ALABAMA COMPUTER SECURITY COMPANY (WAVE SYSTEMS) INVESTMENT OVERVIEW That Ship Will Come in, Right? | TideSports.com

Published Sunday, March 4, 2007
That Ship Will Come in, Right?

WAVE SYSTEMS has never had a profitable quarter. Ever. In nearly 20 years.

“We’re pursuing an opportunity, we have been for a long time, it’s much closer and we can actually now see the light at the end of the tunnel,” Steven K. Sprague, the company’s chief executive, told shareholders at its annual meeting last summer at the Grand Hyatt Hotel in Midtown Manhattan. “It probably fills the tunnel, actually, pretty strongly.”

That flickering light has been enough to attract one of the most devoted bands of investors this side of Berkshire Hathaway. But how do people keep faith in a company that has lost roughly $300 million since its inception in 1988 and has had nearly 50 consecutive quarters in the red since going public?

Mr. Sprague, 42, has sandy-colored hair and a boyishly chubby face that appears to not have aged since the late 1990s. His father, Peter, who ran National Semiconductor for three decades, founded Wave Systems, a tiny technology company in Lee, Mass., that makes software to bolster computer security. Wave’s longtime board members include George Gilder, the conservative technology analyst and author, and Nolan Bushnell, the founder of Atari.

But it is the Wavoids, as Wave’s investors have dubbed themselves, who are most notable. They have included doctors and lawyers and college professors, a former Russian beauty queen, software developers and consultants; they have invested large sums of money in Wave and shared their sorrows, doubts and zealous belief inside Internet chat rooms.

Joe Trippi, who ran the 2004 presidential campaign of Howard Dean, is a Wavoid who has said that he used his experiences with Wave’s cyberspace community to organize Dean supporters online.

The Wavoids say they believe that Wave’s moment has finally come — of course, they have always believed that Wave’s moment has finally come. But there is an argument to be made that if Wave is ever going to succeed, the moment of truth has arrived.

The company’s software is being shipped in appreciable volume on computers made by Dell and Gateway, while Seagate is poised to start selling hard drives that make use of Wave’s software. Granted, the company’s revenue remains laughable, but it has helped develop an emerging set of so-called trusted-computing standards to make computers more secure. These standards have been embraced by Microsoft and other industry giants, and Wave hopes that its software will allow it to cash in.

“The train is starting to leave the station,” David McCoy, a public school teacher from the Chicago suburbs who has been a Wavoid for about a decade, said after Mr. Sprague’s speech. “We’ve known about this for too long; we’ve known people who have bought shares in the last year, who are timing it really well,” he said, adding, “they didn’t suffer enough.”

During the late 1990s, Wave was not unique. Profit-free technology companies proliferated in the bubble years, and for a brief moment in 2000, the stock soared so high that some Wavoids were looking at a nearly 50-fold increase in their portfolios, based on little tangible news. Within two years, the stock collapsed, along with the rest of the market for tech stocks, and many start-ups struggled to stay afloat.

But Wave survived the collapse, as it has weathered a Securities and Exchange Commission investigation, shareholder lawsuits — and, most important, mountainous and unrelenting losses. Last year, the company did a 3-for-1 reverse split to keep its share price out of penny-stock territory and, more important, to keep it listed on the Nasdaq Stock Market.

Vytas Cijunelis, 37, an operations manager at a different software company, said he had been invested in Wave Systems for about nine years. “Nine shameful long years,” Mr. Cijunelis added, his sense of humor intact. “Now, you’re going to listen to that, and you’re going to put that in writing, and it’s going to make me sound like....” he trailed off, thinking about how best to finish his thought.

“I’m being light-hearted about everything,” he finally said. “If I lose the money tomorrow, it’s not like I’m going to cut my throat and jump off a building at the same time.”

Just jump off a building?

“That’s right,” he said. “Maybe cut my throat on the way down.”

THE first Wave shareholder meeting I attended was in 1999, also at the Grand Hyatt. Those were more carefree times. Before the meeting, the Wavoids were literally drinking Kool-Aid, though with a knowing nudge and wink. Some had brought along their license plates — from California, Massachusetts, New York — embossed with Wave’s stock ticker symbol, WAVX — and there was a palpable cheerfulness in the air.

Wave then was the most popular stock followed on Ragingbull.com, a financial message board; more than 100,000 messages had been written kicking around its prospects.

Among the more than 200 people at the shareholder meeting were two accountants from Massachusetts, an adman from Washington, a gem dealer from Philadelphia, a schoolteacher from the Midwest, a day trader from Boston and a retired Merrill Lynch vice president. Most of them wore their Internet handles on their name tags.

“Tick, Tick, Tick,” one Wavoid wrote on Raging Bull that day. “You need a lot of patience with this stock. But we’re all going to be rich!”

Doug McCoy, a university professor who lives in the Chicago suburbs and is David McCoy’s brother, told me he had invested “everything” in Wave. “I’ve broken the first rule of investing,” he said, in a report that appeared at SmartMoney.com.

Over the years, I checked in every now and again, expecting either the company or the community to be long dead. In 2000, the stock spiked from about $12 and change to nearly $40 — well over $100, split-adjusted — making the Wavoids, as one of them put it on Ragingbull, “dizzyyyyyyyyyyy.”

But there was no discernible news driving the activity. A few months later, Wavoids took a bath when the market cratered. “Timber!!!!!!!” one said on the board. “WAVX margin investors . . . Get ready for the margin call from your broker. ... Sorry guys, don’t quit your day jobs just yet.”

A few years later, the company gave up making semiconductors and focused instead on making software that could be used with other companies’ chips. The S.E.C. began investigating Wave in 2003, after company executives made positive statements about Wave’s prospects during a period in which they were selling shares. The commission never brought a case against the company. Wave, which denied wrongdoing, settled shareholder suits related to the investigation last year.

Red ink continued to flow. In 2004, Jonathan Mirin, a former Wavoid, wrote and performed a one-man show in the New York International Fringe Festival about his Wave experience. The stock, he said during the play, “has become like sex, elevated to the status of every third thought. Sex-stock-job, sex-stock-basketball, sex-stock-stock-stock.”

Mr. Mirin eventually declared bankruptcy, but got a good play out of it.

The company’s stock now has a 10-year chart that resembles a sheer cliff face. But Wavoids kept the faith, and they kept talking. They migrated from Yahoo to Silicon Investor to Raging Bull to a series of smaller boards in an eternal quest to find a board that was not overrun by what they call “bashers” who mocked them for hanging on.

Some Wavoids can be a little sensitive about their plight. After I told the Wavoids I was writing another article about the company and its boosters, one poster offered this reply last month: “NNNNOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOOO!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!!”

They have been led, over the years, by Larry Gordon, a k a Snackman, who was a Coca-Cola distributor in Southern California as of the late 1990s but declared on the board he moderates at www.investorshub.com that he would not be interviewed because I made Wavoids look “like buffoons.”

Because Mr. Gordon tolerates little dissent — several people are banned from his board — there is also a board on www.atomicbobs.com for what could be called the dissident Wavoid community: former Wavoids, those who wish to speak more freely and outright bash the stock.

Barry Clairmont, an accountant from Pittsfield, Mass., and a former Wavoid who has been banned from Mr. Gordon’s board, said the remaining true believers “don’t want to even hear anything negative, even if it’s a perfectly legitimate post.”

Mr. Clairmont said he stopped considering himself a Wavoid years ago and now trades in and out of the stock, trying to profit by predicting when the Wavoids are going to trade up the stock. “I lived, ate and breathed Wave,” he said. “I fell right into the trap and believed everything they said; I was loving every minute of it and then realized over time that these guys were full of hot air.”

Of the Wavoids, he said, “I think they’re afraid to admit that they’re wrong because they’ve touted this thing all these years.”

But many Wavoids are clear-eyed.

“I can’t believe I have been invested in this thing for as long as I have,” said Doug McCoy, 38. After the stock crashed in 2000, he lost much of his savings, in part because he was investing on margin, or borrowed money, a practice he now avoids. And he no longer invests “everything” in the company — just about three-quarters of his stock holdings. “I’ve been moderate,” he quipped, “for me.”

How does something like this keep his interest for more than a decade?

In short, he said that every new Internet security breach — whether hackings or loss of data at the retailer T. J. Maxx or at the Department of Veterans Affairs — convinced him of a need for the type of technology Wave was developing.

“The answer is, we all need Internet security,” he said, “so no matter what version or incarnation of the company we’re dealing with, the bottom line is that Wave has already been at the forefront of e-commerce and data protection.”

O.K.. so does this company have a chance?

“They’ve been around forever and never turned a profit,” said Robert Thibadeau, director of security architectures at Seagate, which will begin selling laptop hard drives that use Wave’s software in the next few months.

“It’s phenomenal,” Mr. Thibadeau added, “but I actually believe in them in the sense that there’s a community of companies and individuals who are the core, I’ll call them, of the whole trusted-computing initiative, and Wave is one of the main contributors to it.

“By most measures, Wave shouldn’t have been around, right?” he continued. “But by some method that I have no idea, don’t care to know, they survived, and I think the quality of the stuff is good, the quality of the technical people and some of the business people is really good.”

Wave labored for years on a highly secure chip that would allow users to encrypt data, but found no market for it. So the company tried to create a market for the underlying idea of making security something that was built into the hardware of a computer as well as the software.

In 2003, Wave was a founder, along with Seagate, Microsoft, Intel and other companies, of something called the Trusted Computing Group. That group has spent several years developing standards for a more highly secure approach to computing that uses special semiconductors that are increasingly being installed as standard equipment on computers.

Some versions of Microsoft’s new Vista operating system have a special program that works with these chips to make it harder for hackers to access data on someone else’scomputer, even if that computer is stolen . Wave’s software also works with these chips; its pitch is that the growth of this emerging industry over a spectrum of devices — mobile phones, laptops, servers — will deliver it to profitability.

Companies that are more established are making the same kind of bets, if not to an all-or-nothing extent.

“We’re in the early days for trusted computing,” said Steve Hanna, a senior engineer at Juniper Networks, which sells networking equipment that uses some of Wave’s software. “Corporations have a multiyear replacement cycle for laptops, and in home environments they can be even longer. It takes time for these things to be universal.”

Wave has managed to keep the lights on by selling ever more pieces of itself, until recently at a steep discount. Lately, it has been able to do private stock placements on far more favorable terms — a division of Legg Mason is now its largest shareholder, according to recent financial filings, though with a holding of only $5 million in a company with a total market cap of roughly $100 million.

“I refer to it as publicly traded venture capital,” said Brian G. Swift, chairman and chief executive of Security Research Associates, which markets the company to institutional clients. “We’ve had very good institutional interest,” he said, adding: “You have to have a two- or three-year horizon. To try and move in an out of this position on a quarterly basis would not make a whole lot of sense. You’re recognizing a sea change in the industry.”

Keep in mind that this is a company that reported only about $2.2 million of revenue in the first nine months of last year. But keep in mind, too, that for Wave, that counts as an improvement. In the first nine months of 2005, the company had revenue of $670,866.

“We started way ahead of our time,” said Mr. Sprague, the chief executive. “We originally built silicon and software, and it become clear our silicon wouldn’t be accepted by industry as a standard solution. It was too expensive a part.

“If you asked me back in 2001, will it take until now to get this things going?” he added, “I would have said, ‘No way.’ ”

LIKE communities in the real world, Wavoids have their own shrink.

Dr. Eli Katz, a psychiatrist in Santa Barbara, Calif., who first invested in 1998, said Wave’s technology was “something’s that’s needed.” He added: “There’s still a lot of crime on the Internet and lost laptops and stolen credit cards; I think it’s the best solution.” Dr. Katz first heard about Wave from a stockbroker acquaintance at his tennis club.

“Some of his clients were investing in it,” Dr. Katz said. “They were nephrologists — they were investing in it and they had a couple hundred thousand shares in the early days.” As of last year, he had about 130,000 shares. He reckons that at one point, back when Wave peaked in 2000, his shares were worth $10 million. At Friday’s closing price, 130,000 shares would be worth $308,100.

So would anything make him sell?

“Well, I don’t know,” he said. “If it goes down the tubes, it would probably be too late to sell, by the time I get the news. It will probably go bankrupt and I’ll lose everything.”

Not that he sees that happening. He and other Wavoids still see the company as the next Google or Microsoft. “It has happened for other companies,” he said, adding, “It’s the hope for the future. It’s maybe a dream, but a reachable dream.”