Wave Systems Corp. (fka WAVXQ)

[SPIN]

edit: mjan112 - written by a wavoid poster

if you weren't already aware of that, it demonstrates points made earlier about the article in question & the lack of disclosure by the author as to a potential conflict of interest.

sven, was there a recent Oliver Stone movie marathon where you live? the juxtaposition of your post & the one to which i reply would suggest the polar opposite to what you posit were true. moreover, i recall your prior Sentivision post where the CTO noted to you in reply that updates would be made available by the company on this board.

do you really think some super-secret cabal is holding down the price of wavx?

btw, that recent trading spike wasn't based on pure T/A IMO. nor are the strangely confident posts on yahoo that intimate that "wavx will be a lot more expensive" on such & such a date, etc.

it would seem that the longs are the highly organized faction, but that's JMO...

edit: Bertha, you know how easy it would be to do a parody on wavx longs along those lines? i won't b/c it'd get deleted.

hey wait, the U.S. financial press (including the New York Times) has already done it repeatedly!

http://www.smartmoney.com/onthestreet/index.cfm?story=20030826

On the Street
A Wave of Delusion

By Scott Patterson
August 26, 2003

DAVID STONE DOESN'T like to give stock tips. But in 1995, Stone, who owns a company that makes digital-camera cleaning products, came across an investment he couldn't resist. "I told anybody who would listen that this was a long-term stock," says the 53-year-old from his home in Cape Cod, Mass. "I really think the potential that Wave Systems has is phenomenal. Just think if you'd bought Intel in '78."

Tech fever, it seems, is alive and well in Lee, Mass., a sleepy town nestled in the heart of the Berkshires, a continent away from Silicon Valley. This is where tiny technology outfit Wave Systems (WAVX) was founded in 1988 under the name Indata. It's also the spiritual home of a small, fanatical group of investors known as "Wavoids" who see Microsoft (MSFT)-like potential in Wave Systems' future.

No matter that the company's share price fell from an intraday high of $50.75 in March 2000 to a low of 75 cents in March 2003. No matter that Wave Systems, which makes digital-security hardware and software products for the Internet and e-commerce, has never posted a profit since going public in 1994, and, as of June 30, had racked up $246 million in losses.

Despite this grim reality, Wavoids continue to display an unwavering commitment to their beloved investment. And it seems to be paying off. For some Bubble-era nostalgia, take a glance at the stock's recent activity. In late July, Wave seemed doomed to the corporate bone yards of the over-the-counter bulletin board, its shares having changed hands for less than a buck for most of the year. (The Nasdaq delists companies whose stock trades below $1 for more than 120 consecutive days.) Then came news of a software-bundling deal with Intel (INTC) and a partnership with IBM (IBM) — twin events that caused Wave's stock to spike more than 500% over the course of several days, reaching an intraday peak of $5.24 on Aug. 5.

The numbers tell only part of the story — but what numbers they are. On July 30, Wave closed at 84 cents a share on volume of 136,700. On Aug. 1, it closed at $3.65 on an astonishing 63.7 million in volume. (By way of perspective, Microsoft, a company nearly 2,000 times larger than Wave, sees average daily trading volume of 55.8 million.) The activity seemed to be fueled by two sources: momentum traders who had long ago written off the company for dead, and frantic covering by short sellers who had bet on the company's demise. There's little evidence that institutional investors played much of a role; according to Media General, just 3.8% of Wave's 52 million outstanding shares are institutionally held.

After the dramatic rally, Wavoids took to Internet message boards to boast of their vindication. "The time for caution is past," wrote one fan on Raging Bull. "Those who have eyes to see let them see. But remember to wear sun glasses. Cuz this is going to be white hot."

"Where do we go from here?" wrote another on Investor's Hub. "My bet is onward and upward."

'The Fun Thing About Wave'
Wave's followers continue to believe that the company's digital-security products — primarily its Embassy suite of cryptographic hardware and software — will play a central role in a burgeoning sub-industry known as trusted computing. The movement, called "TC" in the trade, is being heavily promoted by a not-for-profit organization called the Trusted Computing Group (TCG). Backed by such tech behemoths as Advanced Micro Devices (AMD), Hewlett-Packard (HPQ), IBM, Intel and Microsoft, the TCG is coordinating what some say will be the biggest technological shift in the computing world since the advent of the Internet. Wave's July 31 announcement of the Intel deal fell under the TCG umbrella.

If the TCG achieves its far-reaching goals, nearly every computer made in the next few years will contain hardware and software that provide advanced encryption and decryption services for online transactions. In Wave's most starry-eyed vision of future glory, its software and its Embassy chips would be included on most of those computers.

Wave Chief Executive Steven Sprague isn't afraid to speculate on his company's upside possibilities. "This is a technology that could ship on 40 or 50 million PCs and realize an installed base of users that's measured in the tens of millions," he says. "The fun thing about Wave is that it has the potential of tremendous scope."

Burn, Baby, Burn
Unfortunately, Wave has many short-term hurdles to overcome — problems the Wavoids seem willing, even eager, to ignore. For all the talk of paradigm-shattering killer-apps, Wave will have to pull off a minor miracle just to stay in business. Its meager $50,131 in revenue during the first half of the year led to a net loss of $9.8 million, or 24 cents a share. The company has just $6.6 million in cash, and is burning through about $1.2 million a month, according to CEO Sprague, down from $1.6 million earlier this year after layoffs, slashed marketing budgets and other cuts.

Wave has floated the idea of selling additional shares to solidify its capital structure — but the company has given few specifics as to when any offering will take place. HC Wainwright has served as an underwriter in the past, but it's not clear which investment banks will underwrite the next offering. Wave doesn't have much of a relationship with Wall Street, and no analysts cover the stock. In fact, most of the semiconductor analysts we called for comment hadn't even heard of Wave Systems — a reality that flies in the face of claims of Microsoft-like growth potential.

The company's cash troubles were partially allayed when several managers exercised stock options after the early August run-up, adding a quick $2.6 million to company coffers. An additional $1 million was recovered when Wave's former chairman, Peter Sprague, Steven Sprague's father and the founder of the company, repaid a loan Wave had previously written off as uncollectible.

This is no cause for celebration, however. Wave's liberal use of financial-engineering techniques to benefit its officers has long been a sticking point even among its most devout shareholders.

Board of Protectors
In 2001, certain executives took out big personal loans from the company to pay various outstanding debts. Wave's board later approved bonuses matching the amounts of some of the loans executives used to pay down their debts — a maneuver similar to the one at the heart of the Tyco International (TYC) accounting scandal, which has resulted in criminal indictments of three Tyco officers who, prosecutors allege, used the company as their "personal piggy bank." The Sarbanes-Oxley Act of 2002 made the practice of granting personal loans to officers illegal.

Wave made a loan of $250,000 to the company's chief financial officer, Gerard Feeney, in 2001 so he could pay capital-gains taxes on exercised Wave stock options. After extending the due date on the loan in 2002, the company approved a bonus on March 27, 2003, "in an amount equal to Mr. Feeney's obligations with respect to such loan and accrued interest," according to Wave's 2003 Schedule 14(a) proxy filing. Feeney repaid the loan with the funds from the bonus.

Wave also made loans in 2001 to then-Chairman and CEO Peter Sprague totaling about $1.06 million — during a year in which the company lost $48.7 million and saw its stock price plunge 40% to $1.33. In 2002, Wave's compensation committee approved a payment of a bonus of $174,391 so that Sprague could repay part of the debt. This left Sprague owing $999,518. On March 31, 2003, Sprague resigned as chairman and chief executive and assumed the CEO post of Wave subsidiary WaveExpress. His son, Steven Sprague, was named CEO. The company put in place a loan-loss reserve against the elder Sprague's debt in a Nov. 15, 2002, 10(q) filing with the SEC, essentially forgiving the loan.

Then, on Aug. 5, Wave announced that Sprague would repay the loan in full. Why would he pay back a debt the company had already written off? Look no further than the company's skyrocketing shares. "Before [the run-up], the stock was under a dollar," says the 64-year-old Sprague, who served as chairman of National Semiconductor (NSM) from 1965 to 1995. "I saw a window of opportunity, and it was trading in such huge quantities that selling 100,000 shares didn't make much of a difference."

"He just wanted to put [the issue] behind him," says Wave spokesman David Collins, of Jaffoni & Collins, a PR firm. "The loan wasn't only a problem for the company from a cash-flow standpoint, it was increasingly a problem from a shareholder-perception standpoint."

Wave says it made the personal loans to Feeney and Sprague so that they wouldn't have to sell shares to pay their debts. But the record shows that the Spragues have a long history of insider selling. On Jan. 7, 2002, for instance, Peter Sprague sold 60,000 shares of Wave at $2.46 for $147,800. The following month, he sold an additional 10,000 shares at $2 each, and on March 5, as the stock's price continued to fall, he unloaded another 10,000 shares at $1.83. Steven Sprague, meanwhile, on Aug. 6, 2003, exercised options on 150,000 shares, most of which he sold for a total of more than a half a million dollars. And on Aug. 5, CFO Feeney sold 100,000 shares at $5 a piece — right near the stock's 52-week high.

Against the backdrop of Sarbanes-Oxley, it's difficult to avoid the conclusion that the loans were suspect moves for a company that was hemorrhaging cash. James Fisher, director of Emerson Center for Business Ethics at Saint Louis University, says that in such situations, the company's board of directors is often to blame for being too pliant. "If the board is under the thumb of management," says Fisher, "then there's some justification for concluding that these are ill-considered policies most likely designed to enrich the managers, who, from all appearances, haven't been able to guide the firm successfully."

There can be little doubt that at the time many of these decisions were made, Wave's management exercised significant influence over its board. Peter Sprague was chairman of the seven-member board during his reign as CEO. Steven Sprague, formerly the president and chief operating officer, was a director when his father was chairman. Notably, the board also includes George Gilder, author of the popular 2000 book "Telecosm" and a lead cheerleader of the tech boom, who has been a director since the company's IPO. "Having insiders sell stock in a company that's precarious is more damaging than having the company make loans to its officers," says Gilder in defense of the board's decision. (Gilder declined to comment on Wave's future prospects, citing concerns about potential class-action litigation if the company should fail.)

Steven Sprague isn't unaware of the power he and his father have wielded. "Put yourself in the shoes of any board of directors that has to make that call against somebody who probably hired all the people that are on the board," he says. "[Complying] was the right thing to do."

The Clock Is Ticking
So what of the Intel and IBM announcements, which sparked the furious run-up in Wave's stock in recent weeks? The IBM partnership seems to have been misread by the markets; it will generate no direct revenue for Wave, according to the company. The Intel deal, meanwhile, is difficult to quantify, since financial terms weren't disclosed. Intel said it would bundle Wave's software and services on an industry-standard TP-enabled chip known as the Trusted Platform Module (TPM) embedded on a future Intel desktop motherboard, the internal chassis that holds the chips that run personal computers. The deal is similar to a March agreement for National Semiconductor to bundle Wave's software on its PC21100 SafeKeeper security chips, but nothing has been released about the financial terms of that arrangement, either.

Intel, for one, doesn't seem to view the contract as earth-shattering. Spokesman Robert Manetta says the motherboard's rollout will take place in the fourth quarter, but declines to give any further details. "We have a lot of motherboards," says Manetta. "This is just one."

Wave says it's unable to release financial details on the deal because of a nondisclosure agreement with Intel. During its second-quarter conference call with investors on Aug. 14, however, CEO Sprague hinted that it could be worth around 50 cents to $1.50 per motherboard. At potentially millions of units, the deal could indeed be quite lucrative for Wave.

But in typical Wave fashion, management hinted at grand potential while declining to give specifics. The company left its revenue and earnings guidance for the rest of the year unchanged. This doesn't sit right with some. Pacific Growth analyst Brian Alger, who dropped coverage of Wave in August 2002, says that while the company can't release specific figures on the Intel agreement, it should update its revenue guidance for future quarters in which it expects to book sales from the deal. "If there is an expectation for X amount of revenues, and that has materially changed, isn't there an obligation for [management] to inform shareholders?" (Alger doesn't own shares of Wave; Pacific Growth has had an investment-banking relationship with the company in the past.)

Perhaps the problem is the unpredictability of the TC movement itself. Given all of the various players and their competing agendas, it might take years for TC activity to ramp up significantly, says Peter Glaskowsky, editor-in-chief of the trade journal "Microprocessor Report." In all likelihood, Intel won't roll out a dramatic number of TPM-enabled motherboards in the foreseeable future. "The value [of the deal for Wave] a year from now or two years from now I think remains very, very low," says Glaskowsky. He estimates that TC won't be a ubiquitous application for at least four or five years, after Microsoft launches its new operating system, code-named Longhorn, which is expected to carry broad TC capabilities. By then, of course, Wave could very well be out of business.

And with giants like Microsoft and Intel devoting resources to the effort, it's not difficult to imagine smaller players like Wave being marginalized or squeezed out completely. Microsoft, for one, has a long history of this sort of thing.

Ross Anderson, head of the Computer Laboratory at Cambridge University, is unmoved by Wave's claims of a future as a TC titan. "I don't think Wave Systems is a big deal," says Anderson. "From the point of view of the big TC picture, Wave is below the radar." Anderson, a vocal critic of the TC movement for its willingness to cede control of the Internet's information flow to a few big companies, thinks Microsoft has used Wave merely as a "competitive threat" in its dealings with Intel.

Yet Wave's CEO proudly defends the company's all-or-nothing approach. He says he favors big, home-run deals that will cement Wave's status as a TC goliath to short-term deals that would offer much-needed cash now. "If you're looking for me to provide security for a midsize medical-services provider, that's not what Wave Systems is about," says Sprague. "While I could do that and collect a few hundred thousand dollars in revenue, I'll do that at the jeopardy of the broader opportunity. And the broader opportunity has been close enough to touch."

Such thinking played well during the Bubble — but seems hopelessly out of date in 2003. Most investors nowadays would scoff at the notion of a nearly insolvent company turning away easy business. "You have to question that," says Saint Louis University's Fisher. "The promise of a long-term bonanza can cover a lot of short-term shenanigans."

A Few Warts Among Friends
Diehard Wavoids remain undaunted by the company's many shortcomings, and downplay the late-1990s-style excesses. "Sure, I think [management] is a little rich in compensating itself," says Wallett Rogers of Palmyra, Wisc., a retired corporate attorney who's been invested in Wave since the late 1990s. "But it doesn't bother me. You have the warts on the one hand, and on the other hand, you have a company that's potentially the size of a Microsoft three or five years from now. I've made a rational decision based on the relative importance of the warts and the company's potential."

If enough investors feel the same way, Wave may actually survive. But will it be the next Microsoft? Don't bet on it.