Wave Systems Corp. (fka WAVXQ)

[SPIN]

100K = 500K?

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."

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Wave reversed the reserve previously established with respect to notes receivable from Peter J. Sprague, Wave's former Chairman of the Board, of $999,518 during the year ended December 31, 2003, because the notes were collected in the third quarter of 2003. These loans were previously reserved for during the fourth quarter of 2002, because at the time there was substantial doubt about the ability of the borrower to repay these loans. In the third quarter of 2003, Mr. Sprague sold 500,000 shares of Wave Class A Common Stock, and was therefore able to repay the loans and all accrued interest thereon with the proceeds from such sales of Wave's Class A Common Stock. Mr. Sprague resigned as Chairman of the Board of Wave as of March 31, 2003. Mr. Sprague was subsequently appointed Chairman of the Board and Chief Executive Officer of Wavexpress. Consistent with the provisions of the Sarbanes-Oxley Act of 2002, Wave has adopted a written policy prohibiting future loans to officers and directors.

http://www.pinksheets.com/quote/print_filings.jsp?url=%2Fredirect.asp%3Ffilename%3D0001047469%252D04....

let them eat cake!!!