Wave Systems Corp. (fka WAVXQ)

[SPIN]

Wave Systems probed by SEC

By Bill Carey
Berkshire Eagle Staff

LEE -- Software developer Wave Systems Corp. announced late Thursday that it is being investigated by the U.S. Securities and Exchange Commission over public statements and stock transactions made last summer, when the company's share price soared.

Wave's share price on the Nasdaq exchange closed at $1.50 yesterday, down 31 cents, on the first day of trading since the announcement.

In a brief statement, the company said it received notice Wednesday of the SEC investigation, which "relates to certain public statements made by Wave during and around 2003, as well as certain trading in Wave's securities during such time."

Company spokesman John Callahan declined further comment other than to say that "Wave is fully cooperating with the SEC on this matter." SEC spokesman Herb Perone said the regulatory agency would not comment.

Founded by Peter Sprague in 1988 and headed now by his son, Steven, Wave Systems is involved in the development of "trusted computing" software and hardware that uses encryption to protect data from unauthorized users. The company is based at the Lee Corporate Center off Route 102.

Publicly traded since1994, Wave has raised hundreds of millions of dollars in public stock offerings and private investment, but has yet to make a profit. Last month, the company reported a net loss to common shareholders of $21 million for the first nine months of 2003.

In late July and early August, Wave announced that computer-industry titans Intel Corp. and IBM, respectively, had agreed to use its technology in various products. The company's stock, which was trading at 84 cents on July 30, improved to $2.25 the next day and peaked at $4.53 on Aug. 5. The volume of shares traded during that time put Wave at the top of most actively traded companies.

The company on Aug. 7 said it expected to receive $2.6 million from the exercise of share options by current and former employees, and another $1 million owed by Peter Sprague. The elder Sprague had been extended that amount in loans by Wave's board of directors in 2001, but had defaulted on the scheduled repayments.

Another $250,000 loan to Chief Financial Officer Gerard T. Feeney was settled earlier this year when the board approved an "extraordinary" bonus for Feeney that equaled the loan obligation.

Discussion yesterday on Internet message boards frequented by Wave investors pointed to the Intel and IBM announcements -- and a Dow Jones Newswires report citing "much confusion" resulting from the announcements -- as possible focuses of the SEC investigation.

Wave announced third-quarter 2003 financial results on Nov. 13. The company reported net revenue from development service and license contracts of $80,000, compared to third-quarter 2002 revenue of $70,000. It reported a net loss to common shareholders for the quarter of $8.3 million.

Net revenue for the first nine months was $130,000, compared to $393,000 in revenue during the same period last year. The net loss to common shareholders for the first nine months was $21 million, compared to $33.6 million last year, Wave reported.

The company said it had $6 million in cash, enough to fund operating, sales, marketing and development activities until February.

As he has in other pronouncements, Steven Sprague cast a positive light on the situation. "We can now clearly see the growing momentum for trusted computing in the marketplace, and we expect substantial growth in [product] volumes over the course of the next four quarters," he stated.

On Nov. 19, Wave announced that it had raised $7.1 million through a private placement of stock with a group of institutional and other investors. The financing will be used for ongoing operations.

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