounting Standards Board ("FASB") recently issued
Statement of Financial Standards Number 133 ("SFAS 133"), "Accounting for
Derivative Instruments and Hedging Activities." This statement establishes
accounting and reporting standards for derivative instruments and hedging,
requiring recognition of all derivatives as either assets or liabilities in the
statement of financial position measured at fair value. This statement is
effective for all fiscal quarters of fiscal years beginning after June 15, 1999.
We do not expect the effects of adopting SFAS 133 to have a material impact on
our financial condition, results of operations or cash flows.
The AICPA Accounting Standards Executive Committee recently issued
Statement of Position ("SOP") 98-1, Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use. This statement requires that
certain costs related to the development or purchase of internal-use software be
capitalized and amortized over the estimated useful life of the software, and is
effective for fiscal years beginning after December 15, 1998. The statement also
requires that costs related to the preliminary project stage and post
implementation/operations stage in an internal-use computer software development
project can be expensed as incurred. We will comply with the provisions of SOP
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98-1 in fiscal 1999. We do not expect that the adoption of this SOP to have a
material impact on our financial position or results of operations.
The AICPA Accounting Standards Executive Committee recently issued SOP
98-5, Reporting on the Costs of Start-Up Activities. This Statement requires
that costs incurred during start-up activities, including organization costs, be
expensed as incurred, and is effective for fiscal years beginning after December
15, 1998. We will comply with the provisions of SOP 98-5 in fiscal 1999. We do
not expect the adoption of this SOP to have an impact on our financial position
or results of operations.
Impact of Year 2000 Issue
The Year 2000 issue results from computer programs written using two
digits rather than four to define the applicable year. Any of our computer
programs that have date-sensitive software may recognize a date using "00" as
the year 1900 rather than the year 2000. This could result in a system failure
or miscalculations causing disruptions of operations, including, among other
things, a temporary inability to process transactions, send invoices or engage
in similar normal business activities.
We have made an assessment with regard to whether our own internal
information systems are Year 2000 compliant. Since January 1998, in addition to
updating employee computers and workstations, we have upgraded various
accounting, telecommunications, customer care systems and transaction systems at
an aggregate cost of approximately $400,000, with systems that are warranted by
the vendors to be Year 2000 compliant. To the extent we purchase additional
systems, we require that such systems are warranted by the vendors to be Year
2000 compliant. We continue to seek assurances from our existing vendors whose
systems are not warranted to be Year 2000 compliant that such systems will be
Year 2000 compliant. We employ a manager of management information systems,
whose responsibilities include oversight of Year 2000 compliance. We do not
separately track the internal costs incurred for Year 2000 projects, which are
principally the related payroll costs for our information systems personnel.
Although we do not believe that any additional Year 2000 compliance-related
costs will be significant, we cannot assure you that that costs incurred to
address unanticipated issues would not have a material adverse effect on our
business, operating results and financial conditions. Any failure of third-party
equipment or software comprising any part of our systems to operate properly
with regard to Year 2000 and thereafter could require us to incur unanticipated
expenses to address associated problems, which could have a material adverse
effect on our business, operating results and financial condition.
We believe, based on an internal assessment, that the current versions
of our software products are Year 2000 compliant. We have no plan to ascertain
whether the internal systems and products of our potential future customers are
Year 2000 compliant. We may in the future be subject to claims based on Year
2000 problems in others' products or issues arising from the integration of
multiple products within an overall system. Although we have not been involved
in any litigation or proceeding to date involving our products or services
related to Year 2000 issues, we cannot assure you that we will not in the future
be required to defend our products or services or to negotiate resolutions of
claims based on Year 2000 issues. The costs of defending and resolving Year
2000-related disputes, and any of our liabilities for Year 2000-related damages,
including consequential damages, could have a material adverse effect on our
business, operating results and financial condition.
We do not have any specific contingency plans if any Year 2000 problems
develop with respect to our embedded systems or systems acquired from vendors.
Contingency plans will be developed if we identify instances of noncompliance,
and such noncompliance is expected to have a material adverse impact on our
operations. The cost of developing and implementing such plans may itself be
material.
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Year 2000 issues may affect the purchasing patterns of customers and
potential customers in a variety of ways. Many companies are expending
significant resources to replace or remedy their current hardware and software
systems for Year 2000 compliance. These expenditures may result in reduced funds
available to purchase products such as those offered by us. We do not believe
that there is any practical way to ascertain the extent of, and have no plan to
address problems associated with such a reduction in purchasing resources of our
customers. Any such reduction could, however, result in a material adverse
effect on our business, operating results and financial condition. The Year 2000
problem is pervasive and complex, as virtually every computer operation will be
affected in some way. Consequently, you should understand that Year 2000
compliance may not be achieved without significant additional costs to us.
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BUSINESS
Wave Systems Corp. ("Wave") is creating a new electronic commerce model
for digital information and services based on client-side security, transactions
and trust. Since our inception in February of 1988, we have devoted
substantially all of our efforts and resources to research, feasibility studies,
design, development, and market testing of a distributed trust system that
enables client based transactions, including the metered usage of electronic
content and services (the "Wave System"). Electronic content and services refers
to any data, graphic software, video or audio sequence that can be digitally
transmitted and/or stored. As our research and development activities matured,
we were able to devote increased resources to the creation of content
distribution services, market development and the application of the Wave System
to end-user services.
We believe that the Wave System can fundamentally change today's
centralized e-commerce model by creating a distributed trust and security
system, where transactions are executed and recorded in the consumer's devices,
at the consumer's location. This means that electronic content and services can
be consumed with more efficient and flexible pricing, broader distribution
opportunities, greater protection against unauthorized usage and secure,
low-cost, and accurate data on the usage of the products and services.
The Wave System consists of an EMBedded Application Security SYstem
("EMBASSY") in consumer devices that provide the basis for a multi-party trusted
system using both hardware and software. The EMBASSY is a programmable, low cost
"system within a system" that can perform independent transactions such as meter
content usage, store sensitive information such as identities and account
balances and run secure applications for access to services. The EMBASSY is an
open system based on secure smart card hardware technology that can be
integrated into PCs, peripherals, set top boxes or used as an independent
component. The WaveMeter application running in the EMBASSY allows transactions
to occur without the expense of a real-time network connection for every
transaction. The EMBASSY securely stores electronic funds and transaction
information about the usage of electronic content to be transmitted securely to
a central transaction processing center ("WaveNet") periodically. 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 designed to be compatible with every existing content delivery system
such as CD-ROM, the Internet, and digital broadcast. PC OEMs and electronic
content service providers such as telecommunications companies have expressed
interest in the Wave System. We believe that once there is a broad installed
base of the EMBASSY, electronic content and service providers from other market
segments are likely to be attracted to the Wave System.
In order to achieve broad market acceptance of the Wave System, we
pursue strategic relationships with major personal computer manufacturers and
technology suppliers, and promote the use of the EMBASSY to electronic content
owners, particularly developers and distributors of entertainment, audio,
broadcast and educational software. We believe that the EMBASSY can be the
foundation for a "client-side subscriber management system" that is independent
of the content or delivery network. This means that content can be delivered on
CD-ROM, data broadcast, broadband and other forms of transmission.
We believe that the Wave System provides a powerful merchandising
interface for electronic content and services at the point of purchase. This may
increase the interest of consumers to sample electronic content that they are
considering purchasing. The Wave System provides the consumer with enhanced
control of their individual privacy and secure storage of sensitive information.
The Wave
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System facilitates the payment of royalties to content providers and service
partners while allowing both customized and broad, inexpensive distribution to
customers.
In 1998, we enhanced the Wave System to make it acceptable as an open
industry standard for a broad range of security and e-commerce functions in end
user-devices. We have been successful in attracting other companies to port
their applications and services to the Wave System and our EMBASSY platform,
which we believe will increase the value of the system to potential deployment
partners. These strategic relationships have generated what we believe to be
significant joint marketing benefits in our efforts to promote the Wave System
to OEMs and the content industry.
During 1998, we established relationships with RSA Data Security, NEC
Technologies, Pollex Technology, Hewlett-Packard's VerSecure division, Sun
Microsystems, SMSC, ITE, IGST, Sarnoff, Hauppauge Computer Systems and
WavePhore. We also received a payment of $4 million pursuant to a joint venture
agreement with Internet Technology Group, PLC ("ITG"), a United Kingdom company.
In 1999, we will seek to continue to expand our commitments from
additional hardware manufacturers, including personal computer manufacturers,
peripheral companies and companies involved in the commerce of electronic
content and services, both in North America and overseas. We also seek to expand
the role of the Wave System and EMBASSY as a general security device in networks
in order to provide new opportunities for the creation of virtual private
networks and services by telecommunications vendors and Internet service
providers.
Additionally, in 1996 we developed a production software version of the
WaveMeter application that offers a subset of the features of the hardware
version and has been implemented as part of our Internet commerce server (the
"WaveMeter server"). The WaveMeter server enables content owners to secure and
sell their intellectual property from a web site. The e-commerce services
offered through the Wave Meter server do not require the consumer or publisher
to install any additional hardware or software.
Significant uncertainty currently exists with respect to the adequacy
of current funds to support our activities. This uncertainty will continue until
a positive cash flow from operations can be achieved. Additionally, we are
uncertain as to the availability of financing from other sources to fund any
cash deficiencies.
In order to reduce these uncertainties, we are currently evaluating
additional financing options and may therefore elect to raise capital, from time
to time, through equity or debt financings in order to capitalize on business
opportunities and market conditions and to insure the continued development of
our technology, products and services. In January, 1999, we issued a convertible
promissory note in aggregate principal amount of $2 million, which was
subsequently converted into Class A Common Stock in March, 1999, in addition to
and following our completion of an additional $23 million private placement with
institutional, strategic and accredited investors. We cannot assure you,
however, that we can raise additional financing in the future.
As of October 19, 1997, we became obligated to redeem for approximately
$465,000 all of the outstanding shares of the Series A Redeemable Preferred
Stock issued to a certain individual pursuant to the terms of the Restated
Certificate of Incorporation. As of December 31, 1998, our total obligation
(principal plus interest) under the Series A redemption was $493,201, and it
continues to accrue dividends and interest. We have not redeemed such shares as
of March 30, 1999, nor has any demand for redemption been made.
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We presently have no material commitments for capital expenditures.
However, in order to bring the Wave System to market, we anticipate spending
additional amounts on contracting for software development, licensing key
technologies, and inventory items such as computer chips and boards, additional
hardware, and related materials. Such spending will vary based on our
performance.
Our Class A Common Stock was traded on the Nasdaq National
Market from the inception of public trading until October 3, 1997, when we
became listed on the Nasdaq SmallCap Market, due to our inability to meet
certain listing criteria. Later that month we were delisted from the Nasdaq
SmallCap Market, and our stock is currently traded on the Over-the-Counter
Bulletin Board. We applied for a new listing on the Nasdaq National Market on
January 29, 1999 because we met all of the quantitative criteria for the listing
at that time. While we believe that our Class A Common Stock will be again
listed on the Nasdaq National Market shortly, we cannot assure you that Nasdaq
will indeed approve this new listing, nor can we assure you that we will not in
the future be unable again to satisfy Nasdaq's listing criteria. Nevertheless,
in order for us to maintain a listing on The Nasdaq National Market, we must
continue to meet the Nasdaq continuing listing criteria on an ongoing basis. The
failure to achieve, or the future removal of our Class A Common Stock from,
listing on The Nasdaq National Market may have a negative effect on the market
price of our common stock and on the ability of stockholders and investors to
buy and sell shares of the Class A Common Stock in the public markets, and
consequently our ability to raise capital in the future.
We were incorporated in Delaware under the name Indata Corp. on August
12, 1988. We changed our name to Cryptologics International, Inc. on December 4,
1989. We further changed our name to Wave Systems Corp. on January 22, 1993. Our
principal executive offices are located at 480 Pleasant Street, Lee,
Massachusetts 01238 and our telephone number are (413) 243-1600.
We are a development stage company and have realized minimal operating
revenues since our inception. At December 31, 1998 we had an accumulated deficit
of approximately $57.2 million. There can be no assurance that we will be
successful in achieving commercial acceptance of the Wave System.
The Wave System
The Wave System is designed to create new revenue streams for owners of
electronic content by improving upon existing distribution systems for
electronic content. Using existing distribution systems such as CD-ROM and the
Internet, electronic content owners distribute their products to customers in an
encrypted or otherwise secured ("Wave-enabled") form so it can be offered for
sale through the EMBASSY E-Commerce System. Customers are then able to purchase
and access the electronic content on an as-desired basis. We believe that the
Wave System allows electronic content owners to deliver their products to a
larger market because the efficient and secure metering technology facilitates
greater flexibility in content distribution and pricing. We believe that greater
flexibility in electronic distribution and pricing makes the Wave System
particularly attractive to developers, distributors and consumers of
entertainment and educational software.
In addition, the programmable EMBASSY is able to support multiple
secure applications from a range of service providers, applications vendors, and
security companies. We seek to exploit this multi-application capability to
create new sources of revenue through hosting secure applications and creating
additional services based on the EMBASSY distributed trust model. We believe
that our expansion of the EMBASSY has provided a source of increased interest in
Wave's technology as a general-purpose solution for adoption by a wide range of
companies in their platforms and as a secure delivery mechanism.
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The Wave System consists of the EMBASSY E-Commerce System, the
WaveMeter application, a subsystem that records and communicates the usage of
electronic content, and WaveNet, a central transaction processing network. The
EMBASSY controls the loading and execution of multiple secure applications. The
WaveMeter controls and monitors the customer's access to encrypted electronic
information and software. Because the Wave System uses asynchronous
communication, it is well suited to low-cost processing of micro, rental and
rent-to-own transactions. We have completed a prototype incorporating the rental
and rent-to-own functionality into the Wave System using Wave's current chip
technology. This is currently being integrated into a WinTV tuner card from
Hauppauge Computer Systems. This product is planned for introduction into the
market in 1999. With this version of the WaveMeter, application transactions are
executed locally against a source of funds stored in the WaveMeter secure
memory. The WaveMeter retains pricing and licensing information, downloaded from
WaveNet, for use in the execution of these transactions. Transactions are
securely stored in the usage log of the WaveMeter for eventual reporting to
WaveNet. The WaveMeters and WaveNet communicate using Wave's secure
communications protocol.
WaveNet consists of the WaveNet Transaction Processing System ("TXP")
and the WaveNet Information Clearing House ("ICH"). TXP acts as the principal
interface with the EMBASSY. Every EMBASSY-equipped device will contact TXP on a
periodic basis. During this secure communication, all stored event information,
such as purchase logs, are uploaded to TXP, additional credit may be requested,
pending events are delivered to the device, and a routine audit check is
performed. There may be a number of TXP systems to distribute access around the
globe. TXP routes all event logs to ICH where they are processed against Wave's
royalty contracts. ICH calculates royalties due to each partner and handles the
billing and reporting services, ensuring that all Wave partners are properly
compensated. WaveNet is presently in operation.
The Wave System is installed into the customer's PC or integrated into
an attached peripheral device. It is based on a semiconductor device that uses
secure certified integrated circuit technology to store decryption keys, credit
information, and usage data. At present, the WaveMeter, based on our own silicon
chip, is packaged on a half-size ISA board with a battery and a clock and can be
installed in the ISA slot of a PC. In 1999 Wave plans to deliver a new version
of the EMBASSY hardware with a Universal Serial Bus interface (USB) which should
easily integrated into a broad range of products including separate dongles for
portable EMBASSY devices. In 1996, we also developed a production software
version of the WaveMeter application which has been implemented as a component
of the WaveMeter server. The use of the software version of the WaveMeter is
compatible with the use of the hardware version of the WaveMeter application.
We believe that the hardware version of the Wave System with EMBASSY is
the most secure form of content licensing management and metering technology
available today. The hardware and software of the EMBASSY contains a wide range
of security features to strengthen the trusted client capabilities in user
devices. Tampering with the EMBASSY or Wave System applications results in
automatically initiated system lockouts, and is readily detected by both the
EMBASSY and WaveNet. The encryption keys are loaded at the time of manufacture
and are unique and specific to each EMBASSY device. Every piece of electronic
content is protected using a unique key. Services are controlled by secure
applications running in the EMBASSY. Wave believes it has designed a security
architecture where the value of breaking an individual system to ascertain the
keys is low since there are no common keys that allow system-wide use.
Wave supplies the tools that developers need to build and successfully
supply applications to end-users. Electronic content must be Wave-enabled to be
available to end users on the Wave System. A data preparation tool kit
structures data packages, which are individual elements of electronic content
that are uniquely identified, encrypted, priced and formatted to use within the
Wave
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System. Once Wave-enabled, each data package can be delivered to the end user in
many electronic forms. Currently, the two primary mechanisms of delivery of
electronic content to the end user are the Internet and CD-ROM. The Wave System,
however, will work with point-to-multi-point data broadcasting via satellite,
terrestrial TV, FM sideband, magnetic media, cable modem, DVD and broadband.
Markets and Business Strategy
Our long-term strategy is to achieve broad market acceptance of the
Wave System as a distributed trust platform for commerce performed in user
devices. To achieve this goal we pursue strategic relationships with hardware
manufacturers and companies involved in the development of commerce in
electronic content and services. In addition, we believe that, since the Wave
System permits greater flexibility in pricing and distribution of electronic
content, it is particularly well-suited for merchandising consumer content,
entertainment and educational software. Therefore we are vigorously targeting
this market segment as a means of rapidly achieving the broad installed base of
the Wave System. We believe that once there is a broad installed base of the
Wave System and EMBASSY, electronic content owners from other market segments
are likely to be attracted to the Wave System. However, we cannot assure you
that the Wave System will achieve any significant market acceptance.
We have focused on forming agreements with strategic partners that will
help us promote the broad-based acceptance of the Wave System as a platform for
commerce in electronic content. We are currently in discussion with original
equipment manufacturers regarding the incorporation of the Wave System and
EMBASSY into their products. We have also focused on pursuing strategic
relationships with companies seeking to distribute electronic content via the
Internet. The compatibility of the Wave System with the Web has provided us with
a product that has already attracted the attention of leaders in the development
of electronic commerce solutions and particularly commerce in electronic
content. We will continue to focus on developing other strategic relationships
to seek to achieve the broad acceptance of the Wave System as a platform for
electronic commerce.
We have focused on promoting the acceptance of the Wave System by
electronic content owners. The initial target market is entertainment and
educational software developers and distributors. We believe that the Wave
System will provide the home consumer with a new way of acquiring interactive
content and can offer electronic content developers and distributors benefits
similar to those provided by video rental in the film industry. We have invested
heavily in developing relationships with entertainment and educational software
providers. Today, we have over 50 titles functional for demonstration and are
actively preparing others to be launched in 1999.
Competition
We operate in a highly competitive and fragmented environment that is
characterized by rapidly evolving technology. Many of our competitors and
potential competitors have substantially greater financial and technical
resources than us. Also, many current and potential competitors have greater
name recognition and more extensive customer bases that could be leveraged,
thereby gaining market share or product acceptance to our detriment. The Wave
System competes with conventional information delivery systems, such as on-line
services, subscription services on CD-ROM, and services on the Internet.
However, we believe that its metering capability is competitive with other
electronic content delivery systems in a number of applications due to its
superior protection against unauthorized usage, accurate and detailed
information on content usage, and transparent operation. Further, we believe
that it will be competitive with existing distribution systems, including
traditional retail outlets for
<PAGE>
- 33 -
entertainment and educational software, due to its ability to offer these
innovative merchandising mechanisms.
We are aware of other metering systems that compete directly with the
Wave System, and other current and evolving technologies that provide some of
the functionality of the Wave System. There are other companies that have
developed or are in the process of developing technologies that are, or in the
future may be, the basis for competitive products in the field of electronic
content distribution. Some of those technologies may have an entirely different
approach or means of accomplishing the desired effects of the products being
developed by us. We cannot assure you that either existing or new competitors
will not develop products that are superior to or that otherwise achieve greater
market acceptance than our products.
The Wave System is subject to competition from producers of
hardware-based controllers such as dongles and software unlocking systems. We
will compete with well-established producers of dongle-based software unlocking
systems such as Rainbow Technologies, Inc. We also compete with developers of
software unlocking systems such as Portland Software. Wave Systems also provides
basic security services that compete with companies such as QPass and PrivaSeek
in providing electronic wallets and certain e-commerce capabilities. We believe
that the Wave System is superior to existing hardware-based and software
unlocking systems in several ways. These systems primarily operate as "on/off
switches" to control the use of electronic content and services, but are very
limited in their ability to measure and record usage information. We believe
that the Wave System offers superior protection from unauthorized usage, low
operating costs (because it does not require constant communication with and
authorization from a centralized processor), and fast operation that is
convenient and essentially transparent to the end user. Both hardware
controllers and software unlocking systems offer only part of the functionality
of the Wave System. Our distributed trust model also provides a superior
solution for the broadcasting and multicasting of data. Distinct from the
existing software unlocking systems, WaveNet provides centralized back-office
support to owners of electronic content.
Many large information industry players are forming alliances and
attempting to capitalize on the information delivery options offered by the
Internet. In electronic content delivery via the Internet, the Wave System
competes with electronic commerce payment technologies developed and offered by
IBM Micropayment Service, Broadvision, Connect, CyberCash, and Open Market.
However, we believe that many of the electronic commerce payment technologies
may be used as acceptable currency through the Wave System and may be
complementary to, rather than competitive with, the Wave System. We are also
aware of other companies, such as TestDrive, Release Software and InterTrust
that provide electronic content encryption and license management functionality
for transmission of electronic content over the Internet. We believe that the
Wave System is superior to currently available electronic content encryption
technologies due to the high level of persistent security and usage reporting
capabilities of the WaveMeter.
We believe that the interoperability of the Wave System with currently
available and developing distribution media makes the Wave System attractive to
both distributors and consumers of electronic content. A consumer with an
installed EMBASSY System will be able to purchase Wave-enabled content from
sources on CD-ROM and/or the Internet, as well as from sources distributing
electronic content on other developing media, such as broadband. In addition,
with the incorporation of the rental and rent-to-own functionality, the Wave
System will offer greater merchandising flexibility than is possible using
currently available electronic commerce solutions. We caution you, however, that
the Wave System may never achieve the broad-based acceptance necessary to make
it a viable competitor with existing and developing electronic commerce
solutions.
<PAGE>
- 34 -
International Market
Our technologies are controlled under various United States export
control laws and regulations and will require export licenses for certain
exports outside of the United States and Canada. We have received full export
license from the U.S. Department of Commerce for the sale and export of our
single-key DES products. We have also received an export license for our
triple-key data encryption standard products under the provisions of a License
Exception KMI, granted by the Bureau of Export Administration of the U.S.
Department of Commerce. We cannot assure you that that we will have patent
protection or that it will not infringe patents of third parties in foreign
jurisdictions. Because electronic monitoring and the transmission of audited
usage and financial information on end users or payment instructions may be
subject to varying statutory or regulatory controls in foreign jurisdictions,
the use of all portions of the Wave System may not be permitted in any
particular foreign jurisdiction.
Exportable EMBASSY Systems with Strong Cryptography
Wave Systems formed a strategic alliance in 1998 with HP VerSecure in
the development of the trusted client architecture that is the basis of the
EMBASSY E-Commerce System. HP VerSecure provides a security management framework
for EMBASSY that controls the cryptography functions of the device and
application uses of encryption. The primary function of the VerSecure system is
to provide a policy management system that enables the EMBASSY hardware to have
strong cryptography features that can be selectively enabled or disabled in
order to comply with various nations' strength-of-cryptography regulations. This
capability is intended to allow PC OEMs to build a single, consistent product
which can be shipped worldwide, regardless of local cryptography restrictions.
Proprietary Rights and Licenses and Intellectual Property
Our success depends, in part, on our ability to enjoy or obtain
protection for our products and technologies under United States and foreign
patent laws, copyright laws and other intellectual property laws, to preserve
our trade secrets and to operate without infringing the proprietary rights of
third parties. Any issued patent owned or licensed by us may not, however,
afford adequate protection to us and may be challenged, invalidated, infringed
or circumvented. Furthermore, you should understand that our activities may
infringe patents owned by others.
In addition, we may be required to obtain licenses to patents or other
proprietary rights of third parties. Licenses required under any such patents or
proprietary rights may not be made available on terms acceptable to us, if at
all. If we are required to and do not obtain such licenses, we would be
prevented from, or encounter delays in the development and marketing of, our
products and technologies while we attempted to design around such patents or
other rights. Such attempts may not be successful. Failure to obtain such
licenses or to design around such patents or other rights would have a material
adverse effect on us.
We hold non-exclusive patent rights relating to the metered use of
encrypted data in local memory under a limited license (the "License Agreement")
from Titan Corporation ("Titan") to a patent (the "Licensed Patent") jointly
held by Titan and a third party. This License Agreement restricts us from
metering information produced and used solely by a government entity or
producing products that meter this information. In addition, the License
Agreement is subject to the rights of the joint owner of the Licensed Patent,
who has the right to exploit, or to license to third parties, the Licensed
Patent, including in a manner competitive with us. The joint owner of the
Licensed Patent may compete with us or license the Licensed Patent to a
competitor of ours, and our business may exceed the scope of the License
Agreement. Pursuant to the License Agreement, we are obligated to pay certain
royalties to
<PAGE>
- 35 -
Titan. Pursuant to the License Agreement, we have granted to Titan the exclusive
right to use our patents for products distributed to government entities. On
February 28, 1997 we and Titan executed an addendum to the License Agreement
whereby we received a sole license to the Licensed Patent to develop and
distribute products to the in-home consumer microcomputer market segment. Under
this addendum to the License Agreement, Titan waived any and all defaults by us
under the License Agreement occurring prior to February 28, 1997.
We are aware of four United States patents (the "Third Party Patents")
each having some claims that are similar to some of the claims in the Licensed
Patent. Based upon information currently known to us, some of the claims of both
the Licensed Patent and the Third Party Patents cover certain material aspects
of our technology. Therefore, the commercialization of our technology would be
subject to the rights of the holder of the Third Party Patents unless we are
able to invalidate or license such claims. Also, the holder of the Third Party
Patents or a licensee of the Third Party Patents could seek to invalidate such
claims of the Licensed Patent and therefore be able to commercialize a
technology similar to our technology. In either case, in order to invalidate the
other party's patent rights, the party claiming invalidity might need to prove
that it invented the claimed subject matter prior to the other party. We cannot
assure you that we would be successful in invalidating such claims of the Third
Party Patents or that the holder of the Third Party Patents or a licensee of the
Third Party Patents would not be successful in invalidating the claims of the
Licensed Patent. Furthermore, we cannot assure you that the Third Party Patents
could be proven to be invalid on any other basis. Any proceeding involving the
validity of the Licensed Patent and the Third Party Patents would be protracted
and costly. In any suit contesting the validity of a patent, the patent being
contested would be entitled to a presumption of validity and the contesting
party would be required to demonstrate invalidity of such patent by clear and
convincing evidence.
If the Third Party Patents are not invalid insofar as their claims
relate to our technology, then we would require a license from the holder of the
Third Party Patents to commercialize our technology and make, use, or sell
products or practice methods, or license others to sell products or use methods,
utilizing this technology in the United States. Due to the uncertainty as to
whether the Third Party Patents could be proved to be invalid, we have engaged
in preliminary negotiations with the holder of the Third Party Patents to obtain
a license under the Third Party Patents. The negotiations have so far not
produced any agreement and a license may not be obtainable on acceptable terms,
if at all. The inability to obtain a license, if needed, on commercially
reasonable terms would have a material adverse effect on our business and our
future operations.
We have been issued three United States patents relating to encryption
and to our proprietary WaveMeter and WaveNet technology. We also have one patent
pending before the United States Patent Office and three corresponding foreign
patent applications pending before the European Patent Office (collectively, the
"Wave Patents"). The Wave Patents are material to protecting certain of our
technology. Our rights to the Wave Patent derive from a license, amended and
restated in February 1994, from Mr. Peter J. Sprague, our Chairman and Chief
Executive Officer, of his rights in the Wave Patents (the "Amended License
Agreement"), and several agreements with former officers regarding their rights
in the Wave Patents. The Amended License Agreement provides for royalty payments
to be made to Mr. Peter J. Sprague and Dr. John R. Michener, a former officer,
in the aggregate amount of two percent of gross revenues less certain
adjustments, as defined in the Amended License Agreement. The royalty payment is
to be apportioned 75 percent to Mr. Peter J. Sprague and 25 percent to Dr. John
R. Michener. Payment of royalties is secured by a security interest in and to
the Wave Patents. We believe that the agreements as a whole provide us with
exclusive rights under the Wave Patents. There can be no assurance that we will
enjoy exclusive rights to the Wave Patents under such agreements.
<PAGE>
- 36 -
On January 26, 1996, we received notice from E-Data Corporation
(formerly Interactive Gift Express, Inc.), claiming that our practice of our
technology infringes U.S. and foreign patents owned by E-Data Corporation, and
offering to license such patents to us. We are currently obtaining information
needed to investigate the merits of this claim. We believe that there is a
viable argument for non-infringement. The patents owned by E-Data Corporation
are currently being litigated by third parties. We are not involved in these
proceedings.
We rely on trade secrets and proprietary know-how, which we protect, in
part, by confidentiality agreements with our employees and contract partners.
However, we caution you that our confidentiality agreements may be breached and
we may not have have adequate remedies for any breach. Furthermore, we cannot
assure you that our trade secrets will not otherwise become known or be
independently discovered by competitors.
We also rely on copyright to prevent the unauthorized duplication of
our software and hardware products. We have and will continue to protect our
software and our copyright interest therein through agreements with our
consultants. We cannot assure you that copyright laws will adequately protect
our technology.
We have registered trademark and service mark registrations with the
United States Patent and Trademark Office for the marks WaveMeter and WaveNet,
Great Stuff Network, Second Shift (the Wave juggler logo), WaveCommerce, Wave
Interactive Network, WINPublish, WINPurchase and CablePC. We have submitted
trademark registrations for EMBASSY, EMBASSY System and EMBASSY E-Commerce
System and intend to apply for additional name and logo marks in the United
States and foreign jurisdictions as appropriate. No assurance can be given that
federal registration of any of these trademarks in the United States will be
granted. We have abandoned our prior applications for DataWave, InfoWave, and
WaveTrac.
Research and Development
The Wave System incorporates semiconductor, encryption/decryption,
software transaction processing and other technologies in which we have made a
substantial investment in research and development. We expect that we will be
required to continue to make substantial investments in the design of the Wave
System, including EMBASSY, the WaveMeter, WaveNet and software interfaces. For
the years ended December 31, 1998, 1997, and 1996, we expended approximately
$3.5 million, $2.1 million and $3.3 million respectively, on research and
development activities (which amounts include the value of stock issued). In
addition to our ongoing research and development activities, in July 1997 we
licensed technology and in-process research and development from Aladdin
Knowledge Systems for cash and warrants valued at $3.9 million. From our
inception in February 1988 through December 1998, we expended approximately
$18.3 million on research and development activities.
The success of the Wave System depends to a large extent on our ability
to adapt the Wave System for use with various methods for the distribution of
electronic content, the ability of the Wave technology to interface with various
platform environments, and the ability of the Wave System to work in many
application environments. Incorporation of Aladdin's Hasp technology furthered
these efforts and illustrates the adaptive capabilities of the Wave System. We
believe that a significant portion of our future research and development
expenditures will be used to adapt the Wave System accordingly.
We will also continue to expend a significant amount of resources on
the development of new iterations of the EMBASSY and the WaveMeter application.
We believe that by providing various means of linking the EMBASSY to the
customer's computer or network, we will be more likely to
<PAGE>
- 37 -
achieve broad acceptance of the Wave System. We are currently developing other
forms of the EMBASSY to target other market needs.
We are now focusing increased resources on developing our operational
infrastructure. We are placing greater emphasis on developing internal
production and fulfillment systems and marketing infrastructure to distribute
the Wave System. We will also increase the resources available to WaveNet to
adapt to changing market requirements. We plan to expand WaveNet to handle more
end users, to implement more sophisticated pricing methodologies and to add
greater financial system flexibility.
Employees
As of December 31, 1998, we employed 80 full-time employees, 38 of whom
were involved in sales, marketing and administration and 42 of whom were
involved in research and development. As of December 31, 1998, we employed 9
full-time consultants, which are reflected in the foregoing figures. We believe
our employee relations are satisfactory.
Properties
We lease a 10,748 square foot facility for our executive offices and to
house the WaveNet installation, administration, and customer support operations
in Lee, Massachusetts at a monthly rent of $5,598, with a monthly charge of
$2,123 for common costs. The Lee, Massachusetts lease will expire during
February 2001. We lease offices in New York, New York, at a monthly rent of
$7,433, which is scheduled to expire in June 1999. We lease a 6,400 square foot
facility in Princeton, New Jersey at a monthly base rent of $4,214 with a
monthly payment for taxes, insurance and maintenance reimbursements and
improvements which currently totals approximately $1,653 per month. This lease
is scheduled to expire during January 2001. Our principal research and
development activities are conducted at the Princeton facility. We lease a 2,728
square foot facility in San Jose, California for $6,138 per month, which is
scheduled to expire in December 2001.
Legal Proceedings
From time to time, we are party to litigation arising in the ordinary
course of business. We believe that no pending legal proceeding will have a
material adverse effect on our business, financial condition or results of
operations.
<PAGE>
- 38 -
MANAGEMENT
Directors
<TABLE>
<CAPTION>
Business Experience and Principal Occupation or Employment Director
Name Age During Past 5 Years; Positions held with Wave; Other Directorships Since
- ---- --- ------------------------------------------------------------------ --------
<S> <C> <C> <C>
Peter J. Sprague(1)(4) 59 Chairman of since 1988 and Chief Executive Officer Company 1988
since July 1991; Chairman of National Semiconductor Corporation
from 1965 until May 1995; Director of EnLighten Software, Inc.
and Imagek, Inc.; Trustee of the Strang Clinic; Member of
Academy of Distinguished Entrepreneurs, Babson College.
John E. Bagalay, Jr., 65 Senior Advisor to Chancellor, Boston University from January 1993
Ph.D.(1)(2)(4) 1998; Managing Director of Community Technology Fund, a venture
capital affiliate of Boston University, from September 1989
until January 1, 1998; Chief Operating Officer, Chief Financial
Officer and Director of Eurus Technologies, inc. since January
15, 1999; 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., AES, Inc. and
several privately-held corporations; President and CEO of
Cytogen Corporation from January 1998, CFO since October 1997;
Managing Director of Boston University Venture Capital Fund
from 1989-1997.
Philippe Bertin(3) 49 Manager of Financiere Wagram Poncelet (direct marketing; media) 1993
since December 1991; Manager of Midial S.A. (consumer goods)
from 1984 until 1991; Manager of FINOVELEC since October 1997.
George Gilder(4) 59 Chairman of the Executive Committee since 1996; Senior Fellow 1993
at the Discovery Institute in Seattle, Washington; author of
nine books, including Life After Television, Microcosm, The
Spirit of Enterprise and Wealth and Poverty; contributing
editor to Forbes Magazine; Director and President of Gilder
Technology Group, Inc. (publisher of monthly technology
reports); 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, 69 Chairman and Chief Executive Officer of JEMC Corporation 1988
Jr. (1)(2)(3)(4) (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., Levcor International, Inc.,
Transact International, Inc., De-Vlieg Bullard, 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.
Steven Sprague 34 President and Chief Operating Officer since May 1996; President 1997
of Wave Interactive Network from June 1995 to December 30,
1996; Vice President of Operations from April 1994 to June
1995; Wave employee in the areas of operations and strategic
planning from November 1992 to April 1994; consultant to us
from March 1992 to November 1992; President of Tech Support,
Incorporated (hardware technical support information on CD-ROM)
from June 1992 to November 1992; sole proprietor of SKS
Environmental Sales (manufacturers' representative for water
treatment companies) from June 1991 to November 1992.
</TABLE>
- -----------
(1) Member of Nominating Committee.
(2) Member of Compensation Committee.
(3) Member of Audit Committee.
(4) Member of Executive Committee.
<PAGE>
- 39 -
Involvement in Certain Legal Proceedings
Mr. McConnaughy is the Chairman of the Board of the Excellence Group,
LLC, which filed a petition for bankruptcy under Chapter 11 on January 13, 1999.
The Excellence Group's subsidiaries produced labels for a variety of customers.
Executive Officers of the Registrant
Our executive officers are Mr. Peter J. Sprague, Chairman and Chief
Executive Officer, Mr. Steven Sprague, President and Chief Operating Officer and
Mr. Gerard T. Feeney, Senior Vice President of Finance and Administration, Chief
Financial Officer and Secretary. Prior to joining us in June 1998, Mr. Feeney,
40, served for five years as the Vice President of Finance, Chief Financial
Officer and Treasurer of Xionics Document Technologies, Inc.
All officers are elected annually at the first meeting of the Board of
Directors following the annual meeting of the stockholders, and are subject to
removal at any time by the Board of Directors.
Executive Compensation
Summary Compensation Table
The following table sets forth information with respect to the
compensation we paid or awarded to the Chief Executive Officer and the other
executive officers whose cash compensation exceeded $100,000 (collectively, the
"Named Executive Officers") for services rendered in all capacities during 1998,
1997 and 1996.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation Awards
Name and Principal -------------------------------------- --------------------
Position Year Salary($) Bonus($) Number of Shares
- ------------------ ---- --------- -------- Underlying Options(#)
<S> <C> <C> <C> <C>
Peter J. Sprague(1) 1998 $182,917 $150,000 895,395
Chairman and Chief 1997 $160,000 $100,000 10,000
Executive Officer 1996 $160,000 $ 50,000 -0-
Steven Sprague(2) 1998 $177,500 $150,000 954,505
President and 1997 $150,000 $117,500 -0-
Chief Operating Officer 1996 $131,666 $ -0- 150,000
Gerard T. Feeney(3) 1998 $ 90,359 $ 65,000 450,000
Senior Vice President, Chief
Financial Officer and
Secretary
</TABLE>
- ----------------
(1) Mr. Peter Sprague received a bonus of $150,000 for 1998; $75,000 was
received in cash and $75,000 was applied to reduce his debt to Wave (see
Item 13).
(2) Mr. Steven Sprague was elected President and Chief Operating Officer on May
23, 1996 and was not previously an executive officer during 1996. Prior to
that, Mr. Steven Sprague was Vice President of Operations from April 1994
to June 1995 and a Wave employee in the areas of operations and strategic
planning from November 1992 to April 1994.
(3) Mr. Gerard T. Feeney was hired as Senior Vice President, Finance and
Administration and Chief Financial Officer on June 8, 1998 and was elected
Secretary on February 25, 1999.
<PAGE>
- 40 -
Option Grants Table
The following table sets forth certain information regarding options we
granted during the fiscal year ended December 31, 1998 to the Named Executive
Officers.
<TABLE>
<CAPTION>
Potential Realizable Value
Number of % of Total at Assumed Annual Rates of
Shares Options Stock Price Appreciation For
Underlying Granted to Exercise Option Term (1)11
Options Employees Price Expiration -----------------------------
Name Granted (#) Fiscal Year ($/Share) Date 5% ($) 10% ($)
- ---- ----------- ----------- --------- ------------ ------ -------
<S> <C> <C> <C> <C> <C> <C>
Peter J. Sprague (2) 300,000 5.7% $ 1.15 2/6/08 216,900 548,400
50,005 0.1 1.10 3/11/08 37,854 74,657
545,500 10.4 3.66 5/20/08 1,990,529 4,347,090
Steven Sprague (3) 193,200 3.7 1.15 2/6/08 139,684 353,170
250,005 4.8 1.10 3/11/08 189,254 373,257
511,300 9.7 3.66 5/20/08 1,865,734 4,074,550
Gerard T. Feeney 450,000 8.6 3.50 6/8/08 1,265,400 2,941,200
</TABLE>
- --------------
(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) Includes an aggregate of 300,000 options repriced on February 6, 1998.
(3) Includes an aggregate of 193,200 options repriced on February 6, 1998.
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, 1998, and the aggregate number and value of options exercised by the Named
Executive Officers during 1998.
<TABLE>
<CAPTION>
Shares Number of Shares Value of Unexercised
Acquired on Value Underlying Unexercised Options In-The-Money Options
Exercise Received at December 31, 1998(#) at December 31, 1998($)(1)
----------- -------- ------------------------------ ------------------------------
Name Exercisable Unexercisable Exercisable Unexercisable
- ---- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Peter J. Sprague - 0 - - 0 - 31,995 895,505 $ 67 ,715 $ 933,848
Steven Sprague - 0 - - 0 - 1,995 954,505 5,245 1,181,261
Gerard T. Feeney - 0 - - 0 - - 0 - 450,000 - 0 - 98,550
</TABLE>
(1) The last reported bid price for our Class A Common Stock on the OTC Bulletin
Board on December 31, 1998 was $3.719 per share. Value is calculated on the
basis of the difference between the respective option exercise prices and
$3.719, multiplied by the number of shares of common stock underlying the
respective options.
<PAGE>
- 41 -
Compensation of Directors
Directors presently receive no cash compensation for serving on the
Board of Directors. Under our Non-Employee Directors Stock Option Plan, each
director who is one of our employees receives an annual grant of options to
purchase 20,000 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 the day following the grant. Options terminate upon the earliest to occur
of (i) subject to (ii) below, three months after the optionee ceases to be a
director, (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 Wave, all
outstanding stock options will become immediately exercisable.
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning the
beneficial ownership of our Class A and Class B Common Stock as of March 31,
1999 (except as otherwise noted) by (i) each stockholder who is known by us to
own beneficially more than five percent of the outstanding Class A or Class B
Common Stock, (ii) each of our directors, (iii) each of the executive officers
named in the Summary Compensation Table above, and (iv) all of our directors and
executive officers 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.
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 our Board of Directors and
where there is a vote on any merger, consolidation or other similar transaction
which is not recommended by our 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 our outstanding voting
securities. 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.
<PAGE>
- 42 -
<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) 364,486 1.2 1,372,899 49.5 5.4
Steven Sprague(5) 332,163 1.1 189,659 6.8 1.6
John E. Bagalay, Jr.(6) 38,000 * 0 * *
Philippe Bertin(7) 38,000 * 0 * *
George Gilder(8) 67,333 * 2,000 * *
John E. McConnaughy, Jr.(9) 38,000 * 335,000 12.1 1.5
Aladdin Knowledge Sys. (10) 2,531,307 8.0 0 * 7.3
Gerard T. Feeney 0 * 0 * *
All executive officers and
directors as a group
(7 persons)(11) 877,982 2.9 1,899,558 68.6 8.5
</TABLE>
____________
*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, 16.8%; Steven Sprague, 3.0%; John E. Bagalay, Jr., less than 1%;
Philippe Bertin, less than 1%; George Gilder, less than 1%; John E.
McConnaughy, Jr., 4.0%; Aladdin Knowledge Systems, 5.9%; and all Executive
Officers and Directors as a group, 24.1%.
(4) Includes 330,496 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 320,163 shares which are subject to options presently exercisable
or exercisable within 60 days. Also includes 37,102 shares held in trust
for the benefit of Mr. Sprague's family, and for which Mr. Sprague is a
trustee.
(6) Includes 34,000 shares which are subject to options presently exercisable
or exercisable within 60 days.
(7) Includes 34,000 shares which are subject to options presently exercisable
or exercisable within 60 days.
(8) Includes 67,333 shares which are subject to options presently exercisable
or exercisable within 60 days.
(9) Includes 34,000 shares which are subject to options presently exercisable
or exercisable within 60 days.
(10) Includes 2,531,307 shares which are subject to warrants presently
exercisable or exercisable within 60 days.
(11) Includes 681,043 shares which are subject to options presently exercisable
or exercisable within 60 days.
CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Note Receivable from Director/Officer
On November 16, 1992, we made a personal loan to Mr. Peter J. Sprague,
Chairman and Chief Executive Officer, as evidenced by a note for $150,000, which
sum was due and payable to us on January 16, 1993 and which bore interest at the
rate of ten percent (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
<PAGE>
- 43 -
12, 1993 for $150,000, plus accrued interest. The note is due on demand by us
and accrues interest at the rate of 10% per annum. On April 22, 1993, we made an
additional loan to Mr. Peter Sprague for $23,175 as evidenced by a subsequent
note, which is due on demand by us and which bears interest at a rate of 10% per
annum. All of these loans were made to Mr. Sprague for personal reasons. As part
of Mr. Sprague's $150,000 bonus for 1998, $75,000 was applied against his
indebtedness to us. As of December 31, 1998, Mr. Sprague's aggregate
indebtedness (including accrued interest) to us under the notes totaled
$149,342. 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.
Compensation to Steven Sprague
Steven Sprague received aggregate compensation of $327,500, $267,500
and $131,666 for services rendered to us in 1998, 1997 and 1996, respectively.
Steven Sprague is the son of Mr. Peter J. Sprague, Chairman and Chief Executive
Officer.
Compensation to Michael Sprague
Michael Sprague received aggregate compensation of $112,500 and $27,500
for services rendered to us in 1998 and 1997, respectively. Michael Sprague is
the son of Mr. Peter J. Sprague, Chairman and Chief Executive Officer.
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 us in exchange for a non-terminable royalty interest. We
have agreed to makes payments 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 our
technology based on the patent. The royalty payments are allocated 75% to Mr.
Sprague and 25% to a former officer of Wave, and are secured by a security
interest in and to the patent.
License and Cross-License Agreement
On May 1, 1992, we entered into a Joint Technology Development
Agreement and License and Cross-License Agreement with The Titan Corporation
whereby Titan granted to us license rights to the use of certain patents which
are co-owned by Titan. Dr. Gene W. Ray, one of our directors, is a director,
President and Chief Executive Officer of Titan. We 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 patents held by
us. 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 we and Titan executed an addendum to the License and Cross-License
Agreement whereby we 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 us under the License and Cross-License Agreement occurring
prior to February 28, 1997.
<PAGE>
- 44 -
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of (i) 75,000,000 shares of Class
A common stock, $.01 par value, (ii) 13,000,000 shares of Class B common stock,
$.01 par value, and (iii) 2,000,000 shares of preferred stock, $.01 par value.
The following summary description of our capital stock is a summary
only and is not intended to be complete. You should refer to our Restated
Certificate of Incorporation, which is filed as an exhibit to the Registration
Statement of which this prospectus forms a part, and the Delaware General
Corporation Law (the "DGCL"). For a more detailed description of the provisions
highlighted below, please refer to that exhibit and the DGCL.
Common Stock
Our Class A common stock and Class B common stock are equal in all
respects except for voting rights, conversion rights and restrictions on
transferability, as discussed more fully below.
Voting Rights
The voting powers, preferences and relative rights of the Class A
common stock and the Class B common stock are identical in all respects, subject
to the following provisions. Holders of Class A common stock have one vote per
share on all matters submitted to a vote of our stockholders. Holders of Class B
common stock have one vote per share on all matters submitted to a vote of our
stockholders, except that holders of Class B common stock will have five votes
per share on the following matters:
o Any election of directors where one or more directors has been
nominated by any person or persons other than our Board of Directors
or in the event of an "Election Contest" (as described in Rule 14a-11
promulgated under the Securities Exchange Act of 1934, as amended) or
other solicitation of proxies or consents by or on behalf of any
person or persons other than our Board of Directors for the purpose of
electing directors;
o Any vote on a merger, consolidation or reorganization of Wave or
similar business combination or transaction, or any sale, lease,
exchange or other disposition of all or substantially all of the
assets of Wave to or with any other person, if the particular business
combination or other transaction has not been recommended by our Board
of Directors; and
o All matters submitted to a vote of our stockholders in the event that
any person or group (within the meaning of Section 13(d)(3) of the
Securities Exchange Act of 1934, as amended) acquires beneficial
ownership of 20% or more of our outstanding voting securities
(provided that this provision will not apply to any person who
beneficially owns 3% or more of the outstanding voting securities at
the time of the closing of this offering or any group including any
such person).
No class of outstanding common stock alone is entitled to elect any
directors. There is no cumulative voting with respect to the election of
directors. Under our Restated Certificate of Incorporation and the DGCL, the
holders of Class A common stock and Class B common stock are entitled to vote as
separate classes with respect to any amendment to our Restated Certificate of
<PAGE>
- 45 -
Incorporation that would increase or decrease the aggregate number of authorized
shares of any class, increase or decrease the par value of the shares of any
class, or modify or change the powers, preferences or special rights of the
shares of any class so as to affect such class adversely.
Dividends
Holders of the Class A common stock and the Class B common stock are
entitled to receive ratably such dividends, if any, as are declared by our Board
of Directors out of funds legally available for that purpose; provided, that
dividends paid in shares of Class A common stock or Class B common stock shall
be paid only as follows: Shares of Class A common stock shall be paid only to
holders of Class A common stock and shares of Class B common stock shall be paid
only to holders of Class B common stock. Our Restated Certificate of
Incorporation provides that if there is any dividend, subdivision, combination
or reclassification of either class of common stock, a proportionate dividend,
subdivision, combination or reclassification of the other class of common stock
shall simultaneously be made.
Conversion; Limitation on Transferability of Class B common stock
The Class A common stock has no conversion rights. At the option of the
holder, each share of Class B common stock is convertible at any time, and from
time to time, into one share of Class A common stock. In the event of the
transfer or attempted transfer of shares of Class B common stock, except to
certain permitted transferees (including certain family members and trusts
established for their benefit, other holders of Class B common stock and
entities controlled by a holder of Class B common stock), or in the event that
transferred entities controlled by a holder of Class B common stock cease to be
so controlled, such shares of Class B common stock will automatically convert
into an equal number of shares of Class A common stock.
Other Rights
Our stockholders have no preemptive or other rights to subscribe for
additional shares. In the event of our liquidation, dissolution or winding up,
holders of Class A common stock and Class B common stock are entitled to share
ratably in all assets available for distribution to holders of common stock
after payment in full of creditors. No shares of any class of common stock are
subject to a redemption or a sinking fund. All outstanding shares are, and all
shares offered by this prospectus, validly issued, fully paid and nonassessable.
Transfer Agent and Registrar
American Stock Transfer & Trust Company is our transfer agent and
registrar for the Class A common stock.
Preferred Stock
We are authorized to issue 2,000,000 shares of preferred stock. The
Board of Directors is authorized, without any further action by the
stockholders, to determine the voting rights, dividend rights, dividend rates,
liquidation preferences, redemption provisions, sinking fund terms, conversion
or exchange rights and other rights, preferences, privileges and restrictions of
any wholly unissued series of preferred stock and the number of shares
constituting any such series. In addition, such preferred stock could have other
rights, including economic rights senior to the Class A common stock, so that
the issuance of such preferred stock could adversely effect the market value of
the Class A common
<PAGE>
- 46 -
stock. The issuance of preferred stock may also have the effect of delaying,
deferring or preventing a change in control of Wave without any action by the
stockholders.
We have issued and outstanding 360 shares of preferred stock designated
as Series A Cumulative Redeemable Preferred Stock, par value $.01 per share (the
"Series A Cumulative Redeemable Preferred Stock"), all of which is held by one
person. The holder of the Series A Cumulative Redeemable Preferred Stock is
entitled to a cumulative annual dividend of $60 per share payable upon
redemption as and if declared by the Board of Directors, which dividend shall be
declared and payable prior to any dividend being declared or paid upon our
common stock or any other stock of Wave ranking junior to, or on a parity with,
the Series A Cumulative Redeemable Preferred Stock as to dividends or
liquidation rights. In the event of any liquidation, dissolution or winding up
of Wave, whether voluntary or involuntary, the holder of the Series A Cumulative
Redeemable Preferred Stock is entitled to receive a liquidation preference of
$1,000 per share plus the accrued dividends payable thereon. The Series A
Cumulative Redeemable Preferred Stock is redeemable, in whole or in part, at any
time at the option of Wave, at a price of $1,000 per share and is subject to
mandatory redemption five years from the date of issuance. To date, the holder
has not notified us of his intention to redeem this stock. We will continue to
accrue dividends until we receive notice of such an intention on his part.
Certain Provisions of our Restated Certificate of Incorporation and Bylaws
Certain provisions of our Restated Certificate of Incorporation and
Bylaws summarized below may have an anti-takeover effect and may delay, defer or
prevent a tender offer or takeover attempt that a stockholder may consider in
its best interest, including attempts that might result in a premium over the
market price for the shares held by stockholders.
No Stockholder Action by Written Consent; Special Meetings
The Restated Certificate of Incorporation generally provides that
stockholder action may be taken only at an annual or special meeting of
stockholders and cannot be taken by written consent in lieu of a meeting. The
Restated Certificate of Incorporation and Bylaws also provide that, subject to
the rights of the holders of any class or series of Preferred Stock, special
meetings of the stockholders may only be called pursuant to a resolution adopted
by a majority of the Board of Directors. Stockholders are not permitted to call
a special meeting or to require the Board of Directors to call a special meeting
of stockholders. Any call for a meeting must specify the matters to be acted
upon at the meeting. Stockholders are not permitted to submit additional matters
or proposals for consideration at any special meeting.
Stockholder Proposals
The Bylaws establish an advance notice procedure for nominations (other
than by or at the direction of the Board) of candidates for election as
directors at, and for proposals to be brought before, an annual meeting of
stockholders of Wave. Subject to any other applicable requirements, only such
business may be conducted at an annual meeting as has been brought before the
meeting by, or at the direction of, the Board of Directors or by a stockholder
who has given to the Secretary of Wave timely written notice, in proper form, of
the stockholder's intention to bring that business before the meeting. In
addition, only persons who are nominated by, or at the direction of, the Board
of Directors, or who are nominated by a stockholder who has given timely written
notice, in proper form, to the Secretary prior to a meeting at which directors
are to be elected, will be eligible for election as directors of Wave.
Amendment of Certain Certificate Provisions
<PAGE>
- 47 -
The Restated Certificate of Incorporation requires the affirmative vote
of the holders of at least 80% of the outstanding shares of our stock generally
entitled to vote to amend the provisions of the Restated Certificate of
Incorporation and the Bylaws described in the preceding two paragraphs.
Section 203 of the Delaware General Corporation Law
We are subject to Section 203 of the DGCL, which generally prohibits a
publicly held Delaware corporation from engaging in a "business combination"
with an "interested stockholder" for a period of three years after the date of
the transaction in which the person became an interested stockholder, unless (i)
prior to such date the Board of Directors of the corporation approved either the
business combination or the transaction in which the person became an interested
stockholder, (ii) upon consummation of the transaction that resulted in the
stockholder becoming an interested stockholder, the interested stockholder owned
at least 85% of the outstanding voting stock of the corporation excluding shares
owned by directors who are also officers of the corporation and by certain
employee stock plans, or (iii) on or after such date the business combination is
approved by the Board of Directors of the corporation and by the affirmative
vote of at least 662/3% of the outstanding voting stock of the corporation that
is not owned by the interested stockholder. A "business combination" generally
includes mergers, asset sales and similar transactions between the corporation
and the interested stockholder, and other transactions resulting in a financial
benefit to the stockholder. An "interested stockholder" is a person who,
together with affiliates and associates, owns 15% or more of the corporation's
voting stock or who is an affiliate or associate of the corporation and,
together with his affiliates and associates, has owned 15% or more of the
corporation's voting stock within three years.
<PAGE>
- 48 -
SELLING SECURITY HOLDERS
An aggregate of 4,449,479 shares of Class A Common Stock are being
registered in this offering for the account of the Selling Security Holders. Of
such shares, 2,090,954 shares were originally issued in a private placement
completed in March 1999. We granted certain registration rights with respect to
these shares. We agreed to bear expenses, other than fees and expenses of
counsel to the Selling Security Holders, in connection with the registration and
sale of these shares. See "Plan of Distribution."
The following table sets forth the names of the Selling Security
Holders, the number of shares of Class A Common Stock each of the Selling
Security Holders beneficially owns, the number of shares which may be offered
for resale pursuant to this prospectus, and the number of shares, if any, that
will be owned, if any, by each Selling Security Holder after the completion of
this offering.
As of March 31, 1999, there were 31,546,539 shares of Class A Common
Stock outstanding. The shares offered by this prospectus may be offered from
time to time, in whole or in part, by the Selling Security Holders or their
transferees. No Selling Security Holder has held any position nor had any
material relationship with us or our affiliates during the past three years,
except where noted.
The information included below is based upon information provided by
the Selling Security Holders. Because the Selling Security Holders may offer
all, some or none of their shares, we cannot provide a definitive estimate as to
the number of shares that the Selling Security Holders will hold after such
offering.
<TABLE>
<CAPTION>
Shares Shares Beneficially
Beneficially Owned After the
Owned Prior Offering
to the Shares Being -------------------
Selling Security Holder Offering (1) Offered Number Percent
- ---------------------------------------------------------- ------------ ------------ ------ -------
<S> <C> <C> <C> <C>
Aladdin Knowledge Systems, Ltd. (2)....................... 2,531,307 1,216,136 1,315,171 4.2%
Carriage Partners LLC (3)................................. 456,818 456,818 - -
Craig Mudge (4)........................................... 3,093 3,093 - -
Bruce Schneier (5)........................................ 1,031 1,031 - -
Lora Lee Professional Recruiters, Inc. (6)................ 15,000 15,000 - -
Jaffoni & Collins Incorporated (7)........................ 17,500 17,500 - -
William Morris Agency, Inc. (8)........................... 150,000 150,000 - -
Carl A. Artopoeus/Artopoeus Capital Management (9)........ 46,667 46,667 - -
Barry Eskanos (10)........................................ 23,333 23,333 - -
Combination, Inc. (11).................................... 150,000 150,000 - -
Southeast Interactive Technology Fund, LLC (12)........... 278,947 278,947 - -
Barrant V. Merrill (13)................................... 3,000 3,000 - -
Balestra Capital Partners LP (13) (14).................... 655,000 20,000 635,000 2.0
Endeavor Asset Management, LP (13)........................ 15,000 15,000 - -
Clarion Capital Corporation (13) (15)..................... 31,818 31,818 - -
Clarion Offshore Fund Ltd. (13) (15)...................... 13,000 13,000 - -
Clarion Partners, L.P. (13) (15).......................... 46,091 46,091 - -
Fidelity National Title Insurance Company Of New York (13) 125,000 125,000 - -
Bogner Regis, Inc. (13)................................... 10,000 10,000 - -
Stuart G. Gauld (13)...................................... 11,000 11,000 - -
Cascade Capital Partners, L.P. (13)....................... 165,200 165,200 - -
Job & Co. (13)............................................ 12,800 12,800 - -
Gryphon Offshore Fund (13)................................ 22,000 22,000 - -
Anthony Kamin (13)........................................ 5,000 5,000 - -
Lancaster Investment Partners, L.P. (13).................. 50,000 50,000 - -
Loy D. Martin (13)........................................ 10,000 10,000 - -
<PAGE>
- 49 -
Gary Rosenbach (13)....................................... 65,000 65,000 - -
Gary W. Ross (13)......................................... 9,000 9,000 - -
Trellus Partners, L.P. (13)............................... 100,000 100,000 - -
V/F Skagen Global (13).................................... 50,000 50,000 - -
The Brooks Revocable Trust, Evan Brooks & Violet Brooks, - -
Trustees (13)........................................... 25,000 25,000
David C. Brown (13)....................................... 100,000 100,000 - -
M. Jay Walkingshaw (13)................................... 10,000 10,000 - -
Whitney Partners, LP (13)................................. 150,000 150,000 - -
Huey Lewis SSB Keogh Custodian AKA Hugh Cregg (13)........ 3,500 3,500 - -
Cregg Conroy Revocable Trust, Hugh Cregg and - -
Sidney Conroy, Trustees (13)............................ 500 500
Security Trust Co FBO: Paul Dragul, MD (13) (16)......... 15,000 13,000 2,000 *
Security Trust Co FBO: J. Glen McLeod (13) (17).......... 10,000 7,000 3,000 *
Todd Kenck (13) (18)...................................... 2,000 2,000 - -
K.C. Stone (13) (18)...................................... 3,000 3,000 - -
John C. Coleman, Jr. (13) (18)............................ 10,000 10,000 - -
Donald Padou (13) (18).................................... 10,000 10,000 - -
Richard H. Osgood (13) (18)............................... 10,000 10,000 - -
Stephen J. Massocca (13) (18)............................. 70,000 70,000 - -
Stephen Olson (13) (18)................................... 3,500 3,500 - -
Apodaca Investment Group (13) (19)........................ 50,000 50,000 - -
Special Situations Private Equity Fund, LP (13)........... 50,000 50,000 - -
Commerzbank AG (13)....................................... 454,545 454,545 - -
Marcuard Cook & Cie S.A. (13)............................. 50,000 50,000 - -
Paul Burrowes (13)........................................ 25,000 25,000 - -
Security Trend Partners (13).............................. 25,000 25,000 - -
Veritas SG Investment Trust GMBH (13)..................... 100,000 100,000 - -
Gruber & Mcbaine International (13)....................... 11,000 11,000 - -
Jon D. Gruber (13)........................................ 6,500 6,500 - -
Donaghy Inc. (13)......................................... 2,000 2,000 - -
Hare & Co. for Trustees of Hamilton College (13).......... 2,000 2,000 - -
Karl Matthies & Deborah Matthies Community Properties (13) 1,500 1,500 - -
Lagunitas Partners, LP (13)............................... 27,000 27,000 - -
Edgar L. Ball (13)........................................ 20,000 20,000 - -
Thomas J. Niedermeyer, Jr. (13)........................... 5,000 5,000 - -
Hollis Capital (13)....................................... 50,000 50,000 - -
Porter Partners, LP (13).................................. 30,000 30,000 - -
TOTAL................................................ 6,404,650 4,449,479 1,955,171
</TABLE>
- --------------
* less than 1%
(1) Beneficial ownership is determined in accordance with Rule 13d-3(d)
promulgated by the Securities and Exchange Commission under the Securities
and Exchange Act of 1934, as amended. Shares of Common Stock issuable
pursuant to options, warrants and convertible securities, to the extent
such securities are currently exercisable or convertible within 60 days of
November 30, 1997, are treated as outstanding for computing the percentage
of the person holding such securities but are not treated as outstanding
for computing the percentage of any other person. Unless otherwise noted,
each person or group identified possesses sole voting and investment power
with respect to shares, subject to community property laws where
applicable. Shares not outstanding but deemed beneficially owned by virtue
of the right of a person or group to acquire them within 60 days are
treated as outstanding only for purposes of determining the number of and
percent owned by such person or group.
(2) Includes shares held and (i) 1,216,136 shares issuable, at an exercise
price of $1.70 per share, upon exercise of a warrant issued to Aladdin on
July 18, 1997 in connection with a technology license agreement; and (ii)
shares issuable upon exercise of a warrant granted to Aladdin on July 18,
1997 in connection with a technology license agreement. The second warrant
provides Aladdin with the right to
<PAGE>
- 50 -
acquire 7% of the Class A Common Stock on a fully diluted basis for the
average closing price for the 15 trading days prior to exercise. During
June of 1998, Aladdin exercised a portion of the second warrant to purchase
1,000,000 shares and still has the right to acquire shares approximating
3.45% of the Class A Common Stock. During the third quarter of 1997, we
entered into a license agreement with Aladdin, an Israeli company, for
technology and in-process research and development related to Aladdin's
proprietary persistent encryption system. Under the terms of the Aladdin
license agreement, we are prohibited from using any other encryption
technology for the first five years of the license.
(3) Includes (i) 181,818 shares held and (ii) 275,000 shares issued upon
exercise of a warrant sold to Carriage Partners, LLC as full payment for a
$2,000,000 promissory note.
(4) Includes 3,093 shares issued to Dr Mudge as partial payment for consulting
services rendered during 1998, the balance of which was paid in cash.
(5) Includes 1,031 shares issued to Mr. Schneier as partial payment for
consulting services rendered during 1998, the balance of which was paid in
cash.
(6) Includes 15,000 shares issued to Lora Lee Professional Recruiters, Inc. as
payment for professional placement and consulting services rendered during
1998.
(7) Includes 17,500 shares issued to Jaffoni & Collins Incorporated as payment
for investor relations and consulting services rendered during 1998.
(8) Includes 150,000 shares issued to William Morris Agency, Inc. as payment
for investor relations and consulting services rendered during 1998.
(9) Includes 46,667 shares issued to Carl A. Artopoeus and Artopoeus Capital
Management as payment on January 25, 1999 for a legal settlement.
(10) Includes 23,333 shares issued to Barry Eskanos as payment on January 25,
1999 for a legal settlement.
(11) Includes 150,000 shares issued upon exercise of warrants at $1.38 per
share, granted to Combination, Inc., associated with the placement of our
Series G Preferred Stock on March 6, 1998.
(12) Includes 278,947 shares issued upon conversion of a warrant issued on
October 18, 1998 to Southeast Interactive Technology Fund, LLC pursuant to
a convertible note.
(13) These Selling Security Holders received all of these shares (except where
otherwise indicated) from a private sale of a total of 2,090,954 shares on
March 23, 1999, at a price of $11.00 per share, for the aggregate purchase
price of $23,000,494. These shares were sold to a group of accredited
investors pursuant to Regulation D promulgated under the Act.
(14) Of the 655,000 shares reported, Balestra Capital Partners LP beneficially
owns 60,000 shares, including 20,000 shares purchased in the offering
referenced in note 13 above. Also includes 595,000 shares over which
Balestra Capital Partners LP has investment power.
(15) Morton A. Cohen has sole voting and investment power for each of Clarion
Capital Corporation, Clarion Offshore Fund Ltd. and Clarion Partners, L.P.
Mr. Cohen is Chairman of Clarion Capital Corporation and the investment
manager for Clarion Offshore Fund Ltd. and Clarion Partners, L.P.
(16) Of the 15,000 shares reported, Dr. Dragul acquired 13,000 shares in the
offering referenced in note 13 above.
(17) Of the 10,000 shares reported, Mr. McLeod acquired 7,000 shares in the
offering referenced in note 13 above.
<PAGE>
- 51 -
(19) Each of Todd Kenck, K.C. Stone, John C. Coleman, Jr., Donald Padou, Richard
H. Osgood, Stephen J. Massocca and Stephen Olson are affiliates of Pacific
Growth Equities, Inc., which acted as placement agent for the private
placement referenced in note 13 above.
(19) Of the 50,000 shares reported, 28,000 shares are beneficially owned by
Apodaca Investment Partners and 22,000 shares are beneficially owned by
Apodaca Investment Offshore.
PLAN OF DISTRIBUTION
We are registering the shares of Class A Common Stock offered in this
prospectus on behalf of the Selling Security Holder. As used in this prospectus,
"Selling Security Holder" includes pledgees, donees, transferees or other
successors-in-interest selling shares received from a Selling Security Holder as
a gift, partnership or liquidating distribution or other non-sale related
transfer after the date of this prospectus. We will pay all expenses of
registration of the shares offered, except for taxes or underwriting fees,
discounts, and selling commissions. Each Selling Security Holder will pay any
brokerage commissions and similar selling expenses attributable to the sale of
the shares. We will not receive any of the proceeds from the sale of the shares
by the Selling Security Holders.
The Selling Security Holders, their pledgees, donees, distributees,
transferees or other successors-in-interest may sell the shares from time to
time in one or more types of transactions (which may include block transactions)
on one or more exchanges, in the over-the-counter market, in negotiated
transactions, through put or call options transactions relating to the shares,
through short sales of the shares, or a combination of these methods of sale.
The Selling Security Holders may sell their shares at market prices prevailing
at the time of sale, or at negotiated prices.
The Selling Security Holders may use brokers or dealers to sell their
shares. As of the date of this prospectus, we have not been advised by any
Selling Security Holder that he, she or it has made any arrangements as to the
distribution of shares covered by this prospectus.
The Selling Security Holders may sell their shares directly to
purchasers or to or through broker-dealers, which may act as agents or
principals. These broker- dealers may receive compensation in the form of
discounts, concessions or commissions from the Selling Security Holders and/or
the purchasers of shares for whom broker-dealers may act as agents or to whom
they sell as principal, or both (which compensation as to a particular
broker-dealer might be in excess of customary commissions).
The Selling Security Holders and any broker-dealers that act in
connection with the sale of the shares might be deemed to be "underwriters" as
the term is defined in Section 2(11) of the Securities Act of 1933.
Consequently, any commissions received by these broker-dealers and any profit on
the resale of the shares sold by them while acting as principals might be deemed
to be underwriting discounts or commissions under the Securities Act of 1933.
Because the Selling Security Holders may be deemed to be "underwriters"
as defined in Section 2(11) of the Securities Act of 1933, the Selling Security
Holders will be subject to the prospectus delivery requirements of the
Securities Act of 1933.
A Selling Security Holder also may resell all or a portion of the
shares in open market transactions in reliance upon Rule 144 under the
Securities Act of 1933, provided that he, she or it meets the criteria and
conforms to the requirements of that Rule.
Upon being notified by a Selling Security Holders that he, she or it
has entered into any material arrangement with a broker-dealer for the sale of
the shares through a block trade, special offering,
<PAGE>
- 52 -
exchange distribution or secondary distribution or a purchase by a broker or
dealer, we will file a supplement to this prospectus, if required, pursuant to
Rule 424(b) under the Securities Act of 1933, regarding the plan of
distribution.
We have agreed to indemnify the Selling Security Holder against certain
liabilities, including liabilities arising under the Securities Act of 1933, or
to contribute to payments which the Selling Security Holder may be required to
make in respect hereof. The Selling Security Holder has agreed to indemnify us
against certain liabilities, including liabilities arising under the Securities
Act of 1933.
LEGAL MATTERS
The validity of the securities offered hereby will be passed upon for
Wave by Bingham Dana LLP, New York, New York.
EXPERTS
The consolidated financial statements of Wave Systems Corp. and
Subsidiaries (a development stage corporation) as of December 31, 1998 and 1997,
and for each of the years in the three-year period ended December 31, 1998 and
for the period from February 12, 1988 (inception) to December 31, 1998, included
herein and elsewhere in the Registration Statement have been included herein and
in the Registration Statement in reliance upon the report of KPMG Peat Marwick
LLP, independent certified public accountants, appearing elsewhere herein upon
the authority of said firm as experts in accounting and auditing.
<PAGE>
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Consolidated Financial Statements
December 31, 1998 and 1997
(With Independent Auditors' Report Thereon)
Index to Consolidated Financial Statements
<TABLE>
<CAPTION>
Page(s)
-------
<S> <C>
Independent Auditors' Report F-2
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-3
Consolidated Statements of Operations for each of the years ended December 31,
1998, 1997 and 1996 and for the period from February 12,
1988 (inception) through December 31, 1998 F-4
Consolidated Statements of Stockholders' Equity (Deficiency) for each of the
years ended December 31, 1998, 1997 and 1996 and for the period from
February 12, 1988 (inception) through December 31, 1998 F-5
Consolidated Statements of Cash Flows for each of the years ended December 31,
1998, 1997 and 1996 and for the period from
February 12, 1988 (inception) through December 31, 1998 F-10
Notes to Consolidated Financial Statements F-12
</TABLE>
<PAGE>
F-2
INDEPENDENT AUDITORS' REPORT
The Board of Directors and Stockholders
Wave Systems Corp.:
We have audited the consolidated financial statements of Wave Systems Corp. and
subsidiaries (a development stage corporation) as listed in the accompanying
index. These consolidated financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
consolidated financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Wave Systems Corp.
and subsidiaries as of December 31, 1998 and 1997, and the results of their
operations and their cash flows for each of the years in the three-year period
ended December 31, 1998 and for the period from February 12, 1988 (date of
inception) to December 31, 1998 in conformity with generally accepted accounting
principles.
/s/ KPMG PEAT MARWICK LLP
Boston, Massachusetts
March 26, 1999
<PAGE>
F-3
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Consolidated Balance Sheets
December 31, 1998 and 1997
<TABLE>
<CAPTION>
Assets
1998 1997
---- ----
<S> <C> <C>
Current assets:
Cash and cash equivalents $ 1,057,094 $ 758,721
Prepaid expenses and other receivables 5,000 -
------------- -------------
Total current assets 1,062,094 758,721
Property and equipment, net 888,261 849,276
Other assets 107,457 70,216
------------- -------------
2,057,812 1,678,213
============= =============
Liabilities and Stockholders' equity (deficiency)
Current liabilities:
Accounts payable and accrued expenses 3,029,158 1,427,762
Deferred license fee 1,250,000 -
Note payable 561,831 522,124
------------- -------------
Total current liabilities 4,840,989 1,949,886
------------- -------------
Series A Cumulative Redeemable Preferred Stock, $.01 par value.
360 shares issued and outstanding in 1998 and 1997; involuntary
liquidation value, $493,201 493,201 471,601
------------- -------------
Stockholders' Equity (deficiency):
Series G Convertible Preferred stock, $.01 par value. 150,000
shares authorized and 20,000 outstanding in 1998 347,812 -
Common stock, $.01 par value. Authorized 75,000,000 shares as
Class A; issued and outstanding 28,402,149 in 1998 and
22,874,639 in 1997 284,022 228,747
Common stock, $.01 par value. Authorized 13,000,000 shares as
Class B; issued and outstanding 3,140,665 in 1998 and
4,421,953 in 1997 31,407 44,220
Capital in excess of par value 53,430,130 44,520,246
Deficit accumulated during the development stage (57,220,407) (45,324,463)
Less: Note receivable from stockholder, including accrued
interest of $101,167 in 1998 and $88,849 in 1997 (149,342) (212,024)
------------- -------------
Total stockholders' deficiency (3,276,378) (743,274)
------------- -------------
Commitments and contingencies $ 2,057,812 $ 1,678,213
============= =============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
F-4
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Consolidated Statements of Operations
Years ended December 31, 1998, 1997 and
1996 and period from February 12, 1988
(date of inception)
through December 31, 1998
<TABLE>
<CAPTION>
Period from
February 12, 1988
(date of inception)
through
December 31,
1998 1997 1996 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Net revenue $ 10,193 $ 10,712 $ 1,458 $ 22,363
------------ ------------ ----------- ------------
Operating expenses:
Selling, general and administrative 9,874,166 7,983,151 5,560,620 37,310,672
Write-off of goodwill - 769,886 - 769,886
Aladdin license and in process
research and development expense - 3,889,000 - 3,889,000
Research and development 3,508,968 2,146,127 3,309,022 18,254,781
------------ ------------ ----------- ------------
13,383,134 14,788,164 8,869,642 60,224,339
------------ ------------ ----------- ------------
Other income (expense):
License fee 2,750,000 1,000,000 - 3,750,000
License warrant cost (1,100,000) - (1,100,000)
Interest income 111,009 55,282 194,766 1,169,341
Interest expense (284,012) (175,624) (10,397) (850,492)
Other Income - - - 12,720
------------ ------------ ----------- ------------
1,476,997 879,658 184,369 2,981,569
------------ ------------ ----------- ------------
Net loss (11,895,944) (13,897,794) (8,683,815) (57,220,407)
Accrued dividends on preferred stock
(including accretion of assured incremental
yield on preferred stock of $750,000 in
1998, $1,673,000 in 1997 and 620,965 in 1996) 858,863 2,482,982 870,579 4,337,358
------------ ------------ ----------- ------------
Net loss to common stockholders $(12,754,807) $(16,380,776) $(9,554,394) $(61,557,765)
============ ============ =========== ============
Weighted average number of common
shares outstanding during the period 29,299,844 20,943,748 14,956,584 11,570,172
Loss per common share $ (.44) $ (.78) $ (.64) $ (5.32)
============ ============ =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
F-5
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Consolidated Statements of Stockholders' Equity (Deficiency)
Period from February 12, 1988 (date of inception) to December 31, 1998
<TABLE>
<CAPTION>
Deficit
accumulated
Class A Class B Capital during the
common stock common stock in excess of development
Shares Amount Shares Amount par value stage
------ ------ ------ ------ --------- -----
<S> <C> <C> <C> <C> <C> <C>
Shares issued to founders at $.003 per share - $ - 4,680,000 $ 46,800 $(31,200) $ -
Shares issued at $1.25 per share, net of expenses of
$36,574 from September through November 1988 - - 300,000 3,000 335,426 -
Net loss for period ended December 31, 1988 - - - - - (326,832)
----- ----- --------- -------- -------- ---------
Balance at December 31, 1988 - - 4,980,000 49,800 304,226 (326,832)
Shares issued at $1.25 per share, net of expenses of
$68,750, from January through December 1989 - - 270,000 2,700 266,050 -
Shares issued at $1.25 per share in July 1989 as
compensation for services rendered - - 1,920 19 2,381 -
Shares issued by principal stockholders at $1.25
per share in December 1989 as compensation
for services rendered - - - - 374,000 -
Net loss for year ended December 31, 1989 - - - - - (982,186)
----- ----- --------- -------- -------- ---------
Balance at December 31, 1989 - - 5,251,920 52,519 946,657 (1,309,018)
Shares issued by principal stockholder at $1.25
per share in March 1990 as compensation for
services rendered - - - - 56,250 -
Shares issued by principal stockholder at $.50 per
share in March 1990 as compensation for
services rendered - - - - 60,000 -
Shares issued at $1.67 per share in May 1990 as
compensation for services rendered - - 6,000 60 9,940 -
Shares issued at $1.67 per share, net of expenses of
$5,000 in March, April, November and December 1990 - - 390,000 3,900 641,100 -
Net loss for year ended December 31, 1990 - - - - - (1,178,129)
----- ----- --------- -------- -------- ----------
Balance at December 31, 1990 - - 5,647,920 56,479 1,713,947 (2,487,147)
Shares issued at $1.67 per share from March
through November 1991 - - 315,000 3,150 521,850 -
Shares issued at $1.67 per share in November
1991 as compensation for services rendered - - 19,800 198 32,802 -
Net loss for year ended December 31, 1991 - - - - - (1,009,368)
----- ----- --------- -------- -------- ----------
Balance at December 31, 1991 (carried forward) - - 5,982,720 59,827 2,268,599 (3,496,515)
<CAPTION>
Note
receivable
Deferred from
compensation stockholder Total
------------ ----------- -----
<S> <C> <C> <C>
Shares issued to founders at $.003 per share $ - $ - $ 15,600
Shares issued at $1.25 per share, net of expenses of
$36,574 from September through November 1988 - - 338,426
Net loss for period ended December 31, 1988 - - (326,832)
----- ----- ----------
Balance at December 31, 1988 - - 27,194
Shares issued at $1.25 per share, net of expenses of
$68,750, from January through December 1989 - - 268,750
Shares issued at $1.25 per share in July 1989 as
compensation for services rendered - - 2,400
Shares issued by principal stockholders at $1.25
per share in December 1989 as compensation
for services rendered - - 374,000
Net loss for year ended December 31, 1989 - - (982,186)
----- ----- ----------
Balance at December 31, 1989 - - (309,842)
Shares issued by principal stockholder at $1.25
per share in March 1990 as compensation for
services rendered - - 56,250
Shares issued by principal stockholder at $.50 per
share in March 1990 as compensation for
services rendered - - 60,000
Shares issued at $1.67 per share in May 1990 as
compensation for services rendered - - 10,000
Shares issued at $1.67 per share, net of expenses of
$5,000 in March, April, November and December 1990 - - 645,000
Net loss for year ended December 31, 1990 - - (1,178,129)
----- ----- ----------
Balance at December 31, 1990 - - (716,721)
Shares issued at $1.67 per share from March
through November 1991 - - 525,000
Shares issued at $1.67 per share in November
1991 as compensation for services rendered - - 33,000
Net loss for year ended December 31, 1991 - - (1,009,368)
----- ----- ----------
Balance at December 31, 1991 (carried forward) - - (1,168,089)
</TABLE>
<PAGE>
F-6
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Consolidated Statements of Stockholders' Equity (Deficiency) - (Continued)
<TABLE>
<CAPTION>
Deficit
accumulated
Class A Class B Capital during the
common stock common stock in excess of development
Shares Amount Shares Amount par value stage
------ ------ ------ ------ --------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1991 (brought forward) - - 5,982,720 59,827 2,268,599 (3,496,515)
Shares issued at $1.67 per share from January through
October 1992 - - 708,000 7,080 1,172,920 -
Shares issued at $1.67 per share in May 1992 in
connection with License and Cross-License Agreement - - 674,976 6,750 1,118,210 -
Shares issued at $1.67 per share in May 1992 as
compensation for services rendered - - 18,000 180 29,820 -
Shares issued at $2.50 per share in May and November
1992 as compensation for services rendered - - 771,000 7,710 1,919,790 -
Shares issued at $2.50 per share, net of expenses
of $7,500, in November and December 1992 - - 323,001 3,230 796,773 -
Shares issued by principal stockholder in
December 1992 at $2.50 per share as
compensation for services rendered - - - - 75,000 -
Shares canceled in October and December 1992 - - (75,000) (750) 750 -
Issuance of stock options at $.003 exercise price
per share in June 1992 - - - - 798,400 -
Amortization of deferred compensation - - - - - -
Accrued dividends on preferred stock - - - - (6,383) -
Note received from stockholder and accrual of
interest thereon - - - - - -
Net loss for year ended December 31, 1992 - - - - - (4,182,638)
----- ----- --------- ------ --------- ----------
Balance at December 31, 1992 (carried forward) - - 8,402,697 84,027 8,173,879 (7,679,153)
<CAPTION>
Note
receivable
Deferred from
compensation stockholder Total
------------ ----------- -----
<S> <C> <C> <C>
Balance at December 31, 1991 (brought forward) - - (1,168,089)
Shares issued at $1.67 per share from January through
October 1992 - - 1,180,000
Shares issued at $1.67 per share in May 1992 in
connection with License and Cross-License Agreement - - 1,124,960
Shares issued at $1.67 per share in May 1992 as
compensation for services rendered - - 30,000
Shares issued at $2.50 per share in May and November
1992 as compensation for services rendered - - 1,927,500
Shares issued at $2.50 per share, net of expenses
of $7,500, in November and December 1992 - - 800,003
Shares issued by principal stockholder in
December 1992 at $2.50 per share as
compensation for services rendered - - 75,000
Shares canceled in October and December 1992 - - -
Issuance of stock options at $.003 exercise price
per share in June 1992 (398,660) - 399,740
Amortization of deferred compensation 155,455 - 155,455
Accrued dividends on preferred stock - - (6,383)
Note received from stockholder and accrual of
interest thereon - (152,974) (152,974)
Net loss for year ended December 31, 1992 - - (4,182,638)
-------- -------- ----------
Balance at December 31, 1992 (carried forward) (243,205) (152,974) 182,574
</TABLE>
<PAGE>
F-7
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Consolidated Statements of Stockholders' Equity (Deficiency) - (Continued)
<TABLE>
<CAPTION>
Deficit
accumulated
Class A Class B Capital during the
common stock common stock in excess of development
Shares Amount Shares Amount par value stage
------ ------ ------ ------ --------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1992 (brought forward) - - 8,402,697 84,027 8,173,879 (7,679,153)
Shares issued at $1.67 per share in February 1993 - - 30,000 300 49,800 -
Shares issued at $3.50 per share, net of
expenses of $82,427, from April through
December 1993 - - 550,359 5,504 1,838,294 -
Shares issued at $3.50 per share from May to
December 1993 as compensation for services
rendered, for the acquisition of property
and equipment and as additional interest
on borrowings - - 73,319 733 255,884 -
Issuance of warrants to purchase Class B
common stock from September to
December 1993 in conjunction with
the issuance of convertible debt - - - - 72,893 -
Amortization of deferred compensation - - - - - -
Accrued dividends on preferred stock - - - - (38,467) -
Note received from stockholder and
accrual of interest thereon - - - - - -
Net loss for year ended December 31, 1993 - - - - - (3,959,334)
--------- ------ --------- ------ ---------- -----------
Balance at December 31, 1993 - - 9,056,375 90,564 10,352,283 (11,638,487)
Shares issued at $3.50 per share in
January and February 1994 - - 95,715 957 334,046 -
Shares issued at $3.50 per share in
February 1994 as additional interest
on borrowings - - 5,700 57 19,893 -
Issuance of warrants to purchase Class B
common stock in January and February
1994 in conjunction with
the issuance of convertible debt - - - - 115,234 -
Accrued dividends on preferred stock - - - - (39,484) -
Accrual of interest on note receivable
from stockholder - - - - - -
Sale of warrants to underwriter in
September 1994 - - - - 4 -
Conversion of notes payable - - 599,507 5,995 2,079,131 -
Shares issued at $5.00 per share in initial
public offering in September 1994,
net of expenses of $2,929,835 3,728,200 37,282 - - 15,673,883 -
Net loss for year ended December 31, 1994 - - - - - (4,271,501)
--------- ------ --------- ------ ---------- -----------
Balance at December 31, 1994 (carried forward) 3,728,200 37,282 9,757,297 97,573 28,534,990 (15,909,988)
<CAPTION>
Note
receivable
Deferred from
compensation stockholder Total
------------ ----------- -----
<S> <C> <C> <C>
Balance at December 31, 1992 (brought forward) (243,205) (152,974) 182,574
Shares issued at $1.67 per share in February 1993 - - 50,100
Shares issued at $3.50 per share, net of
expenses of $82,427, from April through
December 1993 - - 1,843,798
Shares issued at $3.50 per share from May to
December 1993 as compensation for services
rendered, for the acquisition of property
and equipment and as additional interest
on borrowings - - 256,617
Issuance of warrants to purchase Class B
common stock from September to
December 1993 in conjunction with
the issuance of convertible debt - - 72,893
Amortization of deferred compensation 243,205 - 243,205
Accrued dividends on preferred stock - - (38,467)
Note received from stockholder and
accrual of interest thereon - (39,783) (39,783)
Net loss for year ended December 31, 1993 - - (3,959,334)
------- -------- ----------
Balance at December 31, 1993 - (192,757) (1,388,397)
Shares issued at $3.50 per share in
January and February 1994 - - 335,003
Shares issued at $3.50 per share in
February 1994 as additional interest
on borrowings - - 19,950
Issuance of warrants to purchase Class B
common stock in January and February
1994 in conjunction with
the issuance of convertible debt - - 115,234
Accrued dividends on preferred stock - - (39,484)
Accrual of interest on note receivable
from stockholder - (17,315) (17,315)
Sale of warrants to underwriter in
September 1994 - - 4
Conversion of notes payable - - 2,085,126
Shares issued at $5.00 per share in initial
public offering in September 1994,
net of expenses of $2,929,835 - - 15,711,165
Net loss for year ended December 31, 1994 - - (4,271,501)
------- -------- ----------
Balance at December 31, 1994 (carried forward) - (210,072) 12,549,785
</TABLE>
<PAGE>
F-8
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Consolidated Statements of Stockholders' Equity (Deficiency) - (Continued)
<TABLE>
<CAPTION>
Deficit
accumulated
Class A Class B Capital during the
common stock common stock in excess of development
Shares Amount Shares Amount par value stage
------ ------ ------ ------ --------- -----
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1994 (brought forward) 3,728,200 37,282 9,757,297 97,573 28,534,990 (15,909,988)
Shares issued at prices ranging from
$1.00 per share to $3.13 per share
as compensation for services rendered 31,559 315 - - 57,184 -
Exercise of options to purchase Class B stock - - 681,700 6,817 429,413 -
Accrued dividends on preferred stock - - - - (40,600) -
Accrual of interest on note receivable
from stockholder - - - - - -
Exchange of Class B stock for Class A stock 2,855,859 28,559 (2,855,859) (28,559) - -
Net loss for the year ended December 31, 1995 - - - - - (6,832,866)
---------- -------- --------- ------- ----------- ------------
Balance at December 31, 1995 6,615,618 66,156 7,583,138 75,831 28,980,987 (22,742,854)
Exercise of options to purchase Class A stock 214,091 2,141 - - 420,366 -
Shares issued at prices ranging from $2.06
per share to $3.44 per share as compensation
for services rendered 42,077 421 - - 123,029 -
Issuance of unregistered Class B common
stock to acquire Wave Interactive Network
valued at approximately $.98 per share - - 375,000 3,750 364,688 -
Issuance of warrants to purchase unregistered
shares of Class A common stock in
conjunction with the issuance
of convertible debt and preferred stock - - - 283,455 - -
Conversion of Class B Preferred Stock 2,960,303 29,603 - - 3,078,921 -
Accrual of interest on note receivable - - - - - -
Accrued dividends on preferred stock - - - - (199,014) -
Exchange of Class B stock for Class A stock 1,749,997 17,500 (1,749,997) (17,500) - -
Net loss for the year ended December 31, 1996 - - - - - (8,683,815)
---------- -------- --------- ------- ----------- ------------
Balance at December 31, 1996 11,582,086 115,821 6,208,141 62,081 33,052,432 (31,426,669)
---------- -------- --------- ------- ----------- ------------
Exercise of options to purchase
Class A and B common stock 70,326 703 10,330 104 139,081 -
Shares issued at prices ranging from
$1.00 per share to $3.00 per share
as compensation for services rendered 126,885 1,269 - - 304,227 -
Conversion of preferred stock into
common stock 7,998,860 79,989 - - 6,703,028 -
Issuance of Class A common stock and
warrants to purchase Class A common
stock to Aladdin 500,000 5,000 - - 3,834,000 -
Issuance of Class A common stock and
warrants to purchase Class A common
stock 799,964 8,000 - - 792,000 -
Reduction in note receivable - - - - - -
Accrual of interest on note receivable - - - - - -
Issuance of warrants to purchase Class A
common stock in conjunction with
the issuance of preferred stock - - - - 386,462 -
Accrued dividend on preferred stock
including accretion of assured
incremental yield - - - - (1,372,984) -
Assured incremental yield on issuance
of Series F convertible preferred
stock and debt - - - - 682,000 -
Net loss - - - - - (13,897,794)
Exchange of Class B stock for Class A stock 1,796,518 17,965 (1,796,518) (17,965) - -
---------- -------- --------- ------- ----------- ------------
Balance at December 31, 1997 22,874,639 $228,747 4,421,953 $44,220 $44,520,246 $(45,324,463)
<CAPTION>
Note
receivable
Deferred from
compensation stockholder Total
------------ ----------- -----
<S> <C> <C> <C>
Balance at December 31, 1994 (brought forward) - (210,072) 12,549,785
Shares issued at prices ranging from
$1.00 per share to $3.13 per share
as compensation for services rendered - - 57,499
Exercise of options to purchase Class B stock - - 436,230
Accrued dividends on preferred stock - - (40,600)
Accrual of interest on note receivable
from stockholder - (17,318) (17,318)
Exchange of Class B stock for Class A stock - - -
Net loss for the year ended December 31, 1995 - - (6,832,866)
--- ---------- ----------
Balance at December 31, 1995 - (227,390) 6,152,730
Exercise of options to purchase Class A stock - - 422,507
Shares issued at prices ranging from $2.06
per share to $3.44 per share as compensation
for services rendered - - 123,450
Issuance of unregistered Class B common
stock to acquire Wave Interactive Network
valued at approximately $.98 per share - - 368,438
Issuance of warrants to purchase unregistered
shares of Class A common stock in
conjunction with the issuance
of convertible debt and preferred stock - 283,455 -
Conversion of Class B Preferred Stock - - 3,108,524
Accrual of interest on note receivable - (17,315) (17,315)
Accrued dividends on preferred stock - - (199,014)
Exchange of Class B stock for Class A stock - - -
Net loss for the year ended December 31, 1996 - - (8,683,815)
--- ---------- ----------
Balance at December 31, 1996 - (244,705) 1,558,960
--- ---------- ----------
Exercise of options to purchase
Class A and B common stock - - 139,888
Shares issued at prices ranging from
$1.00 per share to $3.00 per share
as compensation for services rendered - - 305,496
Conversion of preferred stock into
common stock - - 6,783,017
Issuance of Class A common stock and
warrants to purchase Class A common
stock to Aladdin - - 3,839,000
Issuance of Class A common stock and
warrants to purchase Class A common
stock - - 800,000
Reduction in note receivable - 50,000 50,000
Accrual of interest on note receivable - (17,319) (17,319)
Issuance of warrants to purchase Class A
common stock in conjunction with
the issuance of preferred stock - - 386,462
Accrued dividend on preferred stock
including accretion of assured
incremental yield - - (1,372,984)
Assured incremental yield on issuance
of Series F convertible preferred
stock and debt - - 682,000
Net loss - - (13,897,794)
Exchange of Class B stock for Class A stock - - -
--- ---------- ----------
Balance at December 31, 1997 $ - $(212,024) $(743,274)
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
F-9
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Consolidated Statements of Stockholders' Equity (Deficiency) - (Continued)
<TABLE>
<CAPTION>
Deficit
accumulated
Class A Class B Capital during the
common stock common stock in excess of development
Shares Amount Shares Amount par value stage
------ ------ ------ ------ --------- -----
<S> <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)
---------- -------- --------- ------- ----------- -------------
Exercise of options to purchase Class A
common stock 77,558 775 151,180 -
Options issued to employees below fair
market-value - - - - 234,723 -
Exercise of warrants to purchase
Class A common stock 1,652,770 16,528 - - 3,945,740 -
Warrants to purchase Class A common stock
to be issued as part of technology
licensing agreement and issued to
consultants for services - - - - 1,546,824 -
Shares issued at prices ranging from
$1.00 per share to $5.00 per share
as compensation for services rendered 121,400 1,214 - - 647,274 -
Reduction in note receivable - - - - - -
Issuance of Series G Convertible Preferred
stock and Common stock warrants,
net of issuance costs of $222,500 - - - - 218,250 -
Assured incremental yield on issuance
of Series G convertible preferred
stock and debt - - - - 750,000 -
Accrual of interest on note receivable - - - - - -
Accrued dividend on preferred stock
including accretion of assured
incremental yield - - - - (858,863) -
Conversion of Series G Preferred Stock 2,394,494 23,945 - - 2,274,756 -
Net loss - - - - - (11,895,944)
Exchange of Class B stock for Class A stock 1,281,288 12,813 (1,281,288) (12,813) - -
---------- -------- --------- ------- ----------- -------------
Balance at December 31, 1998 28,402,149 $284,022 3,140,665 $31,407 $53,430,130 $(57,220,407)
========== ======== ========= ======= =========== =============
<CAPTION>
Series G Note
Convertible receivable
Preferred from
Stock stockholder Total
----- ----------- -----
<S> <C> <C> <C>
Balance at December 31, 1997 - $(212,024) $(743,274)
--------- ---------- ------------
Exercise of options to purchase Class A
common stock - - 151,955
Options issued to employees below fair
market-value - - 234,723
Exercise of warrants to purchase
Class A common stock - - 3,962,268
Warrants to purchase Class A common stock
to be issued as part of technology
licensing agreement and issued to
consultants for services - - 1,546,824
Shares issued at prices ranging from
$1.00 per share to $5.00 per share
as compensation for services rendered - - 648,488
Reduction in note receivable - 75,000 75,000
Issuance of Series G Convertible Preferred
stock and Common stock warrants,
net of issuance costs of $222,500 1,809,250 - 2,027,500
Assured incremental yield on issuance
of Series G convertible preferred
stock and debt - - 750,000
Accrual of interest on note receivable - (12,318) (12,318)
Accrued dividend on preferred stock
including accretion of assured
incremental yield 837,263 - (21,600)
Conversion of Series G Preferred Stock (2,298,701) - -
Net loss - - (11,895,944)
Exchange of Class B stock for Class A stock - - -
--------- ---------- ------------
Balance at December 31, 1998 $ 347,812 $(149,342) $(3,276,378)
========= ========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
F-10
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Consolidated Statements of Cash Flows
Years ended December 31, 1998, 1997, 1996 and
the Period From February 12, 1988 (Date of Inception)
through December 31, 1998
<TABLE>
<CAPTION>
Period from
February 12, 1988
(date of inception)
through
December 31,
1998 1997 1996 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from operating activities:
Net loss $(11,895,944) $(13,897,794) $(8,683,815) $(57,220,407)
Adjustments to reconcile net loss to net cash
used in operating activities:
Write-off of goodwill - 769,886 - 769,886
Depreciation and amortization 332,741 486,693 316,829 1,520,109
Reserve for note from affiliate - - 1,004,934 1,672,934
Accrued interest on marketable securities - - 48,617 (106,962)
Noncash expenses:
Accretion of assured incremental yield on
convertible debt - 119,000 - 119,000
Common stock issued in connection with
License and Cross-License Agreement - - - 1,124,960
Common stock issued for services rendered
and additional interest on borrowings 648,488 305,496 40,938 3,325,546
Warrants to be issued to ITG and warrants
issued as compensation for services 1,546,824 - - 1,546,824
Issuance of warrants to Aladdin - 2,939,000 - 2,939,000
Accrued interest on note payable 39,707 56,624 9,500 105,831
Preferred stock issued for services rendered - - - 265,600
Compensation associated with issuance of
stock options 234,723 - - 634,463
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 Deferred License fee 1,250,000 - - 1,250,000
Increase in accrued interest on note receivable (12,318) (17,319) (17,315) (101,168)
(Increase) decrease in prepaid expenses and
other receivables (5,000) 70,358 64,413 (5,000)
(Increase) decrease in other assets (37,241) 184,771 (53,346) (122,373)
(Decrease) increase in accounts payable and
accrued expenses 1,601,396 490,599 (191,103) 3,166,670
----------- ----------- ----------- ----------
Net cash used in operating activities (6,296,624) (8,492,686) (7,460,348) (37,984,924)
----------- ----------- ----------- ----------
</TABLE>
(Continued)
<PAGE>
F-11
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Consolidated Statements of Cash Flows, Continued
<TABLE>
<CAPTION>
Period from
February 12, 1988
(date of inception)
through
December 31,
1998 1997 1996 1998
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flows from investing activities:
Acquisition of property and equipment (371,726) (256,306) (252,439) (2,178,844)
Short-term loans to affiliate - - (1,004,934) (1,672,934)
Organizational costs - - - (14,966)
Purchase of marketable securities-held to maturity - - (2,945,458) (27,546,769)
Maturity of marketable securities-held to maturity - - 6,843,041 27,653,731
---------- ----------- ----------- ------------
Net cash provided by (used in) investing
activities (371,726) (256,306) 2,640,210 (3,759,782)
---------- ----------- ----------- ------------
Cash flows from financing activities:
Net proceeds from issuance of common stock 4,114,223 1,837,889 422,507 28,523,694
Net proceeds from issuance of preferred stock
and warrants 2,777,500 3,555,500 5,950,027 12,283,027
Sale of warrants - - - 4
Note receivable from stockholder 75,000 50,000 - (48,175)
Proceeds from notes payable and warrants to
stockholders - - - 2,083,972
Repayments of notes payable to stockholders - - - (1,069,972)
Proceeds from notes payable and warrants - - - 1,284,250
Repayments of note payable - - - (255,000)
Advances from stockholder - - - 227,598
Repayments of advances from stockholder - - - (227,598)
Increase in deferred offering costs - - - -
---------- ----------- ----------- ------------
Net cash provided by financing activities 6,966,723 5,443,389 6,372,534 42,801,800
---------- ----------- ----------- ------------
Net increase (decrease) in cash and cash equivalents 298,373 (3,305,603) 1,552,396 1,057,094
Cash and cash equivalents at beginning of period 758,721 4,064,324 2,511,928 -
---------- ----------- ----------- ------------
Cash and cash equivalents at end of period $1,057,094 $ 758,721 $ 4,064,324 $ 1,057,094
========== =========== =========== ============
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
F-12
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes to Consolidated Financial Statements
December 31, 1998, 1997, 1996 and The Period From
February 12, 1988 (Date of Inception)
Through December 31, 1998
(1) Organization and Basis of Preparation
Wave Systems Corp. (the "Company" or "Wave") is engaged in the research and
development of a proprietary system (the "Wave System") for use with a
computer, that measures, controls, and records the use of electronic
content. The Company is also engaged in various research, development and
marketing efforts to commercialize the Wave System to provide more
efficient and flexible pricing (e.g., pay per use or rent-to-own) and
greater security on the usage of the electronic content. The Company is in
the development stage and, accordingly, the accompanying consolidated
financial statements are presented in a format prescribed for a development
stage enterprise.
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 and on March 23, 1999 completed an
offering of common stock for net proceeds of approximately $23 million, as
discussed in Note 13. Management anticipates that the proceeds of this
offering will be sufficient to fund operations through the end of the third
quarter of 2000. However, while management believes that it can
successfully research, develop and market its products and obtain
additional financing to fund operations beyond 2000, there can be no
assurance that it will be able to do so.
(2) Significant Accounting Policies
(a) Principles of Consolidation
The consolidated financial statements include the financial statements of
Wave; a wholly owned subsidiary, Harvard International Medical Library,
Inc., doing business as MedWave; a majority owned inactive subsidiary,
Network News Corp. ("NNC"); and a wholly owned inactive subsidiary. All
significant intercompany balances and transactions have been eliminated
in consolidation.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of expenses during the
reporting period. Actual results could differ from those estimates.
(c) Cash Equivalents
For purposes of the consolidated statements of cash flows, the Company
considers all highly liquid instruments with a maturity of three months
or less to be cash equivalents.
(d) Property and Equipment
Property and equipment, including computer software, are stated at cost.
Depreciation is computed using the straight-line method over estimated
useful lives of five years.
(Continued)
<PAGE>
F-13
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes to Consolidated Financial Statements - (Continued)
(e) Goodwill
Goodwill, which represents the excess of purchase price over the fair value
of net assets acquired, is amortized on a straight-line basis over the
period expected to be benefited of five years. The Company assesses the
recoverability of this intangible asset by determining whether the
amortization of the goodwill balance over its remaining life can be
recovered through undiscounted future operating cash flows of the related
acquired operation. The amount of goodwill impairment, if any, is
measured based on projected discounted future operating cash flows using
a discount rate reflecting the Company's average cost of funds. The
assessment of the recoverability of goodwill is impacted if estimated
future operating cash flows are not achieved. During the third quarter of
1997, the Company wrote-off goodwill related to the WIN acquisition as it
was uncertain whether the current and expected future results of
operations of WIN would be sufficient to support its carrying value.
(f) Income Taxes
The Company accounts for income taxes under the asset and liability method.
As such, deferred tax assets and liabilities are recognized for the
future tax consequences attributable to differences between the financial
statement carrying amounts of existing assets and liabilities and their
respective tax bases and operating loss and tax credit carryforwards.
Deferred tax assets and liabilities are measured using enacted tax rates
expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on
deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment date.
(g) Stock Option Plan
The Company accounts for its stock option plans in accordance with the
provisions of Accounting Principles Board ("APB") Opinion No. 25,
Accounting for Stock Issued to Employees, and related interpretations. As
such, compensation expense is recorded on the date of grant only if the
current market price of the underlying stock exceeds the exercise price.
On January 1, 1996, the Company adopted the disclosure provisions of
Statement of Financial Accounting Standards ("SFAS") No. 123, Accounting
for Stock Based Compensation and accordingly, provides pro forma net
income and pro forma earnings per share footnote disclosures for employee
stock options as if the fair value-based method defined in SFAS No. 123
had been applied.
(h) Research and Development
Research and development costs are expensed as incurred.
(Continued)
<PAGE>
F-14
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes to Consolidated Financial Statements - (Continued)
(i) Loss Per Share
Basic net loss per common share has been calculated based upon the weighted
average number of shares of common stock outstanding during the period.
No effect has been given to common stock equivalents or convertible
preferred stock, warrants or debt in the diluted loss per common share as
they are all anti-dilutive. Included in net loss to common stockholders
is the accretion of the assured incremental yield related to the ability
of the Series B, C, D, F and G preferred stockholders to acquire common
stock upon conversion at a discount. The assured incremental yield is
being accreted as a dividend over the periods from the dates of issuance
of the preferred stock to the earliest eligible dates for conversion.
(j) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of
The Company reviews its long-lived assets and certain identifiable
intangibles for impairment whenever events or changes in circumstances
indicate that the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison
of the carrying amount of an asset to future net cash flows expected to
be generated by the asset. If such assets are considered to be impaired,
the impairment to be recognized is measured by the amount by which the
carrying amount of the assets exceed the fair value of the assets. Assets
to be disposed of are reported at the lower of the carrying amount or
fair value less costs to sell.
(k) Reclassifications
Certain reclassifications have been made to the 1996 and 1997 consolidated
financial statements to conform to the 1998 presentation.
(3) Related Party Transactions
(a) Note Receivable from Stockholder
A stockholder, the Chairman and Chief Executive Officer of the Company, was
indebted to the Company at December 31, 1998 and 1997 under two
promissory notes totaling $149,342, including accrued interest, due on
demand. During 1998 and 1997, $75,000 and $50,000, respectively, of the
Chairman and Chief Executive Officer's bonus was used to reduce the
principal owed.
The notes are secured by a pledge of 67,000 shares of Class B common stock
held by the stockholder and officer. The notes bear interest at 10% per
annum. The notes and accrued interest thereon have been shown as a
deduction from stockholders' equity in the accompanying consolidated
financial statements.
(b) Payment to Related Party
In 1997, the Company paid $182,209 to Enterprise Engineering Associates
("EEA"), during which time Mr. Michael Sprague was an employee of EEA. On
August 1, 1997, Michael Sprague became an employee of Wave, at an annual
salary of $110,000. Michael Sprague is the son of the Chairman and Chief
Executive Officer of the Company.
In 1998, the Company paid $25,000 to Studio 2, during which time Mr. Kevin
Sprague was an employee of Studio 2. Kevin Sprague is the son of the
Chairman and CEO of the Company.
(Continued)
<PAGE>
F-15
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes to Consolidated Financial Statements, (Continued)
(c) Acquisition and Dispositions
In November 1995, the Company entered into a transaction with certain
individuals whereby shares in its newly-formed subsidiary, Wave
Interactive Network, Inc. ("WIN"), were transferred in exchange for a
demand note. The amount of the demand note was based on the level of
funding provided to WIN by the Company during 1995. The demand note from
WIN accrued interest at a rate of Prime plus 1% and, subject to certain
limitations associated with WIN's ability to raise additional capital,
was convertible into an undiluted 20% of the common shares of WIN at the
option of Wave. The Company retained a 1% ownership in WIN and
transferred the remaining ownership to certain individuals, including
former employees. Approximately 65% of the ownership was transferred to
Steven Sprague, President and CEO of WIN, and three other children of Mr.
Peter J. Sprague, Chairman and CEO of Wave. The note was fully reserved
as its collectibility was dependent upon WIN's ability to raise
additional capital. In addition, the Company entered into a separate
commercial agreement that, among other things, granted certain
distribution rights to WIN in exchange for royalties and other
consideration.
During 1996, the Company continued to finance the operations of WIN through
additional demand notes with terms similar to the original demand note.
The additional notes amounting to $1,004,000 were also fully reserved. On
December 30, 1996, effective as of October 18, 1996, the Company entered
into a merger agreement with WIN whereby the Company exchanged, for all
of the outstanding WIN common stock that it did not own, 375,000 shares
of Class B common stock. These Class B shares are restricted securities
within the meaning of Rule 144 of the Securities Act of 1933, as amended
(the "Act"). Additionally, based on the attainment of a specified
milestone, the shareholders of WIN are entitled to receive an additional
325,000 shares of the Company's Class B common stock. The Company also
issued a 10% convertible note and a warrant to refinance a convertible
note obligation of WIN amounting to approximately $456,000, which
included accrued interest to October 18, 1996, and an outstanding
warrant. Included in the results of operations are WIN's operations from
October 18, 1996. The acquisition was accounted for by the purchase
method.
The purchase price of $952,438 was determined based on the estimated fair
value of the consideration given to the WIN shareholders and noteholders
and was allocated to goodwill as WIN had no net tangible assets.
Subsequently, in 1997, the Company determined it was uncertain whether
the current and expected future results of operations of WIN would be
adequate to support the goodwill capitalization, and wrote-off the
goodwill as impaired. If the contingent consideration of an additional
325,000 shares is issued, the value ascribed to such consideration will
be expensed.
(Continued)
<PAGE>
F-16
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes to Consolidated Financial Statements, (Continued)
(4) Property and Equipment
Property and equipment as of December 31 consisted of the following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Equipment $ 1,554,001 $ 1,297,702
Furniture, fixtures and improvements 459,822 389,530
Computer software 171,363 128,228
----------- ----------
2,185,186 1,815,460
Less: Accumulated depreciation 1,296,925 966,184
----------- -----------
Total $ 888,261 $ 849,276
=========== ===========
</TABLE>
Depreciation expense on property and equipment amounted to approximately
$333,000, $344,000, $272,000 and $1,297,000 for the years ended December
31, 1998, 1997, and 1996 and for the period from inception through December
31, 1998, respectively.
(5) Notes Payable
In connection with the acquisition of WIN, the Company issued a 10%
convertible note amounting to $456,000 and a warrant to refinance WIN's
obligation to a WIN noteholder. The note was convertible any time after
April 1, 1997 and became due, including accrued interest of $66,125, on
April 18, 1998. The note was 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.
On October 18, 1998 the Company restated and amended the note. The note is
now convertible any time after April 1, 1999 and up to April 18, 1999. The
conversion price was reduced to $0.95 per share of common stock. An
additional 75,000 warrants were issued as part of this amended note and the
fair value of these warrants was $106,000. Additionally, the fair value of
the reduced conversion price was $274,000. Such amounts will be amortized
as additional interest expense from the date the note was amended and
warrant issued through the earliest conversion date of April 1, 1999.
During 1998, approximately $123,000 of the value of the reduced conversion
rate and warrant was recorded as interest expense.
(6) Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses as of December 31 consisted of the
following:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Accrual of costs related to the ITG agreement $ 490,000 $ 490,000
Accounts payable 755,521 298,486
Accrued consulting and professional fees 155,000 264,495
Legal Settlement (note 13) 602,000 -
Accrued payroll and related costs 816,269 318,403
Lease payable 60,169 -
Other accrued liabilities 150,199 56,378
---------- ----------
Total $3,029,158 $1,427,762
========== ==========
</TABLE>
(Continued)
<PAGE>
F-17
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes to Consolidated Financial Statements, (Continued)
(7) Capital Stock
(a) Redeemable Preferred Stock
The Company has authorized 2,000,000 shares of preferred stock having a par
value of $.01 per share. On October 19, 1992, the Board of Directors
designated and issued 360 shares of this preferred stock of the Company
as "Series A Cumulative Redeemable Preferred Stock" ("Series A Preferred
Stock").
The Series A Preferred Stock was issued in settlement of compensation owed
to a former officer of the Company for services provided to the Company.
The holder of the Series A Preferred Stock is entitled to receive a
dividend at the rate of $60 per share per annum, when and as declared by
the Board of Directors of the Company. Dividends are cumulative from the
date of original issue, and payable upon redemption.
No dividends may be declared upon the common stock of the Company unless
full cumulative dividends on the Series A Preferred Stock have been
declared and a sum sufficient for the payment thereof has been set apart
for such payment. The stock is non-voting and redeemable at $1,000 per
share, plus accumulated dividends, at any time at the option of the
Company. The stock is subject to mandatory redemption five years from the
date of issuance, or October 1997. Because the dividend rate on the
Preferred Stock was below market rates, the stock was discounted to yield
a market rate of 12% at the time of issuance, resulting in a discount of
$94,400. Dividends of $21,600, $39,267, and $41,800 have been accrued for
the years ended December 31, 1998, 1997 and 1996, respectively. The
holder has not notified the Company of his intention to redeem the stock.
The Company continues to accrue dividends until receipt of such
intention.
In May of 1996, the Company raised $3,214,026, net of issuance costs of
$285,974, through the placement of 350 shares of Series B Preferred Stock
("Series B Preferred Stock") pursuant to Regulation S of the Securities
Act of 1933 ("the Act"). The Series B Preferred Stock has a stated value
of $10,000 per share, which accrues dividends for liquidation and
conversion purposes at 6% per annum, and ranks senior to the Company's
common stock and Series C Convertible Preferred Stock ("Series C
Preferred Stock") and junior to the Series A Preferred Stock. Series B
Preferred Stock was convertible by the holder, in increments, into the
Company's Class A common stock. The Series B Preferred Stock was
convertible at the lesser of 110% of the average closing bid price for
the five days immediately preceding the issue date or 85% of the average
closing bid price for the five days immediately preceding the conversion
date. During 1996, 330 shares of the Company's Series B Preferred Stock
were converted into 2,960,303 shares of the Company's Class A common
stock and the remaining 20 shares of Series B preferred were converted in
1997 into 117,240 shares of the Company's Class A common stock.
In December of 1996, the Company raised $2,634,037 net of issuance costs of
$365,963 ($101,964 of which related to the value ascribed to warrants
issued) through the placement of 150,000 shares of Series C Preferred
Stock pursuant to Regulation D of the Act. The Series C Preferred Stock
has a stated value of $20 per share, which accrues dividends payable
quarterly in cash at 6% per annum.
(Continued)
<PAGE>
F-18
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes to Consolidated Financial Statements, (Continued)
The Series C Preferred Stock ranks senior to the Company's common stock and
junior to the Series A and B Preferred Stock. Series C Preferred Stock
was convertible by the holder, in increments, into the Company's Class A
common stock based on the market price of the Company's Class A common
stock at the time of conversion.
The Series C Preferred Stock was convertible at the lesser of $2.31 per
share or 80%, as adjusted, of the average of the fair value of the Class
A common stock for the five days prior to the conversion date. During
1997 all of the Series C preferred stock was converted into 2,850,439
shares of the Company's Class A common stock.
In May of 1997 the Company raised approximately $1,316,000, net of issuance
costs of $272,000 ($162,000 of which related to the value ascribed to
warrants issued), through the placement of 80,000 shares of newly created
Series D Convertible Preferred Stock. The Series D Preferred Stock had a
stated value of $20 per share, which accrued dividends payable quarterly
in cash at 6%.
The Series D Convertible Preferred Stock was 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
(5) trading days immediately preceding the date of conversion. During
1997 all of the Series D Convertible Preferred Stock was converted into
2,070,095 shares of the Company's Class A Common Stock.
(b) Convertible Preferred Stock
InOctober 1997 the Company raised approximately $1,850,000, net of
issuance costs of $397,000 ($224,000 of which related to the value
ascribed to warrants issued), though the private placement 112,500 shares
of newly created Series F Convertible Preferred Stock. The Series F
Convertible Preferred Stock has a stated value of $20 per share, which
accrued dividends payable quarterly in cash at 6%.
The Series F Convertible Preferred Stock was convertible into the Class A
Common Stock at an effective conversion price of the lower of (a) $1.05
and (b) 80% of the average of the five (5) lowest trading prices of Class
A Common Stock. During 1997 all of the Series F Convertible Preferred
Stock was converted into 2,961,086 shares of the Company's Class A Common
Stock.
During March of 1998, the Company issued 150,000 shares of newly created
Series G Convertible Preferred stock for an aggregate purchase price of
$3,000,000. The Series G Convertible preferred stock is senior to the
Company's classes of common stock, and is junior to the Company' Series A
Redeemable Preferred in liquidation rights. The Series G Convertible
Preferred Stock accrues dividends at the rate of 6% per annum. The Series
G Convertible Preferred stock is convertible into the Company's
unregistered Class A Common stock at the lower of $1.12 or 80% of the
average of the five lowest closing bids for the 25 calendar days prior to
conversion. In addition, the Company issued warrants to the purchaser and
placement agent for 225,000 shares of the Company's Class A common stock
at an exercise price of $1.38. As of December 31, 1998, 20,000 shares
remained outstanding.
(Continued)
<PAGE>
F-19
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes to Consolidated Financial Statements, (Continued)
(c) Common Stock
In December 1989, March through October 1990, and November 1991,
substantially all stockholders as of December 29, 1989 were offered the
right to acquire a number of shares equivalent to their pre-offering
holdings at a price of $.003 per share. Substantially all stockholders
that received the offer accepted this opportunity. This was accounted for
essentially as a stock split effected in the form of a rights offering,
and all shares issued in conjunction with this offering were reflected in
the accompanying consolidated financial statements retroactively.
Two principal stockholders did not acquire the full amount of shares to
which they were entitled. Most of the additional proportionate shares
that these stockholders would have been credited with were offered
instead to certain officers, employees and stockholders for $.003 per
share. To the extent that these rights were offered to the individuals in
compensation for services rendered to the Company, compensation expense
equal to the difference between the estimated fair value as of the date
of issuance and the purchase price of the stock was recorded. The
estimated fair value of the common stock was determined based on sales to
third parties near the date of issuance. Compensation expense associated
with the issuance of these shares of $430,250 is included in the
accompanying consolidated statement of operations for the period from
inception to December 31, 1998.
In May and November, 1992, the Company issued 770,000 shares of Class B
restricted common stock to certain employees, officers and stockholders
of the Company for a purchase price of $.003 per share, payable in the
form of services to the Company.
As these shares were issued for services rendered, compensation expense of
$1,927,500 was recorded representing the estimated fair value of $2.50
per share at the date of issuance, the price at which common stock was
sold to third parties near the time of issuance.
In February 1995, the Company agreed to grant 36,000 shares of Class A
common stock, 12,000 of which were issued in 1995 with the remainder
issued in 1996, to two consultants and six non-employee directors as
compensation for services rendered. Expenses of $112,500 were recorded in
1995 representing the stock's fair value of $3.13 per share at the time
of the agreement to grant.
In July 1995, the Company issued 19,559 shares to two vendors in payment
for services rendered. Costs of $20,000 were recorded representing the
stock's fair value of approximately $1.00 per share at the time the
services were rendered.
In July and August 1996, the Company issued 15,000 and 3,077 shares of
Class A common stock to two consultants as compensation for services
rendered. Expenses of $40,938 have been recorded representing the stock's
fair value of $2.06 and $3.44 per share, respectively, at their dates of
issuance.
During 1997 the Company issued 126,885 shares of the Company's Class A
common stock to vendors or for the settlement of liabilities. Expenses of
$305,496 have been recorded representing the stocks' fair value at the
date of issuance.
(Continued)
<PAGE>
F-20
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes to Consolidated Financial Statements, (Continued)
During 1997 the Company sold approximately 800,000 shares of the Company's
Class A common stock and warrants to purchase 160,000 shares of the
Company's Class A common stock, which may be exercised at an exercise
price of $1.00, for an aggregate purchase price of $800,000. As of
December 31, 1998, 600,000 of the shares had been exercised.
During 1997 the Company issued 500,000 shares of the Company's Class A
common stock in connection with a license agreement with Aladdin
Knowledge Systems, Ltd. for its proprietary persistent encryption
technology. The shares were issued at their fair value on the date of
issuance.
(d) Recapitalization
In January 1994, the Board of Directors authorized the Company to amend and
restate the Company's Certificate of Incorporation to reflect the
authorization of 25,000,000 shares of a newly created Class A common
stock, which stock has voting rights of one vote per share, and the
reclassification of the then current outstanding shares of common stock
into Class B common stock. In June 1994, the Board of Directors
authorized that the Class B common stock will have one vote per share,
except that Class B common stock will have five votes per share in cases
where one or more directors are nominated for election by persons other
than the Company's Board of Directors and where there is a vote on any
merger, consolidation or other similar transaction, which is not
recommended by the Company's Board of Directors. In addition, the Class B
common stock will have five votes per share on all matters submitted to a
vote of the stockholders in the event that any person or group of persons
acquires beneficial ownership of 20% or more of the outstanding voting
securities of the Company. The Class B common stock is convertible into
shares of Class A common stock at any time. The classes of common stock
are alike in all other respects.
(8) Options and Warrants
1991 Plan
In September 1991, the Board of Directors authorized the establishment of a
stock option plan (the "1991 Plan"). The total number of shares of Class B
common stock subject to the Plan is 2,700,000. Options terminate upon the
earlier of the date of the expiration of the option or upon termination of
the employment relationship between the Company or a subsidiary and the
optionee for any reason other than death, disability or retirement.
Employees are entitled to exercise their options on dates determined by the
Compensation Committee of the Board of Directors. Vesting provisions for
options granted generally range from immediate vesting to pro rata vesting
over a three-year period. Options granted under the 1991 Plan may, in the
discretion of the Compensation Committee, include the right to acquire a
reload option. A reload option provides for the automatic grant of a new
option at the then-current market price in exchange for each previously
owned share tendered by an employee in a stock-for-stock exercise.
Subsequent to January 1994 no further options, other than reload options, may
be granted under the 1991 Plan. All options outstanding under the 1991 Plan
continue in full force and effect subject to their original terms.
(Continued)
<PAGE>
F-21
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes to Consolidated Financial Statements, (Continued)
Other Options
In 1993, in connection with an investment banking agreement, the Company
granted options to purchase 30,000 shares of Class B common stock at an
exercise price of $1.67 per share, and options to purchase 14,286 shares of
Class B common stock at an exercise price of $3.50 per share. The options
vested immediately and are exercisable for a period of seven years from the
date of issuance.
1994 Plans
In January 1994, the Board of Directors authorized the establishment of the
1994 Employee Stock Option Plan (the "1994 Plan"). The initial number of
shares of Class A common stock subject to the 1994 Plan was 1,000,000. The
terms of the 1994 Plan are similar to those of the 1991 Plan. Options are
granted with exercise prices that approximate fair market value at the date
of grant. In May 1996, July 1997, and November 1998 the Board of Directors
approved an amendment to the Company's 1994 Plan to increase the number of
shares of Class A common stock reserved for issuance thereunder by
1,000,000, 1,000,000 and 5,000,000, respectively. Therefore, the 1994 Plan
number of shares of Class A common stock reserved for issuance is 8,000,000
shares.
In January 1994, the Board of Directors authorized the establishment of the
Non-Employee Directors Stock Option Plan (the "Directors' Plan"). The total
number of shares of Class A common stock subject to the Directors' Plan was
200,000. Pursuant to the Directors' Plan, each director who was not an
employee of the Company received an initial grant of options to purchase
12,000 shares of Class A common stock at an exercise price of $3.50 per
share.
Any person subsequently elected as a director who is not an employee of the
Company will receive an initial grant of options to purchase 12,000 shares
of Class A common stock on the day he or she is elected a director. In
addition, on the day immediately following each of the dates on which an
incumbent director is reelected, he or she received an additional grant of
options to purchase 2,000 shares of Class A common stock.
In February 1995, the Board of Directors authorized certain changes to the
Directors' Plan. The annual option grant for directors was increased from a
total of 2,000 shares of Class A common stock to 10,000 shares of Class A
common stock. In July 1995, the stockholders of the Company authorized an
increase to the total number of shares subject to the Directors' Plan from
200,000 shares to 500,000 shares. Options to purchase a total of 110,000
and 100,000 shares of Class A common stock at $1.94 to $3.09 and $3.09 per
share, were issued in 1997 and 1996, respectively, to nonemployee
directors. In November 1998, the stockholders of the Company authorized an
increase to the total number of shares subject to the Directors' Plan from
500,000 shares to 1,000,000 shares. The stockholders also amended the
Directors' Plan to provide that options issued to non-employee directors
under such plan vest on the day following the grant.
Initial option grants under the Directors' Plan vest one-third upon grant,
and one-third on each of the first and second anniversaries. Annual option
grants vest 25% after each three-month period following grant.
(Continued)
<PAGE>
F-22
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes to Consolidated Financial Statements, (Continued)
Options under the Directors' Plan are exercisable for a period of ten years
from the date of grant. Options may not be exercised after the option
holder ceases to be a director of the Company, except that in the event of
death or disability of the option holder, the option may be exercised for a
period of one year after the date of death or disability, and, in the event
of retirement of the option holder, the option may be exercised for a
period of three months after the date of retirement.
In September 1996, the Board of Directors authorized the establishment of the
1996 Performance Stock Option Plan ( the "1996 Plan"). The initial number
of shares of Class A common stock subject to the 1996 Plan was 800,000. The
terms of the 1996 Plan are similar to those of the 1994 and 1991 Plans.
Options are granted with exercise prices that approximate fair market value
at the date of grant.
At December 31, 1998, there were approximately 3,360,000 additional shares
available for grant under the 1994 Plan. The per share weighted-average
fair value of stock options granted during 1998, 1997 and 1996 was $2.48,
$1.58 and $2.65 on the dates of grant using the Black Scholes
option-pricing model with the following weighted-average assumptions:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Expected Life (Years) 10 10 10
Interest Rate 6.0% 6.5% 6.4%
Volatility 105% 111% 124%
Dividend Yield 0% 0% 0%
</TABLE>
The Company applies APB Opinion No. 25 in accounting for its Plans and,
accordingly, no compensation cost has been recognized for stock options
granted to employees at fair market value in the financial statements,
except for $234,723 of expense recorded in 1998 for options issued at
exercise prices below the fair market value of the Company's stock.
Had the Company determined compensation cost based on the fair value at the
grant dates for its stock options under SFAS No. 123, the Company's net
loss would have been increased to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1998 1997 1996
---- ---- ----
<S> <C> <C> <C>
Net loss - as reported $(11,895,944) $(13,897,794) $ (8,683,815)
Net loss - pro forma (17,596,312) (15,300,187) (10,025,517)
Net loss to common stockholders - as reported (12,754,807) (16,380,776) (9,554,394)
Net loss to common shareholders - pro forma (18,455,175) (17,783,169) (10,896,096)
Loss per common share - as reported (.44) (.78) (.64)
Loss per common share - pro forma (.63) (.85) (.73)
</TABLE>
Pro forma net loss reflects only options granted since 1995. Therefore, the
full impact of calculating compensation cost for stock options under SFAS
No. 123 is not reflected in the pro forma net loss amounts presented above
because compensation cost is reflected over the options' vesting periods
and compensation cost for options granted prior to January 1, 1995 are not
considered.
(Continued)
<PAGE>
F-23
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes to Consolidated Financial Statements, (Continued)
Summary of Option Activity
A summary of option activity through December 31, 1998 follows:
<TABLE>
<CAPTION>
Class A and B shares Weighted average
subject to option exercise price
----------------- --------------
<S> <C> <C>
Balance at January 1, 1991 - $ -
Options granted 30,000 1.67
----------
Balance at December 31, 1991 30,000 1.67
Options granted 816,750 1.18
----------
Balance at December 31, 1992 846,750 1.20
Options granted 949,186 3.10
----------
Balance at December 31, 1993 1,795,936 2.20
Options granted 310,200 3.05
Options canceled (108,500) 3.38
----------
Balance at December 31, 1994 1,997,636 2.27
Options granted 777,850 2.22
Options canceled (349,205) 2.11
Options exercised (681,700) .64
----------
Balance at December 31, 1995 1,744,581 2.92
Options granted 1,342,075 2.65
Options canceled (503,879) 3.20
Options exercised (214,091) 1.97
----------
Balance at December 31, 1996 2,368,686 2.79
Options granted 316,010 1.58
Options canceled (669,580) 1.58
Options exercised (70,326) 1.90
----------
Balance at December 31, 1997 1,944,790 2.73
Options granted 5,665,278 2.48
Options canceled (701,267) 2.49
Options exercised (77,558) 1.95
----------
Balance at December 31, 1998 6,831,243 $2.48
</TABLE>
At December 31, 1998, there were approximately 1,760,568 options exercisable
at prices ranging from $1.06 to $7.06.
(Continued)
<PAGE>
F-24
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes to Consolidated Financial Statements, (Continued)
The following table summarizes information about stock options outstanding at
December 31, 1998:
<TABLE>
<CAPTION>
Weighted
Weighted average
average remaining
Range of Number Number exercise contractual
exercise prices outstanding exercisable price life
- --------------- ----------- ----------- -------- -----------
<S> <C> <C> <C> <C>
$1.06 131,250 50,167 $1.06 8.6 years
1.07 - 1.69 3,009,675 350,209 1.30 8.5 years
1.70 - 2.31 174,634 44,536 2.10 8.8 years
2.32 - 2.97 89,243 72,707 2.62 5.7 years
2.98 - 3.50 870,767 291,669 3.32 8.2 years
3.51 - 3.81 2,254,894 878,500 3.66 9.4 years
3.82 - 7.06 300,780 72,780 7.06 8.6 years
</TABLE>
Warrants
In 1993 and 1994, the Company issued warrants to acquire a total of 151,600
shares of Class B common stock at $3.50 per share in conjunction with sales
of Class B common stock to individuals and institutions. All warrants are
exercisable for a period of five years from the date of issuance.
In 1993 and 1994, the Company issued warrants to acquire a total of 376,253
shares of Class B common stock at $3.50 per share in conjunction with the
issuance of its 10% Convertible Notes which have since been repaid and in
1994, the Company issued warrants to acquire a total of 46,799 shares of
Class B common stock at $6.00 per share in conjunction with the issuance of
its 15% Notes, also which have since been repaid. All warrants are
exercisable for a period of five years from their dates of issuance.
Under the terms of the Company's initial public offering, the underwriter
acquired warrants to purchase 360,000 Class A common shares at a price of
$6.50 per share for nominal consideration. These warrants are exercisable
for four years commencing in September 1995.
Asa result of the successful placement of 350 shares of Series B Preferred
Stock, a consultant from Digital Media Group, Inc. was issued warrants by
the Company to purchase 30,000 Class A common shares at a price of $3.09
per share. These warrants are exercisable for ten years commencing in March
1996.
(Continued)
<PAGE>
F-25
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes to Consolidated Financial Statements, (Continued)
Due to the successful placement of 150,000 shares of the Company's Series C
Convertible Stock, Wharton Capital Partners Ltd. and The Shemano Group,
Inc., two financial consulting firms, were issued warrants by the Company
to purchase 37,500 Class A common shares each at a price of $2.54 per
share. These warrants expire on December 27, 1999.
In connection with the acquisition of WIN, the Company issued a warrant that
allows the holder the ability to purchase unregistered shares of the
Company's Class A common stock at a price of $1.25 per share at the earlier
of the conversion of a note or April 18, 1998 for a period of five years.
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.
As a result of the successful placement of 80,000 shares of the Company's
Series D Preferred Stock, JNC Opportunity Fund, the acquirer of the
placement, received 80,000 warrants to purchase the Company's unregistered
Class A Common Stock, and financial consultants, primarily Wharton Capital
Partners, received a total of 40,000 warrants. The warrants have an
exercise price of $1.62, and expire on May 30, 2002.
As a result of the successful placement of 112,500 shares of the Company's
Series F Preferred Stock, Combination Inc., the acquirer of the placement,
received 112,500 warrants to purchase the Company's unregistered Class A
Common Stock, and Wharton Capital Partners received 56,250 warrants. The
warrants have an exercise price of $1.26, and expire on October 9, 2002.
In connection with the private placement of approximately 800,000 shares of
the Company's Class A Common Stock, the Company issued 160,000 warrants to
purchase shares of the Company's unregistered Class A Common Stock at an
exercise price of $1.00. The warrants expire on September 16, 2000.
In connection with a technology license agreement with Aladdin, the Company
issued two warrants on July 18, 1997 to purchase the Company's Class A
Common Stock. The first warrant is exercisable in 100,000 share lots, and
provides the holder with the right to acquire 1,216,136 shares of the
Company's unregistered Class A Common Stock at an exercise price of $1.70
per share. The first warrant has a life of two years. The second warrant
provides the holder with the right to acquire 7% of the Company's Class A
Common Stock on a fully diluted basis for the average closing price for the
15 trading days prior to exercise. During June of 1998, Aladdin exercised a
portion of the second warrant to purchase 1,000,000 shares of common stock
and still has the right to acquire shares approximating 3.45% of the
Company's Class A common stock.
(Continued)
<PAGE>
F-26
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes to Consolidated Financial Statements, (Continued)
A summary of warrants outstanding at December 31, 1998, based upon a year end
price of the Class A common stock of $3.718 per share, follows:
<TABLE>
<CAPTION>
Class A and B shares Range of exercise Expiration
Year of issuance subject to warrants prices Term
---------------- ------------------- ----------------- ----------
<S> <C> <C> <C>
1994 542,800 $3.50 - 6.50 5 years
1996 191,905 1.25 - 3.09 5-10 years
1997 1,080,000 1.00 - 1.75 5 years
1997 1,216,136 1.70 2 years
1998 225,000 1.38 - 1.49 5 years
120,000 1.10 - 4.05 5 years
34,680 1.83 10 years
----------
3,410,521
</TABLE>
At December 31, 1998, warrants to acquire approximately 3.4 million shares of
Class A and Class B common stock were exercisable.
The above information table does not include the Aladdin warrant to purchase
3.45% of the Company due to its variable nature.
(9) Licensing Agreements
(a) Licensed Patents
In February 1994, the Company entered into an Amended and Restated License
Agreement (the "Agreement") with Mr. Peter J. Sprague, the Chairman and
Chief Executive Officer of the Company, and Mr. John Michener, then a
shareholder and officer of the Company, whereby the Company was granted an
exclusive license to make, have made, use, lease, sell or otherwise perform
services covered by certain licensed patents (the "Licensed Patents") which
are a fundamental part of the Company's product. The Agreement amends and
restates certain license agreements entered into by the Company prior to
February 1994.
The Agreement provides for royalty payments to be made to the licensors in
the aggregate amount of two percent of the total gross revenues derived by
the Company and any sublicensee of the Company from the exploitation of the
Licensed Patents, less any amounts paid, if any to (i) information and
database providers for information distributed to or through the Company or
its sublicensees, and to (ii) the Company's sublicensees for manufacturing
the product or performing the services covered by the Licensed Patents.
Royalty payments are payable quarterly and are to be apportioned 75% to Mr.
Sprague and 25% to Mr. Michener.
(Continued)
<PAGE>
F-27
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes to Consolidated Financial Statements, (Continued)
Payment of royalties is secured by a security interest in and to the Licensed
Patents. Mr. Sprague assigned all of his right, title, and interest in the
Licensed Patents to the Company.
The Company believes that the agreements as a whole provide it with exclusive
rights under the Wave Patents. There can be no assurance that the Company
will enjoy exclusive rights to the Licensed patents under these agreements.
(b) Aladdin License Agreement
During the third quarter of 1997 the Company entered into a license agreement
with Aladdin Knowledge Systems, Ltd. ("Aladdin"), an Israeli company, for
technology and in-process research and development related to Aladdin's
proprietary persistent encryption system. Under the terms of the Aladdin
license agreement, the Company is prohibited from using any other
encryption technology for the first five years. This technology will be
incorporated into the Wave System to facilitate pay-per-view content
distribution.
The Company acquired the license for this technology in exchange for $950,000
plus two warrants to purchase the Company's Class A common stock valued at
approximately $2.9 million (see note 8). The cost of this license was
expensed as research and development costs. Aladdin also is provided a
royalty payment of 5% to 9% of the Company's net content revenues.
In connection with this agreement, Aladdin acquired an equity position in the
Company by purchasing 500,000 shares of the Company's Class A common stock
for $900,000, which approximated the fair market value of the shares on the
date of purchase (see note 7).
(10) License and Cross-License Agreements
On May 1, 1992, the Company entered into a Joint Technology Development
Agreement and License and Cross-License Agreement ("License and
Cross-License Agreement") with The Titan Corporation ("Titan") whereby
Titan granted to the Company license rights to the use of certain patents
which are co-owned or licensed by 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. The Company issued to Titan 674,976 shares of Class B common
stock in return for the license to Titan's patents. These shares were
valued at $1.67 per share (total $1,124,960), the estimated fair value of
the shares at the time of issuance (based on the price at which shares were
sold to third parties near the time of issuance), and were included in
research and development expense in the accompanying consolidated statement
of operations for the period from February 12, 1988 through December 31,
1996.
The License and Cross-License Agreement provides for royalties to be paid by
the Company to Titan based upon the Company's "Net Revenues," as defined in
the agreement. Net Revenues are defined generally as gross product revenues
less amounts paid to information providers and data base providers for
information provided to the Company for use in its products and services.
Royalties are payable on a quarterly basis.
(Continued)
<PAGE>
F-28
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes to Consolidated Financial Statements, (Continued)
The License and Cross-License Agreement also provides for royalties to be
paid to the Company by Titan based upon Titan's "Allocable Net Revenues,"
as defined in the agreement. Allocable Net Revenues are generally defined
as that portion that a Company patent or information adds to Titan's gross
amounts invoiced to purchasers for all products or information services
making use of a Company patent or know-how and information. Royalties are
payable on a quarterly basis.
The License and Cross-License Agreement specifies certain events of
termination, some of which have already occurred but which have been waived
or extended by Titan.
A director of the Company, who resigned from the Board at the end of 1997, is
also the President, Chief Executive Officer, and a director of Titan.
Pursuant to the terms of a related stockholders agreement, Titan has the
right to designate a member of the Company's Board of Directors for as long
as Titan continues to own at least 50% of the shares originally issued to
Titan. As of December 31, 1998, no royalties have been earned by Titan. On
February 28, 1997, the Company and Titan executed an addendum to the
License Agreement whereby the Company received a sole license to Titan's
patent to develop and distribute products to the in-home consumer
microcomputers market segment. Under this addendum, Titan waived all
defaults previously incurred by Wave as well as extended the license
agreement to expire at the time the patents expire.
(11) Revenue Sharing Agreements With Partners
The Company has, and intends to continue to, enter into revenue sharing
arrangements with information providers, software developers, and hardware
and systems manufacturers such as IBM discussed below. These revenue
sharing arrangements will be negotiated between each of the partners and
the Company. It is anticipated that revenue sharing arrangements will vary
according to the market in which the Wave system is adopted and from which
revenues are derived. Generally, a significant portion of the revenue
collected by the Company will be paid directly to the information provider
or software developer. Once these payments are made the remainder of
revenues will be shared between the Company and other partners. There can
be no assurance that the Company will be successful in entering into
definitive agreements with these parties, or that the terms of such
agreements will be favorable to the Company.
In December 1997, the Company entered into a series of agreements ("the
agreements") with IBM pursuant to which the Company and IBM agreed to
explore ways to incorporate the Company's WaveMeter chip into PC products
and to support each other in achieving industry-wide adoption of the
WaveMeter technology. Pursuant to the agreements, the Company must
subsidize the incremental cost of using the Wave technology in IBM
products. The total subsidy is capped at $30 million. The Company must also
share varying percentages of its usage and advertising fee income that
results from usage of any Wave technology distributed by IBM. In addition,
the Company must provide user and technical service and support to IBM
customers for the end-user application of Wave technology. Finally, the
agreements provide for cash payments upon the attainment of certain
milestones. The amount of such cash payments is based upon the appreciation
of the Company's stock. To date, none of these milestones have been
achieved; therefore, no costs have been recognized in the financial
statements.
(Continued)
<PAGE>
F-29
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes to Consolidated Financial Statements, (Continued)
(12) Joint Venture
In July of 1997, the Company entered into a joint venture with Internet
Technology Group, PLC ("ITG"), a United Kingdom Internet service provider.
The joint venture is owned 25% by the Company and 75% by ITG. The Company
contributed its technical expertise and ITG contributed initial working
capital and the commitment to fund all future working capital requirements
of the joint venture. The objective of the joint venture company, Global
Wave, Ltd., is to promote and commercialize the Wave technology in certain
European and Middle Eastern markets. Pursuant to the joint venture
agreement, the Company received a license fee of up to $5 million in
exchange for the joint venture's right to market the Wave technology in
European and Middle Eastern markets. The license fee was paid by ITG as
part of its commitment to fund the joint venture. During the third quarter
of 1997, the Company received $1.0 million from the joint venture
representing partial payment of the license fee, with the remaining
payments to be made upon the Company's attaining certain milestones related
to the number of Wave Meters distributed. The amount received was recorded
as deferred license fee income in the third quarter of 1997 as it was
uncertain whether the Company had met the contractual requirements required
in order to have earned the first payment. During the fourth quarter of
1997, the Company met these requirements and began recognizing the license
fee ratably over the contractual refund, and recorded the $1 million as a
license fee. Also the Company accrued $490,000 in the fourth quarter of
1997 for expenses related to the Company's obligation to assist the joint
venture in setting up the Wave system in the designated markets. In January
1998, the joint venture agreement was modified to extend the milestone
dates and provide for the payment of an additional $750,000 of the $5
million license fee to the Company. The payment of $750,000 was received in
January 1998. The Company also received the final payment of $3.25 million
in June 1998 pursuant to the licensing and joint venture agreement ("the
Agreement") with Internet Technology Group, PLC, a United Kingdom company.
This payment and the $750,000 received in January 1998 total $4 million
received in 1998. As part of the Agreement, after the final license fee is
paid, the Company and Internet Technology Group, PLC are to issue a
significant warrant to each other for approximately one million shares of
each others' common stock. The exercise price of the Wave warrants is $1.75
per share. The exercise price of the ITG warrant is approximately .995
British pound per share. On June 5, 1998, the final milestone for the last
payment on the license fee was attained and the Company became obligated to
issue its warrant to ITG pending approval by the shareholders of ITG for it
to issue its reciprocal warrant. On this date the net fair market value of
the exchange of warrants represented a net cost to the Company of
approximately $1.1 million. The Company, upon determining this cost, has
recorded the total amount as ITG net warrant cost in the Consolidated
Statement of Operations.
The joint venture is entirely funded through advances from ITG and the
Company has no commitment to fund the operations of the joint venture.
The Company accounts for its 25% interest in the joint venture pursuant to
the equity method of accounting. At December 31, 1998 and 1997, the
Company's investment in the joint venture was $0 for financial reporting
purposes.
(Continued)
<PAGE>
F-30
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes to Consolidated Financial Statements, (Continued)
(13) Commitments and Contingencies
Litigation
The Company is party to legal proceedings generally incidental to its
business. Management believes that the outcome of such litigation will not
have a material adverse effect on the consolidated financial position or
results of operations of the Company.
On June 27, 1997 a complaint alleging breach of contract, among other related
claims, was filed against the Company by Carl A. Artopeous and Artopeous
Capital Management (collectively, "Artopeous") with the Sacramento Superior
Court in Sacramento, California in connection with the engagement of
Artopeous by the Company to arrange financing. The action has been removed
to the Federal Court, Eastern District of California. Wave filed its answer
in December 1997 and agreed to a settlement on January 25, 1999. The
settlement cost of approximately, $602,000 and has been accrued in the
December 31, 1998 financial statements.
Leases
In December 1994, the Company entered into an operating lease beginning March
1995 for its offices in New York, New York, which expired on February 28,
1998. The lease provided for minimum annual rent of $200,000 plus
applicable increases. The Company has subsequently terminated this lease
and entered into a new lease in the same facility. The minimum annual rent
for the new lease is approximately $81,000 and its expiration is June 1999.
The Company also leases premises in Princeton, New Jersey; San Jose,
California; and Lee, Massachusetts, under operating leases, which expire on
various dates through January 14, 2001.
The Company is obligated under a capital lease for a phone system in the Lee,
Massachusetts office. At December 31, 1998 the gross amount of plant and
equipment and related accumulated amortization recorded under capital
leases were as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Phone Equipment $111,291 $111,291
Less: Accumulated Amortization 33,387 11,129
-------- --------
Ending Balance $ 77,904 $100,162
======== ========
</TABLE>
Amortization of assets held under capital leases is included with
depreciation expense.
(Continued)
<PAGE>
F-31
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes to Consolidated Financial Statements, (Continued)
Future minimum lease payments under noncancelable operating leases (with
initial or remaining lease terms in excess of one year) and future minimum
capital lease payments as of December 31, 1998 are as follows:
<TABLE>
<CAPTION>
Year ending December 31, Capital Lease Operating Lease
------------------------ ------------- ---------------
<S> <C> <C> <C>
1999 $ 42,372 $203,937
2000 21,186 162,604
2001 - 119,382
--------
Total minimum lease payments 63,558 $485,923
========
Less: interest 3,389
Present Value of net minimum -------
lease payments 60,169
Less: current installment of obligations
under capital lease 39,409
-------
Obligation under capital lease
excluding current installments $20,760
=======
</TABLE>
Rent expense for the years ended December 31, 1998, 1997, 1996 and for the
period from inception through December 31, 1998 amounted to approximately
$307,000, $383,000, $341,000 and $1,800,000, respectively.
(14) Income Taxes
The Company has net operating loss carryforwards for tax return purposes of
approximately $47.6 million which expire beginning in 2003 through 2014.
Pursuant to the Tax Reform Act of 1986, annual utilization of the Company's
net operating loss carryforwards may be limited if a cumulative change in
ownership of more than 50% occurs within a three year period. The Company
has not determined whether there has been such a cumulative change in
ownership or the impact on the utilization of the loss carryforwards if
such change has occurred.
The tax effects of temporary differences that give rise to the deferred tax
asset at December 31, 1998 and 1997 are as follows:
<TABLE>
<CAPTION>
1998 1997
---- ----
<S> <C> <C>
Deferred tax assets:
Net operating loss carryforwards $ 19,978,000 $15,493,000
License rights 980,000 1,307,000
------------ -----------
Total gross deferred tax assets 20,958,000 16,800,000
Less valuation allowance (20,958,000) (16,800,000)
------------ -----------
Net deferred tax asset $ - $ -
============ ===========
</TABLE>
The valuation allowance increased by approximately $4.2 million and $5.2
million, during the years ended December 31, 1998 and 1997, respectively.
(Continued)
<PAGE>
F-32
WAVE SYSTEMS CORP. AND SUBSIDIARIES
(a development stage corporation)
Notes to Consolidated Financial Statements, (Continued)
(15) Defined Contribution Plan
The Company adopted the Wave Systems Corp. 401(k) Savings and Investment
Plan, a defined contribution plan, to which substantially all employees can
contribute on January 1, 1995. Employees of the Company become eligible
immediately on employment. The Company has the option to make discretionary
matching contributions; no contributions were made in 1998, 1997 or 1996.
(16) Disclosures about the Fair Value of Financial Instruments
Cash and Cash Equivalents, Accounts Receivable, Accounts Payable and Accrued
Expenses, and Note Payable
The carrying amounts of these instruments, other than the note, approximate
fair value because of their short maturities. The note payable approximates
its estimated fair value based on the timing of its issue.
Limitations
Fair value estimates are made at a specific point in time, based on relevant
market information and information about the financial instrument. These
estimates are subjective in nature and involve uncertainties and matters of
significant judgment and therefore cannot be determined with precision.
Changes in assumptions could significantly affect the estimates.
(17) Subsequent Events
During March of 1999, the Company raised approximately $23,000,000 through
the private placement to institutional, strategic and accredited individual
investors of approximately 2.1 million shares of Class A common stock at
$11.00 per share.
During January of 1999, the Company issued a non-interest bearing convertible
promissory note for $2,000,000 to one (1) accredited investor. The note
shall be due and payable on January 26, 2002 unless the company raises
financing of at least $5,000,000, whereby the Company must repay the
principal of the note within five business days of such financing, unless
converted into Class A common stock of the Company. The note holder is
entitled to 275,000 warrants to purchase Class A common stock at an
exercise price of $4.00, and the warrants expire on January 26, 2004. If,
over any sixty (60) consecutive day period, the average of the averaged
daily high and low prices of the Class A Common Stock, as reported by
Bloomberg Information Services, Inc., exceeds seven dollars ($7.00), the
Company has the option to force the conversion of the Warrants. The fair
value of such warrant will be recorded as interest expense through the
earliest available conversion date of the note. In March 1999, subsequent
to and in addition to the Company's completion of the $23 million private
placement, the $2 million note was converted into 181,818 shares of the
Company's Class A common stock at a conversion price of $11.00 a share.
<PAGE>
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth the various expenses to be paid by Wave
in connection with the sale of the securities being registered, other than sales
commissions. All of the amounts shown are estimated except the Commission
registration fee.
<TABLE>
<S> <C>
Commission registration fee........... $24,430
Accounting fees and expenses.......... 10,000
Printing expenses..................... 5,000
Miscellaneous ........................ 1,570
Legal fees and expenses............... 50,000
-------
Total.............................. $91,000
=======
</TABLE>
Item 14. INDEMNIFICATION OF DIRECTOR AND OFFICERS
In accordance with Section 102(b)(7) of the Delaware General
Corporation Law (the "DGCL"), the Restated Certificate of Incorporation of Wave
contains a provision to limit the personal liability of the our directors for
violations of their fiduciary duties. This provision eliminates each director's
liability to Wave or its stockholders for monetary damages except (i) for any
breach of the director's duty of loyalty to Wave or its stockholders, (ii) for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, (iii) under Section 174 of the DGCL providing for
liability of directors for unlawful payment of dividends or unlawful stock
purchases or redemptions, or (iv) for any transaction from which the director
derived an improper personal benefit. The effect of this provision is to
eliminate the personal liability of directors for monetary damages for actions
involving a breach of their fiduciary duty of care, including any such actions
involving gross negligence. Also, there may be certain liabilities, such as
those under the federal securities laws or other state or federal laws, which a
court may hold are unaffected by the Restated Certificate of Incorporation.
The Restated Certificate of Incorporation also provides that if the
DGCL is amended to further eliminate or limit the liability of directors, then
the liability of a director of Wave shall be so eliminated or limited, without
further stockholder action, to the fullest extent permissible under the DGCL as
so amended.
Section 145 of the DGCL provides that a corporation may indemnify any
person, including officers and directors, who are, or are threatened to be made,
parties to any threatened, pending or completed legal action, suit or
proceeding, whether civil, criminal, administrative or investigative (other than
an action by or in the right of such corporation), by reason of the fact that
such person was an officer, director, employee or agent of such corporation, or
is or was serving at the request of such corporation as a director, officer,
employee or agent of another corporation. The indemnity may include expenses
(including attorneys' fees), judgments, fines and amounts paid in settlement
actually and reasonably incurred by such person in connection with such action,
suit or proceeding, provided such officer, director, employee or agent acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
corporation's best interests and, for criminal proceedings, had no reasonable
cause to believe that his conduct was unlawful. A Delaware corporation may
indemnify officers and directors in an action by or in the right of the
corporation under the same conditions, except that no indemnification is
permitted without judicial approval if the officer or director is adjudged to be
liable to the corporation. Where an officer or director is successful on the
merits or otherwise in defense of any
<PAGE>
action referred to above, the corporation must indemnify him against the
expenses which such officer or director actually or reasonably incurred. Our
Bylaws provide for indemnification of the officers and directors to the fullest
extent permitted by the DGCL. In addition, we maintain officers' and directors'
liability insurance which insures against liabilities that our officers and
directors may incur in such capacities.
Item 15. RECENT SALES OF UNREGISTERED SECURITIES
On March 30, 1999 we sold 181,818 shares of its Class A Common Stock,
at a price of $11.00 per share, in satisfaction of the then outstanding
principal amount of $2,000,000 on a note we had issued to Carriage Partners,
LLC. Such issuance was exempt from registration provisions of the Securities Act
in accordance with the exemption available under Section 4(2) of said Act.
On March 23, 1999 we sold 2,090,954 shares of Class A Common Stock, at
a price of $11.00 per share, for an aggregate purchase price of $23,000,494. The
shares were sold to a group of accredited investors pursuant to Regulation D
promulgated under the Act. Accordingly, such issuance was exempt from the
registration provisions of the Securities Act in accordance with the exemption
provided by Section 4(2) of the Securities Act. Pacific Growth Equities, Inc.
acted as sole placement agent for the private placement, receiving a commission
of approximately $1.2 million.
On January 26, 1999 we issued warrants to purchase 275,000 shares of
Class A Common Stock at an exercise price of $4.00 per share, exercisable until
January 26, 2004, to one investor. That investor was an "accredited investor" as
that term is defined in Rule 501 of Regulation D of the Securities Act.
Accordingly, such issuance was exempt from the registration provisions of the
Securities Act in accordance with the exemption provided by Section 4(2) of the
Securities Act. If, over any sixty consecutive day period, the average of the
daily high and low prices of the Class A Common Stock, as reported by Bloomberg
Information Services, exceeds seven dollars ($7.00), we may force the conversion
of these warrants. These warrants were issued as consideration for a $2,000,000
promissory note, bearing no interest, due January 26, 2002.
On January 25, 1999, the Company issued 46,667 shares of Class A Common
Stock to Carl A. Artopeous and Artopeous Capital Management (collectively,
"Artopeous") and 23,333 shares of Class A Common Stock to Barry Eskanos, each
with respect to the settlement of legal claims filed against the Company. Such
issuance was exempt from registration provisions of the Securities Act in
accordance with the exemption available under Section 4(2) of said Act.
The Company issued 3,093 shares of Class A Common Stock to Dr Craig
Mudge as partial payment for consulting services rendered during 1998, with the
remainder of the fee paid in cash. Such issuance was exempt from registration
provisions of the Securities Act in accordance with the exemption available
under Section 4(2) of said Act.
The Company issued 1,031 shares of Class A Common Stock to Bruce
Schneier as payment partial for consulting services rendered during 1998, with
the remainder of the fee paid in cash. Such issuance was exempt from
registration provisions of the Securities Act in accordance with the exemption
available under Section 4(2) of said Act.
The Company issued 15,000 shares of Class A Common Stock to Lora Lee
Professional Recruiters, Inc. as payment for professional placement and
consulting services rendered during 1998. Such issuance was exempt from
registration provisions of the Securities Act in accordance with the exemption
available under Section 4(2) of said Act.
II-2
<PAGE>
The Company issued 17,500 shares of Class A Common Stock to Jaffoni &
Collins Incorporated as payment for investor relations and consulting services
rendered during 1998. Such issuance was exempt from registration provisions of
the Securities Act in accordance with the exemption available under Section 4(2)
of said Act.
The Company issued 150,000 shares of Class A Common Stock to William
Morris Agency, Inc. as payment for investor relations and consulting services
rendered during 1998. Such issuance was exempt from registration provisions of
the Securities Act in accordance with the exemption available under Section 4(2)
of said Act.
On March 6, 1998 we 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 ten (10) Trading Days immediately preceding the
Conversion Date, as defined in the Certificate of Designation of the Series G
Convertible Preferred Stock. In addition to the Series G Convertible Preferred
Stock, we also issued warrants to purchase a total of 225,000 shares of Class A
common stock at an exercise price of $1.38 per share, exercisable until October
9, 2002.
On October 9, 1997 we issued 112,500 shares of newly created Series F
Convertible Preferred Stock, par value $.01 ("Series F Convertible Preferred
Stock"), at a price of $20 per share, for an aggregate purchase price of
$2,250,000. The shares were sold to one (1) accredited investor pursuant to
Regulation D promulgated under the Act. The Series F Convertible Preferred Stock
is convertible into the Class A common stock at an effective conversion price of
the lower of (a) $1.05 and (b) 80% of the average of the five (5) lowest trading
prices of the Class A common stock during (x) a day on which the Class A common
stock is traded on The Nasdaq National Market or The Nasdaq SmallCap Market or
principal national securities exchange or market on which the Class A common
stock has been listed, or (y) if the Class A common stock is not listed on The
Nasdaq National Market or The Nasdaq SmallCap Market or any stock exchange or
market, a day on which the Class A common stock is traded in the
over-the-counter market, as reported by the OTC Bulletin Board, or (z) if the
Class A common stock is not quoted on the OTC Bulletin Board, a day on which the
Class A common stock is quoted in the over-the-counter market as reported by the
National Quotation Bureau Incorporated (or any similar organization or agency
succeeding its functions of reporting prices) ("Trading Days"), as reported by
Bloomberg Information Services, Inc. during the ten (10) Trading Days
immediately preceding the Conversion Date, as defined in the Certificate of
Designation of the Series F Convertible Preferred Stock. In addition to the
Series F Convertible Preferred Stock, we also issued warrants to purchase a
total of 168,750 shares of Class A common stock at an exercise price of $1.26
per share, exercisable until October 9, 2002. As of December 31, 1997, all of
the shares of the Series F Preferred stock have been converted into Class A
common stock
II-3
<PAGE>
On September 16, 1997, we issued 800,000 shares of our Class A common
stock, and warrants to purchase 160,000 shares of Class A common stock, which
may be exercised at an exercise price equal to $1.00, for an aggregate purchase
price of $800,000 pursuant to Regulation D promulgated under the Securities Act
of 1933, as amended (the "Act"), to six (6) accredited investors.
On May 30, 1997 we issued 80,000 shares of newly created Series D
Convertible Preferred Stock, at a price of $20 per share, for an aggregate of
$1,600,000. The shares were sold to one (1) accredited investor pursuant to
Regulation D promulgated under the Act. The Series D Convertible Preferred Stock
is convertible into our Class A common stock 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 our Class A common stock for the five (5)
trading days immediately preceding the Date of Conversion, defined in the
Certificate of Designation of the Series D Convertible Preferred Stock. In
addition to the Series D Convertible Preferred Stock, we also issued warrants to
purchase a total of 120,000 shares of Class A common stock at an exercise price
of $1.62 per share, exercisable until May 30, 2002. As of December 31, 1997, all
of the shares of the Series D Preferred Stock have been converted into Class A
common stock.
On December 27, 1996 we issued 150,000 shares of newly created Series C
Convertible Preferred Stock, par value $.01 (the "Series C Preferred Stock"), at
a price of $20 per share, for an aggregate price of $3,000,000. The Series C
Preferred Stock was sold to one (1) accredited investor pursuant to Regulation D
promulgated under the Act. The Series C Preferred Stock is convertible into the
Class A common stock at an effective conversion price of the lower of (i) $2.31,
or (ii) 80%, which is subject to adjustment, of the average closing bid price on
the Nasdaq National Market System of our Class A common stock for the five (5)
trading days immediately preceding the date that the holders of the Series C
Preferred Stock choose to convert the Series C Preferred Stock into the Class A
common stock. In addition to the Series C Preferred Stock, we also issued
warrants to purchase a total of 75,000 shares of Class A common stock at an
exercise price of $2.54 per share as part of the aforementioned transaction. As
of July 23, 1997, all of the shares of the Series C Preferred stock have been
converted into Class A common stock.
On May 29, 1996 we issued 350 shares of newly created Series B
Preferred Stock, par value $.01 (the "Series B Preferred Stock"), at a price of
$10,000 per share, for an aggregate price of $3,500,000. The Series B Preferred
Stock was sold to five (5) off-shore investors pursuant to Regulation S
promulgated under the Act. The Series B Preferred Stock was convertible into the
Class A common stock at an effective conversion price of the lower of (i) $3.01,
or (ii) 85% of the average closing bid price on the Nasdaq National Market
System of our Class A common stock for the five (5) trading days immediately
preceding the date that the holders of the Series B Preferred Stock chose to
convert the Series B Preferred Stock into the Class A common stock. As of March
17, 1997, all of the shares of Series B Preferred Stock have been converted into
Class A common stock.
II-4
<PAGE>
Item 16. EXHIBITS AND FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
Exhibit No. Description of Exhibit
- ---------------------------------------------------------------------------------------
<S> <C> <C>
3.1 -- Restated Certificate of Incorporation of Registrant (incorporated by
reference to Exhibit 3.1 of the Registrant's Registration Statement on
Form S-1, File No. 33-75286)
3.2 -- Bylaws of Registrant (incorporated by reference to Exhibit 3.2 of the
Registrant's Registration Statement on Form S-1, File No. 33-75286)
4.1 -- Form of Stock Certificate of Class A Common Stock (incorporated by
reference to Exhibit 4.1 of the Registrant's Registration Statement on
Form S-1, File No. 33-75286)
4.2 -- Form of Representative's Warrant Agreement, including the form of
Representative's Warrant (incorporated by reference to Exhibit 4.2 of the
Registrant's Registration Statement on Form S-1, File No. 33-75286)
4.3 -- Certificate of Designation of Series B Preferred Stock of Wave Systems
Corp. as filed with the Delaware Secretary of State on May 24, 1996
(incorporated by reference to Exhibit 3.1 of the Registrant's Current
Report on Form 8-K filed on May 30, 1996, File No. 0-24752)
4.4 -- Certificate of Designation of Series C Convertible Preferred Stock of
Wave Systems Corp. as filed with the Delaware Secretary of State on
December 27, 1996 (incorporated by reference to Exhibit 3.1 of the
Registrant's Current Report on Form 8-K filed on January 8, 1997, File
No. 0-24752)
4.5 -- Certificate of Designation of Series D Convertible Preferred Stock of
Wave Systems Corp. as filed with the Delaware Secretary of State on
December 27, 1996 (incorporated by reference to Exhibit 3.1 of the
Registrant's Current Report on Form 8-K filed on June 3, 1997, File No.
0-24752)
4.6 -- Certificate of Designation of Series F Convertible Preferred Stock of
Wave Systems Corp. as filed with the Delaware Secretary of State on
October 9, 1997 (incorporated by reference to Exhibit 3.1 of the
Registrant's Current Report on Form 8-K filed on October 15, 1997, File
No. 0-24752)
4.7 -- 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)
*5.1 -- Opinion of Bingham Dana LLP with respect to the legality of the shares
being offered.
+10.1 -- Joint Technology Development Agreement, dated as of May 1, 1992, between
The Titan Corporation and Cryptologics International, Inc. (incorporated
by reference to Exhibit 10.2 of the Registrant's Registration Statement
on Form S-1, File No. 33-75286)
+10.2 -- License and Cross-License Agreement, dated as of May 1, 1992, between The
Titan Corporation and Cryptologics International, Inc.
II-5
<PAGE>
(incorporated by reference to Exhibit 10.3 of the Registrant's
Registration Statement on Form S-1, File No. 33-75286)
10.3 -- Amendment to License and Cross-License Agreement, dated as of August 27,
1993, between The Titan Corporation and Wave Systems Corp. (incorporated
by reference to Exhibit 10.4 of the Registrant's Registration Statement
on Form S-1, File No. 33-75286)
10.4 -- Amended and Restated License Agreement, dated February 14, 1994, by and
among Wave Systems Corp., Peter J. Sprague and John R. Michener
(incorporated by reference to Exhibit 10.5 of the Registrant's
Registration Statement on Form S-1, File No. 33-75286)
#10.5 -- Wave Systems Corp. 1994 Stock Option Plan (incorporated by reference to
Exhibit 10.6 of the Registrant's Registration Statement on Form S-1, File
No. 33-75286)
#10.6 -- Wave Systems Corp. Non-Employee Directors Stock Option Plan (incorporated
by reference to Exhibit 10.7 of the Registrant's Registration Statement
on Form S-1, File No. 33-75286)
10.7 -- Regulation S Securities Subscription Agreement, dated as of May 29, 1996
(incorporated by reference to Exhibit 4.1 of the Registrant's Current
Report on Form 8-K filed on May 30, 1996, File No. 0-24752)
10.8 -- Purchase Agreement between Wave Systems Corp. and JNC Opportunity Fund
Ltd., dated as of December 27, 1996 (incorporated by reference to Exhibit
4.1 of the Registrant's Current Report on Form 8-K filed on January 8,
1997, File No. 0-24752)
10.9 -- Registration Rights Agreement between Wave Systems Corp. and JNC
Opportunity Fund Ltd., dated as of December 27, 1996 (incorporated by
reference to Exhibit 4.2 of the Registrant's Current Report on Form 8-K
filed on January 8, 1997, File No. 0-24752)
10.10 -- Purchase Agreement between Wave Systems Corp. and JNC Opportunity Fund
Ltd., dated as of May 30, 1997 (incorporated by reference to Exhibit 4.1
of the Registrant's Current Report on Form 8-K filed on June 3, 1997,
File No. 0-24752)
10.11 -- Registration Rights Agreement between Wave Systems Corp. and JNC
Opportunity Fund Ltd., dated as of May 30, 1997 (incorporated by
reference to Exhibit 4.2 of the Registrant's Current Report on Form 8-K
filed on June 30, 1997, File No. 0-24752)
10.12 -- Purchase Agreement between Wave Systems Corp. and Combination, Inc.,
dated as of October 9, 1997 (incorporated by reference to Exhibit 4.1 of
the Registrant's Current Report on Form 8-K filed on October 15, 1997,
File No. 0-24752)
10.13 -- Registration Rights Agreement between Wave Systems Corp. and Combination
Inc., dated as of October 9, 1997 (incorporated by reference to Exhibit
4.2 of the Registrant's Current Report on Form 8-K filed on October 15,
1997, File No. 0-24752)
10.14 -- Purchase Agreement between Wave Systems Corp. and Combination Inc., dated
as of March 6, 1998 (incorporated by reference to Exhibit 4.1
II-6
<PAGE>
of the Registrant's Current Report on Form 8-K filed on March 19,
1998, File No. 0-24752)
10.15 -- 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)
10.16 -- Addendum to License and Cross-License Agreement, dated February 28, 1997,
between The Titan Corporation and Wave Systems Corp. (incorporated by
reference to Exhibit 10.10 of the Registrant's Annual Report on Form 10-K
filed on March 24, 1997, file No. 0-24752).
10.17 -- Convertible Promissory Note, dated January 26, 1999, between Carriage
Partners, LLC and Wave Systems Corp. (incorporated by reference to
Exhibit 10.17 of the Registrant's Annual Report on Form 10-K filed on
March 31, 1999, file No. 0-24752).
#10.18 -- Employment Contract, dated June 8, 1998, between Gerard T. Feeney and
Wave Systems Corp. (incorporated by reference to Exhibit 10.18 of the
Registrant's Annual Report on Form 10-K filed on March 31, 1999, file No.
0-24752).
#10.19 -- Employment Contract, dated November 10, 1998, between
Steven Sprague and Wave Systems Corp. (incorporated by
reference to Exhibit 10.19 of the Registrant's Annual Report
on Form 10-K filed on March 31, 1999, file No.
0-24752).
10.20 -- Securities Purchase Agreement, dated March 23, 1999, by
and among Wave Systems Corp. and the purchasers listed
therein.
10.21 -- Registration Rights Agreement, dated March 23, 1999, by
and among Wave Systems Corp. and the investors listed
therein.
23.1 -- Consent of Bingham Dana LLP (included as part of Exhibit 5.1 hereto)
23.2 -- Consent of Independent Auditors - KPMG Peat Marwick LLP
24 -- Power of Attorney (included on signature pages)
27 -- Financial Data Schedule
</TABLE>
+Confidential treatment has been granted as to portions of this exhibit.
#Management contract or compensatory plan.
* To be filed as an amendment.
(b) Financial Statement Schedules:
All schedules have been omitted since they are either not required
or not applicable.
II-7
<PAGE>
Item 17. UNDERTAKINGS
The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being
made, a post-effective amendment to this registration statement:
(i) To include any prospectus required by Section 10(a)(3) of the
Securities Act;
(ii) To reflect in the prospectus any facts or events arising after the
effective date of the registration statement (or the most recent
post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement. Notwithstanding the foregoing, any
increase or decrease in the volume of securities offered (if the total
dollar value of securities offered would not exceed that which was
registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of a prospectus
filed with the Commission pursuant to Rule 424(b) if, in the aggregate,
the changes in volume and price represent no more than a 20% change in
the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement;
(iii) To include any material information with respect to the plan of
distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement;
Provided, however, that paragraphs (1)(i) and (1)(ii) do not
apply if the registration statement is on Form S-3 or Form S-8, and the
information required to be included in a post-effective amendment by
those paragraphs is contained in periodic reports filed by the
registrant pursuant to Section 13 or Section 15(d) of the Exchange Act
that are incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment shall be deemed to
be a new registration statement relating to the securities offered
therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the
termination of the offering.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers and controlling
persons of the registrant pursuant to the foregoing provisions, or
otherwise, we have been advised that in the opinion of the Commission
such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a
claim for indemnification against such liabilities (other than payment
by Wave of expenses incurred or paid by a director, officer or
controlling person of Wave in the successful defense of any action,
suit or proceeding) is asserted by such director, officer or
controlling person in connection with the securities being registered,
we will, unless in the opinion of its counsel the matter has been
settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against
public policy as expressed in the Securities Act and will be governed
by the final adjudication of such issue.
II-8
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the
registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form S-1 and has duly caused this Registration
Statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the Town of Lee, Commonwealth of Massachusetts, on the 9th day of
April, 1999.
Wave Systems Corp.
By: /s/ Peter J. Sprague
------------------------
Name: Peter J. Sprague
Title: Chairman and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL MEN BY THESE PRESENTS, that each person whose signature
appears below hereby constitutes and appoints Peter J. Sprague and Steven
Sprague and each of them, his true and lawful attorneys-in-fact and agents, with
full power of substitution and resubstitution, for him or her and in his or her
name, place and stead, in any and all capacities, to sign any and all amendments
(including post-effective amendments) to this Registration Statement, and to
file the same, with all exhibits thereto, and other documents in connection
therewith, with the Securities and Exchange Commission, granting unto said
attorneys-in-fact and agents, and each of them, full power and authority to do
and perform each and every act and thing requisite and necessary to be done in
and about the premises, as full to all intents and purposes as he or she might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his or her substitute
or substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Peter J. Sprague Chairman and Chief Executive April 9, 1999
- -------------------------------- Officer
Peter J. Sprague
/s/ Steven Sprague President, Chief Operating Officer April 9, 1999
- -------------------------------- and Director
Steven Sprague
/s/ John E. Bagalay, Jr. Director April 9, 1999
- --------------------------------
John E. Bagalay, Jr.
/s/ Philippe Bertin Director April 9, 1999
- --------------------------------
Philippe Bertin
/s/ George Gilder Director April 9, 1999
- --------------------------------
George Gilder
/s/ John E. McConnaughy, Jr. Director April 9, 1999
- --------------------------------
John E. McConnaughy, Jr.
/s/ Gerard T. Feeney Senior Vice President, Finance April 9, 1999
- -------------------------------- and Administration, Chief Financial
Gerard T. Feeney Officer and Secretary (Principal
Accounting Officer)
</TABLE>
II-9
Exhibit 10.20
WAVE SYSTEMS CORP.
SECURITIES PURCHASE AGREEMENT
This SECURITIES PURCHASE AGREEMENT is dated as of the 23rd day of
March, 1999 by and between WAVE SYSTEMS CORP., a Delaware corporation with its
principal office at 480 Pleasant Street, Lee, Massachusetts 01238 (the
"Company"), and the several purchasers named in the attached Exhibit A
(individually, a "Purchaser" and collectively, the "Purchasers").
WHEREAS, the Company desires to issue and sell to the Purchasers, and
the Purchasers, severally, desire to purchase from the Company, the aggregate
quantity of up to 3,000,000 shares (the "Purchased Shares") of the authorized
but unissued shares of Class A common stock, $.01 par value per share, of the
Company (the "Common Stock").
NOW THEREFORE, in consideration of the mutual agreements,
representations, warranties and covenants herein contained, the parties hereto
agree as follows:
1. Definitions. As used in this Agreement, the following terms
shall have the following respective meanings:
(a) "Affiliate" of a party means any corporation or other
business entity controlled by, controlling or under common control with such
party. For this purpose "control" shall mean direct or indirect beneficial
ownership of more than fifty percent (50%) of the voting or income interest in
such corporation or other business entity.
(b) "Closing" shall have the meaning ascribed to such term in
Section 2.2 hereof.
(c) "Closing Date" means the date of the Closing.
(d) "Exchange Act" means the Securities Exchange Act of 1934,
as amended, and all of the rules and regulations promulgated thereunder.
(e) "Majority Purchasers" means, at the relevant time of
reference thereto, either (i) those Purchasers holding more than fifty percent
(50%) of the Purchased Shares then held by all of the Purchasers or (ii) those
Purchasers holding commitments hereunder to purchase more than fifty percent
(50%) of the Purchased Shares to be purchased by all Purchasers.
(f) "Purchasers" means all of the Purchasers listed on Exhibit
A hereto.
(g) "Registration Rights Agreement" shall mean that certain
Registration Rights Agreement, dated as of the date hereof, among the Company
and the Purchasers.
<PAGE>
-2-
(h) "SEC" shall mean the Securities and Exchange Commission.
(i) "Securities Act" shall mean the Securities Act of 1933, as
amended, and all of the rules and regulations promulgated thereunder.
2. Purchase and Sale of Purchased Shares.
2.1 Purchase and Sale. Subject to and upon the terms and
conditions set forth in this Agreement, the Company agrees to issue and sell to
each Purchaser, and each Purchaser, severally, hereby agrees to purchase from
the Company, at the Closing, the number of shares of Common Stock set forth
opposite the name of such Purchaser under the heading "Number of Purchased
Shares to be Purchased" on Exhibit A hereto, at a purchase price of $11.00 per
share. The total purchase price payable by each Purchaser for the number of
shares of Common Stock that such Purchaser is hereby agreeing to purchase is set
forth opposite the name of such Purchaser under the heading "Purchase Price" on
Exhibit A hereto. The aggregate purchase price payable by all of the Purchasers
to the Company for all of the Purchased Shares at the Closing shall be
$22,945,494.
2.2 Closing. The closing of the transactions contemplated
under this Agreement (the "Closing") shall take place at the New York offices of
Bingham Dana LLP, 399 Park Avenue, New York, New York 10022 at 10:00 a.m. on the
earlier of (i) the business day after the Company shall have given written
notice (the "Closing Notice") to the Purchasers that it believes all of the
conditions precedent set forth in Section 5.1 have been satisfied in full or
(ii) thirty (30) days from the date hereof, or at such other location, date and
time as may be agreed upon between the Purchasers and the Company.
2.3 Sale to Strategic Investor. Each of the Purchasers
acknowledges and agrees that 500,000 shares of Common Stock out of the aggregate
number of shares being offered by the Company hereunder are being reserved for
issuance and sale by the Company to a strategic investor. The strategic investor
has not made any commitment to purchase such shares of Common Stock as of the
Closing Date. However, it is the Company's present intention to sell such shares
to the strategic investor on the same terms and conditions as the sale of
Purchased Shares being sold to the Purchasers on the Closing Date, provided that
the strategic investor makes a commitment to the Company to purchase such shares
on or before April 5, 1999. On the date of the closing of the issuance and sale
of shares to the strategic investor hereunder, (i) the strategic investor will
become a "Purchaser" hereunder by executing an accession agreement hereto, (ii)
Exhibit A will be amended to add the name of the strategic investor, and (iii)
the strategic investor will become an "Initial Investor" under the Registration
Rights Agreement by executing an accession agreement thereto. No further action
on the part of the Purchasers shall be required to complete the issuance and
sale by the Company of the shares of Common Stock described above to the
strategic investor, or for the accession by the strategic investor to this
Agreement and the Registration Rights Agreement. Each of the Purchasers
acknowledges that the Company is not in a position to determine whether the
strategic investor will make any investment in the Company, that the Company has
not made and is not making any representation or warranty to such Purchaser as
to the likelihood that the strategic investor will make any investment in the
Company, and that such Purchaser has been instructed by the
<PAGE>
-3-
Company not to base its investment decision on the possibility that the
strategic investor will make any such investment.
3. Representations and Warranties of the Company. The Company
hereby represents and warrants to each of the Purchasers as follows:
3.1 Incorporation. The Company is a corporation duly
organized, validly existing and in good standing under the laws of the State of
Delaware and is qualified to do business in each jurisdiction in which the
character of its properties or the nature of its business requires such
qualification, except where the failure to so qualify would not have a material
adverse effect upon the Company. The Company has all requisite corporate power
and authority to carry on its business as now conducted. The Company has no
active subsidiaries.
3.2 Capitalization. The authorized capital stock of the
Company consists of (i) 75,000,000 shares of Class A common stock, par value
$0.01 per share, (ii) 13,000,000 shares of Class B common stock, par value $0.01
per share, and (iii) 2,000,000 shares of preferred stock, shares of each of
which class of the capital stock of the Company have been issued and are
outstanding as set forth in Schedule 3.2 hereto. The terms, preferences and
privileges of the outstanding shares of Class A Common Stock, Class B Common
Stock and Preferred Stock are set forth in the Company's Certificate of
Incorporation or, in the case of Preferred Stock of any series, in the
applicable Certificate of Designations for such series. Except as set forth in
Schedule 3.2 hereto, there are no existing options, warrants, calls, preemptive
(or similar) rights, subscriptions or other rights, agreements, arrangements or
commitments of any character obligating the Company to issue, transfer or sell,
or cause to be issued, transferred or sold, any shares of the capital stock of
the Company or other equity interests in the Company or any securities
convertible into or exchangeable for such shares of capital stock or other
equity interests (collectively, "Securities"), and there are no outstanding
contractual obligations of the Company to repurchase, redeem or otherwise
acquire any shares of its capital stock or other equity interests. The Company
has reserved 12,447,405 shares of Class A Common Stock for issuance upon
exercise of rights under or conversion of outstanding Securities. Schedule 3.2
sets forth the number of stock options outstanding under the Company's stock
incentive plans, and the number of shares reserved for issuance under such plans
that are not subject to outstanding options. Except as set forth in Schedule 3.2
no holder of any capital stock or Securities of the Company has any outstanding
registration rights.
3.3 Authorization. All corporate action on the part of the
Company, its officers, directors and stockholders necessary for the
authorization, execution, delivery and performance of this Agreement and the
Registration Rights Agreement and the consummation of the transactions
contemplated herein and therein has been taken. When executed and delivered by
the Company, each of this Agreement and the Registration Rights Agreement shall
constitute the legal, valid and binding obligation of the Company, enforceable
against the Company in accordance with its terms, except as such may be limited
by bankruptcy, insolvency, reorganization or other laws affecting creditors'
rights generally and by general equitable principles. The Company has all
requisite corporate power to enter into this Agreement and the Registration
Rights Agreement and to carry out and perform its obligations under the terms of
this Agreement and the Registration Rights Agreement.
<PAGE>
-4-
3.4 Valid Issuance of the Purchased Shares. The Purchased
Shares being purchased by the Purchasers hereunder will, upon issuance pursuant
to the terms hereof, be duly authorized and validly issued, fully paid,
nonassessable and free of any liens or encumbrances created by the Company and
will, assuming the accuracy of the representations and warranties made by each
of the Purchasers to the Company, be in compliance with applicable state and
federal securities laws.
3.5 SEC Documents. The Company has furnished to each
Purchaser a true and complete copy of the Company's Annual Report on Form 10-K
for the year ended December 31, 1997 and the Company's Quarterly Reports on Form
10-Q for the three month periods ended, respectively, on March 31, June 30 and
September 30, 1998, and any other statement, report, registration statement
(other than registration statements on Form S-8) or definitive proxy statement
filed by the Company with the SEC during the period commencing September 30,
1998 and ending on the date hereof. The Company will, promptly upon the filing
thereof, also furnish to each Purchaser all statements, reports (including,
without limitation, Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q
and Current Reports on Form 8-K), registration statements and definitive proxy
statements filed by the Company with the SEC during the period commencing on the
date hereof and ending on the Closing Date (all such materials required to be
furnished to each Purchaser pursuant to this sentence or pursuant to the next
preceding sentence of this Section 3.5 being called, collectively, the "SEC
Documents"). The Company will file its Annual Report on Form 10-K on or before
March 31, 1999. In addition to the foregoing SEC Documents, the Company will
deliver to each Purchaser a copy of its Annual Report to Stockholders as and
when such report is delivered to stockholders. As of their respective filing
dates, the SEC Documents complied or will comply in all material respects with
the requirements of the Exchange Act or the Securities Act, as applicable, and
none of the SEC Documents contained any untrue statement of a material fact or
omitted to state a material fact required to be stated therein or necessary in
order to make the statements made therein, in light of the circumstances under
which they were made, not misleading, as of their respective filing dates,
except to the extent corrected by a subsequently filed SEC Document. The Company
has not filed any amendment to its Annual Report on Form 10-K for the year ended
December 31, 1997 or its Quarterly Reports on Form 10-Q for the three month
periods ended, respectively, on March 31, June 30 and September 30, 1998 except
for the three-months ended June 30, 1998. The Company has not filed any Current
Reports on Form 8-K with respect to any event occurring between September 30,
1998 and the date hereof.
3.6 Financial Statements. The Company's audited Statements of
Income, Stockholders' Equity and Cash Flows for the fiscal year ended December
31, 1997 and the Company's audited Balance Sheet as of December 31, 1997 are
included in the Company's Annual Report on Form 10-K for the year ended December
31, 1997, a copy of which has been delivered to the Purchasers. The Company's
unaudited Statements of Income, Stockholders' Equity and Cash Flows for the
three month periods ended March 31, June 30 and September 30, 1998 and the
Company's unaudited Balance Sheets as of March 31, June 30 and September 30,
1998 are included in the Company's Quarterly Reports on Form 10-Q for the three
month periods ended, respectively, on March 31, June 30 and September 30 of
1998, copies of which have been delivered to the Purchasers. All of the
financial statements referred to above in this Section 3.6 are hereinafter
referred to, collectively, as the "Financial Statements". The Financial
Statements have been prepared in accordance with generally accepted accounting
principles
<PAGE>
-5-
applied on a consistent basis during the periods involved, and fairly present,
in all material respects, the financial position of the Company and the results
of its operations as of the date and for the periods indicated thereon, except
that those Financial Statements that are unaudited may not have been prepared in
accordance with generally accepted accounting principles because of the absence
of footnotes normally contained therein and may be subject to normal year-end
audit adjustments which, individually, and in the aggregate, will not be
material.
3.7 Consents. All consents, approvals, orders,
authorizations, registrations, qualifications, and filings required on the part
of the Company to be obtained or made prior to the Closing in connection with
the execution, delivery or performance of this Agreement and the Registration
Rights Agreement, and the consummation of the transactions contemplated herein
and therein have been obtained or made or will be obtained or made, prior to the
Closing.
3.8 No Conflict. The execution and delivery of this Agreement
and the Registration Rights Agreement by the Company and the consummation of the
transactions contemplated hereby and thereby will not conflict with or result in
any violation of or default (with or without notice or lapse of time, or both)
under, or give rise to a right of termination, cancellation or acceleration of
any obligation or to a loss of a material benefit or give rise to an event which
results in the creation of any lien, charge or encumbrance upon any of the
Company's properties or assets under (i) any provision of the Certificate of
Incorporation or By-laws of the Company or (ii) any agreement or instrument,
permit, franchise, license, judgment, order, statute, law, ordinance, rule or
regulations, applicable to the Company or its respective properties or assets.
3.9 Absence of Litigation. There is no action, suit or
proceeding or, to the Company's knowledge, any investigation, pending, or to the
Company's knowledge, threatened against the Company and in which an unfavorable
outcome, ruling or finding in any said matter, or for all matters taken as a
whole, might have a material adverse effect on the Company. The foregoing
includes, without limitation, any such action, suit, proceeding or investigation
that questions this Agreement or the Registration Rights Agreement or the right
of the Company to execute, deliver and perform under same.
3.10 Over-the-Counter Trading. The Common Stock is traded on
the Nasdaq Over-the-Counter Bulletin Board. On January 29, 1999, the Company
filed an application for listing of the Class A Common Stock on the NASDAQ
National Market System.
3.11 Brokers or Finders. Except for Pacific Growth Equities,
Inc., the Company has not dealt with any broker or finder in connection with the
transactions contemplated by this Agreement, and the Company has not incurred,
and shall not incur, directly or indirectly, any liability for any brokerage or
finders' fees or agents commissions or any similar charges in connection with
this Agreement or any transaction contemplated hereby. All fees payable to
Pacific Growth Equities, Inc. will be paid by the Company.
3.12 Compliance With Charter, Laws, etc. The Company is in
compliance in all material respects with the terms of its Certificate of
Incorporation and By-laws as currently in effect, true and complete copies of
which will be made available to each Purchaser upon request, and each of the
Certificate of Incorporation and By-laws of the Company is in full force and
<PAGE>
-6-
effect as of the Closing Date. The Company has complied, and is in compliance
with, all federal, state, county, local and foreign laws, rules, regulations,
ordinances, decrees and orders applicable to the operation of its business or to
the real property or personal property that it owns or leases (including,
without limitation, all such laws, rules, ordinances, decrees and orders
relating to antitrust, currency exchange, environmental protection, occupational
safety and health, equal opportunity, pension, securities and
trading-with-the-enemy matters), except where any failure to comply could not
reasonably be expected to have a material adverse effect on the Company.
3.13 Private Offering. During the six months preceding the
date of this Agreement, neither the Company nor any person acting on its behalf
has, directly or through any agent, sold, offered for sale, solicited offers to
buy or otherwise negotiated in respect of any security (as defined in the
Securities Act) that is or may be integrated with the sale of the Purchased
Shares in a manner that would require the registration of the issuance and sale
by the Company of the Purchased Shares under the Securities Act. During the six
months preceding the date of this Agreement, neither the Company nor any person
acting on its behalf has offered or sold any Purchased Shares by means of any
general solicitation or general advertising within the meaning of Rule 502(c)
under the Securities Act. Assuming the accuracy of the Purchasers'
representations in Section 4 hereof, the offering and sale of the Purchased
Shares will satisfy the requirements of Rule 506 under the Securities Act.
3.14 Changes.
(a) Since September 30, 1998, except as set forth in
Schedule 3.14, there has not been:
(i) any damage, destruction or loss (whether or not
covered by insurance) to its assets which has had or is expected to have a
material adverse effect on the Company;
(ii) any material change in the accounting methods or
practices followed by the Company;
(iii) any material debt, obligation or liability
(whether absolute or contingent) incurred by the Company (whether or not
presently outstanding) except (x) current liabilities incurred, and obligations
under agreements entered into, in the ordinary course of business and (y)
obligations or liabilities entered into or incurred in connection with the
execution of this Agreement;
(iv) any sale, lease, abandonment or other disposition
by the Company of any real property or, other than in the ordinary course of
business, of any equipment or other operating properties or, other than in the
ordinary course of business, any sale, assignment, transfer, license or other
disposition by the Company of any intellectual property or other intangible
asset;
(v) any dividends or other distributions of cash or
other property paid by the Company in respect of any of its capital stock
(except for the issuance of shares of the
<PAGE>
-7-
Company's Class A Common Stock upon exercise of rights under, or conversion of,
the Company's Preferred Stock, Class B Common Stock or other Securities);
(vi) any waivers or releases by the Company of any
material debt or obligation owed to the Company; or
(vii) to the best of the Company's knowledge, any
other event that could reasonably be expected to result in a material adverse
effect on the Company.
(b) Notwithstanding anything to the contrary in this
Agreement, if, after the date of this Agreement the Company discloses to the
Purchasers or the Purchasers otherwise become aware of any information
concerning an event that renders the representation and warranty set forth in
this Section 3.14 inaccurate, and such information is material and not otherwise
available to the public generally, the Purchasers agree not to sell, assign or
otherwise transfer any of the Purchased Shares based on such material non-public
information until such material non-public information is made available to the
public generally. In the event that the Closing contemplated hereby actually
occurs, the Company shall disclose such material non-public information in the
Registration Statement required to be filed pursuant to the Registration Rights
Agreement.
3.15 Material Contracts. Except as set forth on Schedule 3.15
hereto, the contracts listed as exhibits to the Company's Annual Report on Form
10-K for the year ended December 31, 1997 and the Company's Quarterly Reports on
Form 10-Q for the three month periods ended, respectively, on March 31, June 30
and September 30, 1998, are all of the material contracts (as defined in the
Securities Exchange Act of 1934 as amended) to which the Company is a party or
by which it or its assets may be bound. The Company is, and, to the best of the
Company's knowledge, all other parties to such material contracts are, in
compliance in all material respects with their obligations thereunder. Except as
set forth in Schedule 3.15, none of such material contracts have been amended or
modified in any material respect.
3.16 Title to Properties and Assets, Liens, etc. The Company
has good and marketable title to its properties and assets, and good title to
its leasehold estates, in each case subject to no mortgage, pledge, lien, lease,
encumbrance, or charge, other than (i) those resulting from taxes which have not
yet become delinquent, (ii) minor liens and encumbrances which do not materially
detract from the value of the property subject thereto or have a material
adverse effect on the Company, and (iii) those that have otherwise arisen in the
ordinary course of business.
3.17 Patents and Trademarks. The Company owns or has rights
to use such trade names, copyrights, trade secrets, information, patents,
trademarks, service marks, rights and processes (including all applications
therefor) as are necessary for its business as now conducted and as proposed to
be conducted, without any conflict with or infringement of the rights of others,
except where any such conflict or infringement could not reasonably be expected
to have a material adverse effect on the Company. Except as set forth on
Schedule 3.17 hereto, there are no material options, licenses, or agreements of
any kind relating to the foregoing, nor is the Company bound by or a party to
any material options, licenses or agreements of any kind with respect to the
patents, trademarks, service marks, trade names, copyrights, trade secrets,
licenses,
<PAGE>
-8-
proprietary rights and processes of any other person or entity. The Company has
not received any communications alleging that the Company has violated or, by
conducting its business as now conducted or proposed, would violate any of the
patents, trademarks, service marks, trade names, copyrights or trade secrets or
other proprietary rights of any other person or entity. The Company is not aware
that any of its employees is obligated under any contract (including licenses,
covenants or commitments of any nature) or other agreement, or subject to any
judgment, decree or order of any court or administrative agency, that would
interfere with the use of his or her best efforts to promote the interests of
the Company or that would conflict with the Company's business as now conducted
or proposed to be conducted. To the best of the Company's knowledge, no person
or entity is infringing or threatening to infringe the patents, trademarks,
service marks, trade names, copyrights or trade secrets or other proprietary
rights of the Company. All employees, officers, directors and consultants, other
than those employees or consultants who are not privy to any of the Company's
confidential information, are bound by confidentiality and assignment of
intellectual property and technology agreements and such agreements and
obligations do not confer on any such person any rights of the intellectual
property of the Company.
3.18 Labor Matters. The Company has no collective bargaining
agreement with any of its employees and, to the Company's knowledge, there is no
labor union organizing activity pending or threatened with respect to the
Company. There are no disputes pending or, to the knowledge of the Company,
threatened between the Company, on the one hand, and any of its employees, on
the other hand, other than employee grievances arising in the ordinary course of
business which would not, individually or in the aggregate, have a material
adverse effect on the Company. Except as set forth on Schedule 3.18, the Company
has no agreements providing for the payment of severance with any of its
officers, directors or employees. The Company has complied in all material
respects with the Employee Retirement Income Security Act of 1974, as amended
("ERISA"), and does not maintain any plans subject to the filing requirements of
Section 302 of ERISA or the provisions of Title IV of ERISA.
4. Representations and Warranties of the Purchasers. Each
Purchaser severally for itself, and not jointly with the other Purchasers,
represents and warrants to the Company as follows:
4.1 Authorization. All action on the part of such Purchaser
and, if applicable, its officers, directors, partners and shareholders necessary
for the authorization, execution, delivery and performance of this Agreement and
the Registration Rights Agreement and the consummation of the transactions
contemplated herein and therein has been taken. When executed and delivered,
each of this Agreement and the Registration Rights Agreement will constitute the
legal, valid and binding obligation of such Purchaser, enforceable against such
Purchaser in accordance with its terms, except as such may be limited by
bankruptcy, insolvency, reorganization or other laws affecting creditors' rights
generally and by general equitable principles. Such Purchaser has all requisite
corporate, trust or partnership (as the case may be) power to enter into each of
this Agreement and the Registration Rights Agreement and to carry out and
perform its obligations under the terms of this Agreement and the Registration
Rights Agreement.
<PAGE>
-9-
4.2 Purchase Entirely for Own Account. Such Purchaser is
acquiring the Purchased Shares being acquired by it hereunder, for investment,
for its own account, and not for resale or with a view to distribution thereof
in violation of the Securities Act.
4.3 Investor Status; Etc. Such Purchaser certifies and
represents to the Company that, at the time such Purchaser acquires any of the
Purchased Shares, such Purchaser will be an "Accredited Investor" as defined in
Rule 501 of Regulation D promulgated under the Securities Act. Such Purchaser's
financial condition is such that it is able to bear the risk of holding any and
all of the Purchased Shares acquired by it for an indefinite period of time and
the risk of loss of its entire investment. Such Purchaser has been afforded the
opportunity to ask questions of and receive answers from the management of the
Company concerning the Company and its business and this investment, and has
also been afforded the opportunity to review any relevant documents and records
concerning the business of the Company. Such Purchaser has such knowledge and
experience in financial and business matters that it is capable of evaluating
the merits and risks of an investment in the Company.
4.4 Purchased Shares Not Registered. Such Purchaser
understands that because the Purchased Shares are issued by the Company in a
transaction exempt from the registration requirements of the Securities Act, the
Purchased Shares have not been registered under the Securities Act, and that the
Purchased Shares must continue to be held by such Purchaser unless a subsequent
disposition thereof is registered under the Securities Act or is exempt from
such registration. The Purchaser understands that the exemptions from
registration afforded by Rule 144 (the provisions of which are known to it)
promulgated under the Securities Act depend on the satisfaction of various
conditions, and that, if applicable, Rule 144 may afford the basis for sales
only in limited amounts.
4.5 Additional Investment Representations. Such Purchaser
shall deliver to the Company a Certificate of Additional Investment
Representations in the form of Exhibit C hereto (in each case, an "Investment
Representations Certificate"). Such Purchaser acknowledges that the Company is
relying on the truth and accuracy of the representations and warranties
contained in its Investment Representations Certificate in the offering of those
Purchased Shares being offered for sale to such Purchaser without having first
registered such Purchased Shares under the Securities Act.
4.6 No Conflict. The execution and delivery of this
Agreement and the Registration Rights Agreement by such Purchaser and the
consummation of the transactions contemplated hereby and thereby will not
conflict with or result in any violation of or default by such Purchaser (with
or without notice or lapse of time, or both) under, or give rise to a right of
termination, cancellation or acceleration of any obligation or to a loss of a
material benefit under (i) any provision of the organizational documents of such
Purchaser or (ii) any agreement or instrument, permit, franchise, license,
judgment, order, statute, law, ordinance, rule or regulations, applicable to
such Purchaser or its respective properties or assets, except where any such
event under clause (ii) could not reasonably be requested to have a material
adverse effect on the transactions contemplated by this Agreement.
4.7 Consents. All consents, approvals, orders and
authorizations required on the part of such Purchaser in connection with the
execution, delivery or performance of this
<PAGE>
-10-
Agreement and the consummation of the transactions contemplated herein have been
obtained or will be obtained prior to the Closing.
4.8 Brokers. Such Purchaser has not retained, utilized or
been represented by any broker or finder in connection with the transactions
contemplated by this Agreement.
5. Conditions Precedent.
5.1 Conditions to the Obligation of the Purchasers to
Consummate the Closing. The obligation of each Purchaser to consummate the
Closing and to purchase and pay for the Purchased Shares being purchased by it
pursuant to this Agreement is subject to the satisfaction of the following
conditions precedent (any of which conditions may be waived by the Majority
Purchasers):
(a) The representations and warranties contained herein of the
Company shall be true and correct on and as of the Closing Date with the same
force and effect as though made on and as of the Closing Date.
(b) The Registration Rights Agreement shall have been executed
and delivered by the Company.
(c) The Company shall not have been adversely affected in any
material way prior to the Closing Date; and the Company shall have performed all
obligations and conditions herein required to be performed or observed by the
Company on or prior to the Closing Date.
(d) Such Purchaser shall have received from Bingham Dana LLP,
counsel to the Company, an opinion addressed to the Purchasers, dated the
Closing Date and substantially in the form of Exhibit D hereto.
(e) Each of the members of the Board of Directors, the Chief
Executive Officer, the Chief Operating Officer and the Chief Financial Officer
shall have entered into a Lock-up Agreement in the form of Exhibit E hereto with
the Company agreeing not to sell any shares of the Company's Common Stock during
the period commencing on the Closing Date and ending on the earlier to occur of
(i) 90 days after the effective date of the registration statement required to
be filed pursuant to the Registration Rights Agreement and (ii) 120 days after
the Closing Date.
(f) No proceeding challenging this Agreement or the
Registration Rights Agreement or the transactions contemplated hereby or
thereby, or seeking to prohibit, alter, prevent or materially delay the Closing,
shall have been instituted before any court, arbitrator or governmental body,
agency or official and shall be pending.
(g) The purchase of and payment for the Purchased Shares by
the Purchasers shall not be prohibited by any law or governmental order or
regulation. All necessary consents, approvals, licenses, permits, orders and
authorizations of, or registrations, declarations and filings with, any
governmental or administrative agency or of any other person with respect to
<PAGE>
-11-
any of the transactions contemplated by the Agreement shall have been duly
obtained or made and shall be in full force and effect.
(h) All instruments and corporate proceedings in connection
with the transactions contemplated by this Agreement and the Registration Rights
Agreement to be consummated at the Closing shall be satisfactory in form and
substance to such Purchaser, and such Purchaser shall have received copies
(executed or certified, as may be appropriate) of all documents which such
Purchaser may have reasonably requested in connection with such transactions.
(i) The offer and sale of the Purchased Shares to the
Purchasers pursuant to this Agreement shall be exempt from registration under
the Securities Act.
(j) The Company shall have delivered to the Purchasers a
certificate dated as of the Closing Date signed by an authorized officer of the
Company certifying the satisfaction of the conditions set forth in Section
5.1(a) and (c).
5.2 Conditions to the Obligation of the Company to
Consummate the Closing. The obligation of the Company to consummate the Closing
and to issue to each Purchaser the Purchased Shares to be purchased by it at the
Closing is subject to the satisfaction of the following conditions precedent
(any of which conditions may be waived by the Company):
(a) The representations and warranties contained herein of
such Purchaser shall be true and correct on and as of the Closing Date with the
same force and effect as though made on and as of the Closing Date.
(b) Such Purchaser shall have performed all obligations and
conditions herein required to be performed or observed by such Purchaser on or
prior to the Closing Date.
(c) The Registration Rights Agreement shall have been executed
and delivered by such Purchaser.
(d) Such Purchaser shall have executed and delivered to the
Company such Purchaser's Investment Representations Certificate.
(e) No proceeding challenging this Agreement or the
transactions contemplated hereby, or seeking to prohibit, alter, prevent or
materially delay the Closing, shall have been instituted before any court,
arbitrator or governmental body, agency or official and shall be pending.
(f) The sale and/or issuance of any of the Purchased Shares by
the Company shall not be prohibited by any law or governmental order or
regulation.
(g) Such Purchaser shall have delivered to the Company a
certificate dated as of the Closing Date signed by an authorized officer of such
Purchaser certifying the satisfaction of the conditions set forth in Section
5.2(a) and that such Purchaser has performed all obligations and conditions
herein required to be performed or observed by it on or prior to the Closing
Date.
<PAGE>
-12-
6. Conduct of Business Pending Closing. The Company covenants and
agrees that, between the date of this Agreement and the earlier of the
termination of this Agreement or the Closing Date, unless the Majority
Purchasers shall otherwise agree in writing, the businesses of the Company shall
be conducted only in, and the Company shall not take any action except in, the
ordinary course of business and in a manner consistent with past practice. By
way of amplification and not limitation, except as contemplated by this
Agreement, the Company shall not, between the date of this Agreement and the
earlier of the termination of this Agreement or the Closing Date, directly or
indirectly do, or propose to do, any of the following without the prior written
consent of the Majority Purchasers:
(a) amend or otherwise change the Company's Certificate of
Incorporation or By-laws or equivalent organizational documents;
(b) issue, sell, pledge, dispose of, grant, encumber, or
authorize the issuance, sale, pledge, disposition, grant or encumbrance of any
shares of Common Stock, or Preferred Stock, or any options, warrants,
convertible securities or other rights of any kind to acquire shares of Common
Stock or Preferred Stock, or any other ownership interest (including, without
limitation, any phantom interest), of the Company at a purchase price per share
that is less than the purchase price per Purchased Share to be paid by the
Purchasers, except (i) pursuant to issued, outstanding or authorized options,
warrants or other Securities, or (ii) for the issuance of capital stock or other
securities in connection with the establishment of corporate relationships for
purposes other than capital raising;
(c) declare, set aside, make or pay any dividend or other
distribution, payable in cash, stock, property or otherwise, with respect to any
of its capital stock;
(d) reclassify, combine, split, subdivide or redeem, purchase
or otherwise acquire, directly or indirectly, any of its capital stock;
(e) (i) acquire (including, without limitation, by merger,
consolidation, or acquisition of stock or assets) any corporation, partnership,
other business organization or any division thereof or any material amount of
assets; (ii) incur any indebtedness for borrowed money or issue any debt
securities or assume, guarantee or endorse, or otherwise as an accommodation
become responsible for, the obligations of any person, or make any loans or
advances, except in the ordinary course of business and consistent with past
practice; (iii) enter into any contract or agreement material to the business,
results of operations or financial condition of the Company other than in the
ordinary course of business, consistent with past practice; (iv) authorize any
capital expenditure in excess of $100,000; or (v) enter into or amend any
contract, agreement, commitment or arrangement with respect to any matter set
forth in this subsection (e);
(f) sell, assign or otherwise transfer all or substantially
all of the assets of the Company; or
<PAGE>
-13-
(g) take any action, other than reasonable and usual actions
in the ordinary course of business and consistent with past practice, with
respect to accounting policies or procedures.
7. Restrictions on Transfer; Delivery of Purchased Shares.
7.1 Restrictions on Transfer of the Purchased Shares.
(a) No Purchaser shall offer, sell, assign, transfer, endorse,
pledge, mortgage, hypothecate or otherwise convey or dispose of any of the
Purchased Shares purchased by it, or any interest therein, unless (i) any such
offer, sale, assignment, transfer, endorsement, pledge, mortgage, hypothecation
or other conveyance or disposition shall be effected (A) pursuant to and in
conformity with an effective registration statement under the Securities Act (a
"Registered Sale") or any then available exemption from the registration
requirements of the Securities Act, and (B) pursuant to and in conformity with
any applicable state securities or blue sky laws, and (ii) in the case of any
offer, sale, assignment, transfer, endorsement, pledge, mortgage, hypothecation
or other conveyance or disposition other than pursuant to a Registered Sale, if
requested by the Company, such Purchaser shall have obtained and delivered to
the Company a written legal opinion of counsel (reasonably satisfactory to the
Company as to such counsel and as to the substance of such opinion) to the
effect that any such proposed offer, sale, assignment, transfer, endorsement,
pledge, mortgage, hypothecation or other conveyance or disposition by such
Purchaser does not violate the registration provisions of the Securities Act and
any applicable state securities or blue sky law.
(b) No Purchaser shall sell, assign, transfer, endorse,
pledge, mortgage, hypothecate or otherwise convey or dispose of any of the
Purchased Shares purchased by it, or any interest therein, unless the proposed
transferee thereof shall have executed and delivered to the Company a written
agreement or instrument, in form and substance satisfactory to the Company,
providing for such proposed transferee's written acknowledgment and agreement
that he, she or it shall be bound by all of the provisions of this Section 7,
provided, however, that if such sale, assignment, transfer, endorsement, pledge,
mortgage, hypothecation or other conveyance or disposition is made pursuant to a
Registered Sale or in accordance with Rule 144 of the Securities Act, such
written agreement or instrument shall not be required.
7.2 Effect of Violation of Transfer Restrictions; Preventive
Measures. Any offer, sale, assignment, transfer, endorsement, pledge, mortgage,
hypothecation, or other conveyance or disposition of any Purchased Shares, or of
any interest therein, in violation of this Section 7 shall be null and void. The
Company may make a notation on its records or give instructions to any of its
transfer agents in order to implement the restrictions on transfer set forth in
this Section 7. The Company shall not incur any liability for any delay in
recognizing any transfer of any Purchased Shares if the Company reasonably
believes that any such transfer may have been or would be in violation of the
provisions of the Securities Act, applicable blue sky laws or this Section 7.
<PAGE>
-14-
7.3 Legends.
(a) Each certificate evidencing any of the Purchased Shares
shall be endorsed with the legend set forth below, and each Purchaser covenants
that, except to the extent such restrictions are waived by the Company, it shall
not transfer the Purchased Shares represented by any such certificate without
complying with the restrictions on transfer described in this Agreement and the
legends endorsed on such certificate:
"THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR
THE SECURITIES LAWS OF ANY STATE AND MAY NOT BE OFFERED, SOLD,
ASSIGNED, TRANSFERRED, ENDORSED, PLEDGED, MORTGAGED,
HYPOTHECATED OR OTHERWISE CONVEYED OR DISPOSED OF, UNLESS SUCH
SHARES ARE (1) SO REGISTERED OR (2) AN EXEMPTION FROM SUCH
REGISTRATION IS AVAILABLE AND, IF REQUESTED BY THE COMPANY, A
WRITTEN LEGAL OPINION OF COUNSEL REASONABLY SATISFACTORY TO
THE COMPANY IS PROVIDED BY THE TRANSFEROR. IF THE SHARES
REPRESENTED BY THIS CERTIFICATE ARE NOT TRANSFERRED PURSUANT
TO AND IN CONFORMITY WITH AN EFFECTIVE REGISTRATION STATEMENT
UNDER THE SECURITIES ACT OF 1933 OR IN ACCORDANCE WITH RULE
144 OF THE SECURITIES ACT OF 1933, SUCH SHARES ARE ALSO
SUBJECT TO CERTAIN RESTRICTIONS ON TRANSFER SET FORTH IN
SECTION 7 OF A SECURITIES PURCHASE AGREEMENT DATED MARCH 23
1999, AND NO TRANSFER OF SUCH SHARES SHALL BE VALID OR
EFFECTIVE IF IT IS NOT EFFECTED IN COMPLIANCE WITH ALL OF SUCH
RESTRICTIONS ON TRANSFER. A COPY OF SUCH SECURITIES PURCHASE
AGREEMENT MAY BE OBTAINED AT NO COST BY WRITTEN REQUEST MADE
BY THE HOLDER OF RECORD OF SUCH SHARES TO THE SECRETARY OF
WAVE SYSTEMS CORP. "
(b) Each certificate evidencing any of the Purchased Shares
shall be endorsed with any legend required under any applicable state securities
or blue sky laws.
8. Termination; Liabilities Consequent Thereon. This Agreement
may be terminated and the transactions contemplated hereunder abandoned at any
time prior to the Closing only as follows:
(a) by any Purchaser, upon notice to the Company if the
Closing has not occurred on or prior to March 30, 1999; provided, however, that
the right to terminate this Agreement pursuant to this Section 8(a) shall not be
available to any Purchaser whose failure to fulfill any obligation of such
Purchaser under this Agreement has been the cause of, or resulted in, the
failure of the Closing to occur on or prior to such date; or
<PAGE>
-15-
(b) by the Company, upon notice to the Purchasers if the
Closing has not occurred on or prior to March 30, 1999; provided, however, that
the right to terminate this Agreement pursuant to this Section 8(b) shall not be
available to the Company if the Company's failure to fulfill any obligation of
the Company under this Agreement has been the cause of, or resulted in, the
failure of the Closing to occur on or prior to such date; or
(c) at any time by mutual agreement of the Company and the
Majority Purchasers; or
(d) by any Purchaser in respect of the Purchased Shares to be
purchased by such Purchaser, if there has been any material breach of any
representation, warranty or covenant of the Company contained herein and the
same has not been cured prior to March 30, 1999; or
(e) by the Company in respect of the Purchased Shares to be
purchased by a Purchaser, if there has been any material breach of any
representation, warranty or covenant of such Purchaser contained herein and the
same has not been cured prior to March 30, 1999.
Any termination pursuant to this Section 8 shall be without liability
on the part of any party, unless such termination is the result of a material
breach of this Agreement by a party to this Agreement in which case such
breaching party shall remain liable for such breach notwithstanding any
termination of this Agreement.
9. Miscellaneous Provisions.
9.1 Public Statements or Releases. None of the parties to
this Agreement shall make, issue, or release any announcement, whether to the
public generally, or to any of its employees, suppliers, or customers, with
respect to this Agreement or the transactions provided for herein, or make any
statement or acknowledgment of the existence of, or reveal the status of, this
Agreement or the transactions provided for herein, without the prior consent of
the other parties, which shall not be unreasonably withheld or delayed,
provided, that nothing in this Section 9.1 shall prevent any of the parties
hereto from making such public announcements as it may consider necessary in
order to satisfy its legal obligations, but to the extent not inconsistent with
such obligations, it shall provide the other parties with an opportunity to
review and comment on any proposed public announcement before it is made.
9.2 Further Assurances. Each party agrees to cooperate fully
with the other parties, to execute such further instruments, documents and
agreements and to give such further written assurances, as may be reasonably
requested by the other party to better evidence and reflect the transactions
described herein and contemplated hereby, and to carry into effect the intents
and purposes of this Agreement, and to use its best efforts to cause the
conditions precedent set forth in Sections 5.1 and 5.2 to be satisfied.
9.3 Rights Cumulative. Each and all of the various rights,
powers and remedies of the parties shall be considered to be cumulative with and
in addition to any other rights, powers and remedies which such parties may have
at law or in equity in the event of the breach of any of the terms of this
Agreement. The exercise or partial exercise of any right,
<PAGE>
-16-
power or remedy shall neither constitute the exclusive election thereof nor the
waiver of any other right, power or remedy available to such party.
9.4 Pronouns. All pronouns or any variation thereof shall be
deemed to refer to the masculine, feminine or neuter, singular or plural, as the
identity of the person, persons, entity or entities may require.
9.5 Notices.
(a) Any notices, reports or other correspondence (hereinafter
collectively referred to as "correspondence") required or permitted to be given
hereunder shall be sent by courier (overnight or same day) or telecopy or
delivered by hand to the party to whom such correspondence is required or
permitted to be given hereunder. The date of giving any notice shall be the date
of its actual receipt.
(b) All correspondence to the Company shall be addressed as
follows:
Wave Systems Corp.
480 Pleasant Street
Lee, Massachusetts 01238
Attention: Steven Sprague,
President and Chief Operating Officer
Telephone: (413) 243-1600
Telecopier: (413) 243-0045
with a copy to:
Bingham Dana LLP
399 Park Avenue
New York, NY 10022-4689
Attention: Neil Townsend, Esq.
Telephone: (212) 318-7722
Telecopier: (212) 752-5378
(c) All correspondence to any Purchaser shall be sent to such
Purchaser at the address set forth in Exhibit A.
(d) Any entity may change the address to which correspondence
to it is to be addressed by notification as provided for herein.
9.6 Captions. The captions and paragraph headings of this
Agreement are solely for the convenience of reference and shall not affect its
interpretation.
9.7 Severability. Should any part or provision of this
Agreement be held unenforceable or in conflict with the applicable laws or
regulations of any jurisdiction, the invalid or unenforceable part or provisions
shall be replaced with a provision which accomplishes, to the extent possible,
the original business purpose of such part or provision in a
<PAGE>
-17-
valid and enforceable manner, and the remainder of this Agreement shall remain
binding upon the parties hereto.
9.8 Governing Law. This Agreement shall be governed by and
construed in accordance with the internal and substantive laws of the State of
New York and without regard to any conflicts of laws concepts which would apply
the substantive law of some other jurisdiction.
9.9 Waiver. No waiver of any term, provision or condition of
this Agreement, whether by conduct or otherwise, in any one or more instances,
shall be deemed to be, or be construed as, a further or continuing waiver of any
such term, provision or condition or as a waiver of any other term, provision or
condition of this Agreement.
9.10 Expenses. Each party will bear its own costs and
expenses in connection with this Agreement.
9.11 Assignment. The rights and obligations of the parties
hereto shall inure to the benefit of and shall be binding upon the successors
and permitted assigns of each party. No Purchaser may assign its rights or
obligations under this Agreement or designate another person other than an
Affiliate of such Purchaser (i) to perform all or part of such Purchaser's
obligations under this Agreement or (ii) to have all or part of such Purchaser's
rights and benefits under this Agreement, in each case without the prior written
consent of the Company. The Company may not assign its rights or obligations
under this Agreement or designate another person (i) to perform all or part of
its obligations under this Agreement or (ii) to have all or part of its rights
and benefits under this Agreement, in each case without the prior written
consent of the Purchasers. Notwithstanding anything expressed or implied in this
Agreement to the contrary, the Purchasers' rights under Section 9 hereof may not
be assigned or transferred to, or exercised by, any other person other than an
Affiliate of any such Purchaser.
9.12 Survival. The respective representations and warranties
given by the parties hereto, and the other covenants and agreements contained
herein, shall survive the Closing Date and the consummation of the transactions
contemplated herein, without regard to any investigation made by any party.
9.13 Entire Agreement. This Agreement constitutes the entire
agreement between the parties hereto respecting the subject matter hereof and
supersedes all prior agreements, negotiations, understandings, representations
and statements respecting the subject matter hereof, whether written or oral. No
modification, alteration, waiver or change in any of the terms of this Agreement
shall be valid or binding upon the parties hereto unless made in writing and
duly executed by the parties hereto.
9.14 Use of Proceeds. The proceeds from the sale of the
Purchased Shares hereunder will be used by the Company for working capital,
general corporate purposes, repayment of certain indebtedness in the amount of
approximately $2,000,000, the repurchase of certain capital stock in the amount
of approximately $600,000, and acquisitions and/or payments pursuant to joint
venture agreements.
<PAGE>
-18-
9.15 Information Rights. For so long as such Purchaser holds
any of the Purchased Shares, the Company shall deliver to each of such
Purchaser, copies of its quarterly and annual disclosure statements (including
financial statements and exhibits) as filed by the Company with the SEC and all
press releases issued by the Company.
9.16 Counterparts. This Agreement may be executed and
delivered (including by facsimile transmission) in one or more counterparts, and
by the different parties hereto in separate counterparts, each of which when
executed and delivered shall be deemed to be an original but all of which taken
together shall constitute one and the same agreement.
9.17 Listing of Shares. The Company shall list for trading on
The Nasdaq National Market a sufficient number of shares to cover the Purchased
Shares at such time as the Company's listing application to list the Common
Shares on The Nasdaq National Market shall have been approved by The Nasdaq.
[Remainder of Page Intentionally Left Blank]
<PAGE>
-19-
IN WITNESS WHEREOF, the parties hereto have executed this Agreement
under seal as of the day and year first above written.
WAVE SYSTEMS CORP.
By: ____________________________________
Name: Gerard T. Feeney
Title: Chief Financial Officer
[Purchasers Signature Pages Follow]
[SIGNATURE PAGE TO SECURITIES PURCHASE AGREEMENT]
<PAGE>
-20-
SCHEDULE 1
----------
WAVE SYSTEMS CORP.
------------------
INVESTORS
<TABLE>
<CAPTION>
Number of
Purchased Shares
INVESTOR Purchased
-------- ---------
<S> <C>
COMMERZBANK AG 454,545
BARRANT V. MERRILL 3,000
BALESTRA CAPITAL PARTNERS LP 20,000
ENDEAVOR ASSET MANAGEMENT, LP 15,000
CLARION CAPITAL CORPORATION 31,818
CLARION OFFSHORE FUND LTD. 13,000
CLARION PARTNERS, L.P. 46,091
MARCUARD COOK & CIE S.A. 50,000
FIDELITY NATIONAL TITLE INSURANCE COMPANY OF NEW YORK 125,000
BOGNER REGIS, INC. 10,000
STUART G. GAULD 11,000
CASCADE CAPITAL PARTNERS, L.P. 165,200
JOB & CO. 12,800
GRYPHON OFFSHORE FUND 22,000
ANTHONY KAMIN 5,000
LANCASTER INVESTMENT PARTNERS, L.P. 50,000
LOY D. MARTIN 10,000
</TABLE>
<PAGE>
-21-
<TABLE>
<CAPTION>
Number of
Purchased Shares
INVESTOR Purchased
-------- ---------
<S> <C>
PAUL BURROWES 25,000
GARY ROSENBACH 65,000
GARY W. ROSS REVOCABLE TRUST 9,000
SECURITY TREND PARTNERS 25,000
TRELLUS PARTNERS, L.P. 100,000
VERITAS SG INVESTMENT TRUST GMBH 100,000
V/F SKAGEN GLOBAL 50,000
GRUBER & MCBAINE INTERNATIONAL 11,000
JON D. GRUBER 6,500
DONAGHY INC. 2,000
HARE & CO. A/C #651653 FOR TTES OF HAMILTON COLLEGE 2,000
KARL MATTHIES AND DEBORAH MATTHIES COMMUNITY PROPERTIES A/C #2 1,500
LAGUNITAS PARTNERS, LP 27,000
THE BROOKS REVOCABLE TRUST, DTD 3/22/96 EVAN BROOKS & VIOLET BROOKS, TRUSTEES 25,000
EDGAR L. BALL 20,000
DAVID C. BROWN 100,000
M. JAY WALKINGSHAW 10,000
WHITNEY PARTNERS, LP 150,000
HUEY LEWIS SSB KEOGH CUSTODIAN AKA HUGH CREGG 3,500
</TABLE>
<PAGE>
-22-
<TABLE>
<CAPTION>
Number of
Purchased Shares
INVESTOR Purchased
-------- ---------
<S> <C>
CREGG CONROY REVOCABLE TRUST U/A DATED 6/11/91 HUGH CREGG AND SIDNEY 500
CONROY TRUSTEES
SECURITY TRUST CO FBO: PAUL DRAGUL, MD 13,000
SECURITY TRUST CO FBO: J. GLEN MCLEOD 7,000
PAINE WEBBER CUSTODIAN/TODD KENCK IRA 2,000
K.C. STONE 3,000
JOHN C. COLEMAN, JR. 10,000
DONALD PADOU 10,000
RICHARD H. OSGOOD 10,000
STEPHEN J. MASSOCCA 20,000
PACIFIC GROWTH EQUITIES INC 401K PROFIT SHARING PLAN FBO STEPHEN J. MASSOCCA 50,000
STEPHEN OLSON 3,500
THOMAS J. NIEDERMEYER, JR. 5,000
APODACA INVESTMENT GROUP 50,000
HOLLIS CAPITAL 50,000
PORTER PARTNERS, LP 30,000
SPECIAL SITUATIONS PRIVATE EQUITY FUND, LP 50,000
</TABLE>
Exhibit 10.21
WAVE SYSTEMS CORP.
REGISTRATION RIGHTS AGREEMENT
This REGISTRATION RIGHTS AGREEMENT (this "Agreement") is made as of
March 23, 1999 by and among (i) Wave Systems Corp., a Delaware corporation (the
"Company"), (ii) each person listed on Exhibit A attached hereto (collectively,
the "Initial Investors" and each individually, an "Initial Investor"), and (iii)
each person or entity that subsequently becomes a party to this Agreement
pursuant to, and in accordance with, the provisions of Section 11 hereof
(collectively, the "Investor Permitted Transferees" and each individually an
"Investor Permitted Transferee").
WHEREAS, the Company has agreed to issue and sell to the Initial
Investors, and the Initial Investors have agreed to purchase from the Company,
up to 3,000,000 shares (the "Purchased Shares") of the Company's Class A common
stock, $0.01 par value per share (the "Common Stock"), all upon the terms and
conditions set forth in that certain Securities Purchase Agreement, dated of
even date herewith, between the Company and the Initial Investors (the
"Securities Purchase Agreement"); and
WHEREAS, the terms of the Securities Purchase Agreement provide that it
shall be a condition precedent to the closing of the transactions thereunder,
for the Company and the Initial Investors to execute and deliver this Agreement.
NOW, THEREFORE, in consideration of the premises and mutual covenants
contained herein, the parties hereto hereby agree as follows:
1. DEFINITIONS. The following terms shall have the meanings provided
therefor below or elsewhere in this Agreement as described below:
"Board" shall mean the board of directors of the Company.
"Closing" shall have the meaning ascribed to such term in the
Securities Purchase Agreement.
"Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended, and all of the rules and regulations promulgated thereunder.
"Investors" shall mean, collectively, the Initial Investors and the
Investor Permitted Transferees; provided, however, that the term "Investors"
shall not include any of the Initial Investors or any of the Investor Permitted
Transferees that ceases to own or hold any Purchased Shares.
"Qualifying Holder" shall have the meaning ascribed thereto in Section
11 hereof.
"Registrable Shares" shall mean the Purchased Shares, provided,
however, such term shall not, after the Mandatory Registration Termination Date,
include any of the Purchased Shares of any Purchaser who can sell all of its
Purchased Shares under Rule 144 within the next 90 days.
<PAGE>
-2-
"Rule 144" shall mean Rule 144 promulgated under the Securities Act and
any successor or substitute rule, law or provision.
"SEC" shall mean the Securities and Exchange Commission.
"Securities Act" shall mean the Securities Act of 1933, as amended, and
all of the rules and regulations promulgated thereunder.
2. EFFECTIVENESS; TERMINATION. This Agreement shall become effective
and legally binding only if the Closing occurs. This Agreement shall terminate
and be of no further force or effect, automatically and without any action being
required of any party hereto therefor, upon the termination of the Securities
Purchase Agreement pursuant to Section 8 thereof.
3. MANDATORY REGISTRATION.
(a) As soon as possible and, in any event, within ten (10) business
days after the Closing, the Company will prepare and file with the SEC a
registration statement on Form S-1 for the purpose of registering under the
Securities Act all of the Registrable Shares for resale by, and for the account
of, the Investors as selling stockholders thereunder (the "Registration
Statement"). The Registration Statement shall permit the Investors to offer and
sell, on a delayed or continuous basis pursuant to Rule 415 under the Securities
Act, any or all of the Registrable Shares. The Company agrees to use its best
efforts to cause the Registration Statement to become effective as soon as
practicable following its filing. The Company shall be required to keep the
Registration Statement effective until such date that is the earlier of (i) the
date when all of the Registrable Shares registered thereunder shall have been
sold or (ii) the second anniversary of the Closing, subject to extension as set
forth below (such date is referred to herein as the "Mandatory Registration
Termination Date"). Thereafter, the Company shall be entitled to withdraw the
Registration Statement and the Investors shall have no further right to offer or
sell any of the Registrable Shares pursuant to the Registration Statement (or
any prospectus relating thereto). In the event the right of the selling
Investors to use the Registration Statement (and the prospectus relating
thereto) is delayed or suspended pursuant to Sections 4(c) or 10 hereof, the
Company shall be required to extend the Mandatory Registration Termination Date
beyond the second anniversary of the Closing by the same number of days as such
delay or Suspension Period (as defined in Section 10 hereof).
(b) The offer and sale of the Registrable Shares pursuant to the
Registration Statement shall not be underwritten.
(c) If the Registration Statement has not been filed with the SEC by
the tenth business day after the Closing Date under the Securities Purchase
Agreement (such tenth business day being the "Penalty Date"), then, on the fifth
business day after the Penalty Date, the Company will execute and deliver to
each Initial Investor a common stock purchase warrant of the Company (each such
warrant being an "Investor Warrant"). The Investor Warrant delivered to each
Initial Investor (I) shall entitle such Initial Investor to purchase that number
of shares of Class A Common Stock of the Company equal to the product of (x) the
number of business days after the Penalty Date (up to a maximum of four) on
which the Registration Statement is filed with the SEC, multiplied by (y) 1/8 of
one share, multiplied by (z) the total number of shares purchased by such
Initial Investor on the Closing Date, (ii) shall have an
<PAGE>
-3-
exercise price per share equal to the purchase price per share of Common Stock
under the Securities Purchase Agreement, (iii) shall not include any "cashless
exercise" provisions or anti-dilution protection, other than so-called
"structural" anti-dilution protection, (iv) shall expire on the fifth
anniversary after the Closing Date, and (v) shall otherwise contain customary
terms.
4. OBLIGATIONS OF THE COMPANY. In connection with the Company's
obligation under Section 3 hereof to file the Registration Statement with the
SEC and to use its best efforts to cause the Registration Statement to become
effective as soon as practicable, the Company shall, as expeditiously as
reasonably possible:
(a) Prepare and file with the SEC such amendments and
supplements to the Registration Statement and the prospectus used in
connection therewith as may be necessary to comply with the provisions
of the Securities Act with respect to the disposition of all
Registrable Shares covered by the Registration Statement;
(b) Furnish to the selling Investors such number of copies of
a prospectus, including a preliminary prospectus, in conformity with
the requirements of the Securities Act, and such other documents
(including, without limitation, prospectus amendments and supplements
as are prepared by the Company in accordance with Section 4(a) above)
as the selling Investors may reasonably request in order to facilitate
the disposition of such selling Investors' Registrable Shares;
(c) Notify the selling Investors, at any time when a
prospectus relating to the Registration Statement is required to be
delivered under the Securities Act, of the happening of any event as a
result of which the prospectus included in or relating to the
Registration Statement contains an untrue statement of a material fact
or omits any fact necessary to make the statements therein not
misleading; and, thereafter, the Company will promptly (and in any
event within 5 business days) prepare (and, when completed, give notice
to each selling Investor) a supplement or amendment to such prospectus
so that, as thereafter delivered to the purchasers of such Registrable
Shares, such prospectus will not contain an untrue statement of a
material fact or omit to state any fact necessary to make the
statements therein not misleading; provided that upon such notification
by the Company, the selling Investors will not offer or sell
Registrable Shares until the Company has notified the selling Investors
that it has prepared a supplement or amendment to such prospectus and
delivered copies of such supplement or amendment to the selling
Investors (it being understood and agreed by the Company that the
foregoing proviso shall in no way diminish or otherwise impair the
Company's obligation to promptly prepare a prospectus amendment or
supplement as above provided in this Section 4(c) and deliver copies of
same as above provided in Section 4(b) hereof); and
(e) Use commercially reasonable efforts to register and
qualify the Registrable Shares covered by the Registration Statement
under such other securities or Blue Sky laws of such jurisdictions as
shall be reasonably appropriate in the opinion of the Company or as
reasonably requested by any Investor, provided that the Company shall
not be required in connection therewith or as a condition thereto to
qualify to do business or to file a general consent to service of
process in any such states or jurisdictions, and provided further that
(notwithstanding anything in this Agreement to the contrary with
respect to the bearing of
<PAGE>
-4-
expenses) if any jurisdiction in which any of such Registrable Shares
shall be qualified shall require that expenses incurred in connection
with the qualification therein of any such Registrable Shares must be
borne by the selling Investors and may not be paid or reimbursed by the
Company, then the selling Investors shall, to the extent required by
such jurisdiction, pay their pro rata share of such qualification
expenses.
5. FURNISH INFORMATION. It shall be a condition precedent to the
obligations of the Company to take any action pursuant to this Agreement that
the selling Investors shall furnish to the Company such information regarding
them and the securities held by them as the Company shall reasonably request and
as shall be required in order to effect any registration by the Company pursuant
to this Agreement.
6. EXPENSES OF REGISTRATION. All expenses incurred in connection with
the registration of the Registrable Shares pursuant to this Agreement (excluding
underwriting, brokerage and other selling commissions and discounts), including
without limitation all registration and qualification and filing fees, printing,
and fees and disbursements of counsel for the Company, shall be borne by the
Company. In addition, the Company shall reimburse the Investors as a group for
the reasonable accountable costs and expenses incurred by one legal counsel to
the selling Investors as a group.
7. DELAY OF REGISTRATION. The Investors shall not take any action to
restrain, enjoin or otherwise delay any registration as the result of any
controversy which might arise with respect to the interpretation or
implementation of this Agreement.
8. INDEMNIFICATION.
(a) To the extent permitted by law, the Company will indemnify and hold
harmless each selling Investor, any investment banking firm acting as an
underwriter for the selling Investors, any broker/dealer acting on behalf of any
selling Investors and each officer and director of such selling Investor, such
underwriter, such broker/dealer and each person, if any, who controls such
selling Investor, such underwriter or broker/dealer within the meaning of the
Securities Act, against any losses, claims, damages or liabilities, joint or
several, to which they may become subject under the Securities Act or otherwise,
insofar as such losses, claims, damages or liabilities (or actions in respect
thereof) arise out of or are based upon any untrue or alleged untrue statement
of any material fact contained in the Registration Statement, in any preliminary
prospectus or final prospectus relating thereto or in any amendments or
supplements to the Registration Statement or any such preliminary prospectus or
final prospectus, or arise out of or are based upon the omission or alleged
omission to state therein a material fact required to be stated therein, or
necessary to make the statements therein not misleading; and will reimburse such
selling Investor, such underwriter, broker/dealer or such officer, director or
controlling person for any legal or other expenses reasonably incurred by them
in connection with investigating or defending any such loss, claim, damage,
liability or action; provided, however, that the indemnity agreement contained
in this Section 8(a) shall not apply to amounts paid in settlement of any such
loss, claim, damage, liability or action if such settlement is effected without
the consent of the Company (which consent shall not be unreasonably withheld),
nor shall the Company be liable in any such case for any such loss, damage,
liability or action to the extent that it arises out of or is based upon an
untrue statement or alleged untrue statement or omission made in connection with
the Registration Statement, any preliminary prospectus or final prospectus
relating thereto or any amendments or supplements to the
<PAGE>
-5-
Registration Statement or any such preliminary prospectus or final prospectus,
in reliance upon and in conformity with written information furnished expressly
for use in connection with the Registration Statement or any such preliminary
prospectus or final prospectus by the selling Investors, any underwriter for
them or controlling person with respect to them.
(b) To the extent permitted by law, each selling Investor will
severally and not jointly indemnify and hold harmless the Company, each of its
directors, each of its officers who have signed the Registration Statement, each
person, if any, who controls the Company within the meaning of the Securities
Act, any investment banking firm acting as underwriter for the Company or the
selling Investors, or any broker/dealer acting on behalf of the Company or any
selling Investors, and all other selling Investors against any losses, claims,
damages or liabilities to which the Company or any such director, officer,
controlling person, underwriter, or broker/dealer or such other selling Investor
may become subject to, under the Securities Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereto) arise out
of or are based upon any untrue or alleged untrue statement of any material fact
contained in the Registration Statement or any preliminary prospectus or final
prospectus, relating thereto or in any amendments or supplements to the
Registration Statement or any such preliminary prospectus or final prospectus,
or arise out of or are based upon the omission or alleged omission to state
therein a material fact required to be stated therein or necessary to make the
statements therein not misleading, in each case to the extent and only to the
extent that such untrue statement or alleged untrue statement or omission or
alleged omission was made in the Registration Statement, in any preliminary
prospectus or final prospectus relating thereto or in any amendments or
supplements to the Registration Statement or any such preliminary prospectus or
final prospectus, in reliance upon and in conformity with written information
furnished by the selling Investor expressly for use in connection with the
Registration Statement, or any preliminary prospectus or final prospectus; and
such selling Investor will reimburse any legal or other expenses reasonably
incurred by the Company or any such director, officer, controlling person,
underwriter, broker/dealer or other selling Investor in connection with
investigating or defending any such loss, claim, damage, liability or action,
provided, however, that the liability of each selling Investor hereunder shall
be limited to the proceeds (net of underwriting discounts and commissions, if
any) received by such selling Investor from the sale of Registrable Shares
covered by the Registration Statement, and provided, further, however, that the
indemnity agreement contained in this Section 8(b) shall not apply to amounts
paid in settlement of any such loss, claim, damage, liability or action if such
settlement is effected without the consent of those selling Investor(s) against
which the request for indemnity is being made (which consent shall not be
unreasonably withheld).
(c) Promptly after receipt by an indemnified party under this Section 8
of notice of the commencement of any action, such indemnified party will, if a
claim in respect thereof is to be made against any indemnifying party under this
Section 8, notify the indemnifying party in writing of the commencement thereof
and the indemnifying party shall have the right to participate in and, to the
extent the indemnifying party desires, jointly with any other indemnifying party
similarly noticed, to assume at its expense the defense thereof with counsel
mutually satisfactory to the indemnifying parties with the consent of the
indemnified party which consent will not be unreasonably withheld, conditioned
or delayed. In the event that the indemnifying party assumes any such defense,
the indemnified party may participate in such defense with its own counsel and
at its own expense, provided, however, that the counsel for the indemnifying
party shall act as lead counsel in all matters pertaining to such defense or
settlement of such claim and the indemnifying party shall only pay for such
indemnified party's expenses for the period prior to the date of its
participation on such defense.
<PAGE>
-6-
The failure to notify an indemnifying party promptly of the commencement of any
such action, if prejudicial to his ability to defend such action, shall relieve
such indemnifying party of any liability to the indemnified party under this
Section 8, but the omission so to notify the indemnifying party will not relieve
him of any liability which he may have to any indemnified party otherwise other
than under this Section 8.
(d) Notwithstanding anything to the contrary herein, the indemnifying
party shall not be entitled to settle any claim, suit or proceeding unless in
connection with such settlement the indemnified party receives an unconditional
release with respect to the subject matter of such claim, suit or proceeding and
such settlement does not contain any admission of fault by the indemnified
party.
9. REPORTS UNDER THE EXCHANGE ACT. With a view to making available to
the Investors the benefits of Rule 144 and any other rule or regulation of the
SEC that may at any time permit the Investors to sell the Purchased Shares to
the public without registration, the Company agrees to use commercially
reasonable efforts: (i) to make and keep public information available, as those
terms are understood and defined in the General Instructions to Form S-3, S-1,
or any successor or substitute form, and in Rule 144, (ii) to file with the SEC
in a timely manner all reports and other documents required to be filed by an
issuer of securities registered under the Securities Act or the Exchange Act,
(iii) as long as any Investor owns any Purchased Shares, to furnish in writing
upon such Investor's request a written statement by the Company that it has
complied with the reporting requirements of Rule 144 and of the Securities Act
and the Exchange Act, and to furnish to such Investor a copy of the most recent
annual or quarterly report of the Company, and such other reports and documents
so filed by the Company as may be reasonably requested in availing such Investor
of any rule or regulation of the SEC permitting the selling of any such
Purchased Shares without registration, and (iv) undertake any additional actions
reasonably necessary to maintain the availability of the Registration Statement
or the use of Rule 144.
10. DEFERRAL. Notwithstanding anything in this Agreement to the
contrary, if the Company shall furnish to the selling Investors a certificate
signed by the President or Chief Financial Officer of the Company stating that
the Board of Directors of the Company has made the good faith determination (i)
that continued use by the selling Investors of the Registration Statement for
purposes of effecting offers or sales of Registrable Shares pursuant thereto
would require, under the Securities Act, premature disclosure in the
Registration Statement (or the prospectus relating thereto) of material,
nonpublic information concerning the Company, its business or prospects or any
proposed material transaction involving the Company, (ii) that such premature
disclosure would be materially adverse to the Company, its business or prospects
or any such proposed material transaction or would make the successful
consummation by the Company of any such material transaction significantly less
likely and (iii) that it is therefore essential to suspend the use by the
Investors of such Registration Statement (and the prospectus relating thereto)
for purposes of effecting offers or sales of Registrable Shares pursuant
thereto, then the right of the selling Investors to use the Registration
Statement (and the prospectus relating thereto) for purposes of effecting offers
or sales of Registrable Shares pursuant thereto shall be suspended for a period
(the "Suspension Period") of not more than 45 days after delivery by the Company
of the certificate referred to above in this Section 10. During the Suspension
Period, none of the Investors shall offer or sell any Registrable Shares
pursuant to or in reliance upon the Registration Statement (or the prospectus
relating thereto). Notwithstanding the foregoing, the Company shall not be
entitled to
<PAGE>
-7-
Suspension Periods totaling more than 90 days in any consecutive twelve-month
period during the term of this Agreement.
11. TRANSFER OF REGISTRATION RIGHTS. None of the rights of any Investor
under this Agreement shall be transferred or assigned to any person unless (i)
such person is a Qualifying Holder (as defined below), and (ii) such person
agrees to become a party to, and be bound by, all of the terms and conditions of
this Agreement by duly executing and delivering to the Company an Instrument of
Adherence in the form attached as Exhibit B hereto. For purposes of this Section
11, the term "Qualifying Holder" shall mean, with respect to any Investor, (i)
any partner thereof, (ii) any corporation, partnership or other business entity
controlling, controlled by, or under common control with, such Investor or any
partner thereof, or (iii) any other direct transferee from such Investor of at
least 50% of those Registrable Shares held or that may be acquired by such
Investor. None of the rights of any Investor under this Agreement shall be
transferred or assigned to any Person (including, without limitation, a
Qualifying Holder) that acquires Registrable Shares in the event that and to the
extent that such Person is eligible to resell such Registrable Shares pursuant
to Rule 144(k) of the Securities Act.
12. ENTIRE AGREEMENT. This Agreement constitutes and contains the
entire agreement and understanding of the parties with respect to the subject
matter hereof, and it also supersedes any and all prior negotiations,
correspondence, agreements or understandings with respect to the subject matter
hereof.
13. MISCELLANEOUS.
(a) This Agreement may not be amended, modified or terminated,
and no rights or provisions may be waived, except with the written consent of
each Investor and the Company.
(b) This Agreement shall be governed by and construed and
enforced in accordance with the laws of The Commonwealth of Massachusetts, and
shall be binding upon and inure to the benefit of the parties hereto and their
respective heirs, personal representatives, successors or assigns, provided that
the terms and conditions of Section 11 hereof are satisfied. This Agreement
shall also be binding upon and inure to the benefit of any transferee of any of
the Purchased Shares provided that the terms and conditions of Section 11 hereof
are satisfied. Notwithstanding anything in this Agreement to the contrary, if at
any time any Investor shall cease to own any Purchased Shares, all of such
Investor's rights under this Agreement shall immediately terminate.
(c) (i) Any notices, reports or other correspondence
(hereinafter collectively referred to as "correspondence") required or permitted
to be given hereunder shall be sent by courier (overnight or same day) or
telecopy or delivered by hand to the party to whom such correspondence is
required or permitted to be given hereunder. The date of giving any notice shall
be the date of its actual receipt.
(ii) All correspondence to the Company shall be
addressed as follows:
Wave Systems Corp.
480 Pleasant Street
Lee, Massachusetts 01238
<PAGE>
-8-
Attention: Steven Sprague, President and
Chief Operating Officer
Telephone: (413) 243-1600
Telecopier: (413) 243-0045
with a copy to:
Bingham Dana LLP
399 Park Avenue
New York, NY 10022-4689
Attention: Neil Townsend, Esq.
Telephone: (212) 318-7722
Telecopier: (212) 752-5378
(iii) All correspondence to any Investor shall be sent to
such Purchaser at the address set forth in Exhibit A.
(d) Any entity may change the address to which correspondence
to it is to be addressed by notification as provided for herein.
(e) The parties acknowledge and agree that in the event of any
breach of this Agreement, remedies at law may be inadequate, and each of the
parties hereto shall be entitled to seek specific performance of the obligations
of the other parties hereto and such appropriate injunctive relief as may be
granted by a court of competent jurisdiction.
(e) This Agreement may be executed in a number of
counterparts, an of which together shall for all purposes constitute one
Agreement, binding on all the parties hereto notwithstanding that all such
parties have not signed the same counterpart.
[Remainder of Page Intentionally Left Blank]
<PAGE>
-9-
IN WITNESS WHEREOF, the parties hereto have executed this Agreement as
of the date and year first above written.
WAVE SYSTEMS CORP.
By: ____________________________
Name: Gerard T. Feeney
Title: Chief Financial Officer
[Initial Investors Signature Pages Follow]
[SIGNATURE PAGE TO REGISTRATION RIGHTS AGREEMENT]
<PAGE>
EXHIBIT A
---------
Name and Address
----------------
<PAGE>
EXHIBIT B
---------
WAVE SYSTEMS CORP.
Instrument of Adherence
-----------------------
Reference is hereby made to that certain Registration Rights Agreement,
dated as of March 23, 1999, among Wave Systems Corp., a Delaware corporation
(the "Company"), the Initial Investors and the Investor Permitted Transferees,
as amended and in effect from time to time (the "Registration Rights
Agreement"). Capitalized terms used herein without definition shall have the
respective meanings ascribed thereto in the Registration Rights Agreement.
The undersigned, in order to become the owner or holder of [__________
shares of the Class A common stock, par value $0.01 per share (the "Common
Stock"), of the Company], hereby agrees that, from and after the date hereof,
the undersigned has become a party to the Registration Rights Agreement in the
capacity of an Investor Permitted Transferee, and is entitled to all of the
benefits under, and is subject to all of the obligations, restrictions and
limitations set forth in, the Registration Rights Agreement that are applicable
to Investor Permitted Transferees. This Instrument of Adherence shall take
effect and shall become a part of the Registration Rights Agreement immediately
upon execution.
Executed under seal as of the date set forth below under the laws of
The Commonwealth of Massachusetts.
Signature: ______________________________
Name:
Title:
Accepted:
WAVE SYSTEMS CORP.
By: ________________________________
Name:
Title:
Date: ______________________________
Exhibit 23.2
Independent Auditors' Consent
The Board of Directors
Wave Systems Corp.:
We consent to the use of our report included herein and to the references to our
firm under the headings "Selected Consolidated Financial Data" and "Experts" in
the prospectus.
/s/ KPMG Peat Marwick LLP
KPMG Peat Marwick LLP
Boston, Massachusetts
April 9, 1999
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<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> DEC-31-1998
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493,201
347,812
<COMMON> 315,429
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<TOTAL-LIABILITY-AND-EQUITY> 2,057,812
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