SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For the Quarter Ended June 30, 1997 Commission File No. 0-26068
ACACIA RESEARCH CORPORATION
---------------------------
(Exact name of registrant as specified in its charter)
California 95-4405754
- ------------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation organization)
12 South Raymond Avenue, Pasadena CA 91105
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (818) 449-6431
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes X No .
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At June 30, 1997, 2,381,372 shares of common stock, no par value, of the
Registrant were outstanding.
ACACIA RESEARCH CORPORATION
Table Of Contents
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
Consolidated Balance Sheet . . . . . . . . . . . . . . 3
Consolidated Statement of Operations . . . . . . . . . 4
Consolidated Statement of Cash Flows . . . . . . . . . 5
Notes to Consolidated Financial Statements . . . . . . 6
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . 9
PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . .13
Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . .15
ITEM 1. FINANCIAL STATEMENTS
ACACIA RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 1997 and December 31, 1996
(Unaudited)
June 30, 1997 December 31, 1996
------------------ -------------------
ASSETS
Current Assets
Cash and cash equivalents $ 1,808,614 $ 292,701
Distributions receivable 0 400,000
Notes receivable 799,500 820,500
Receivables from affiliates 0 52,592
Other receivables 192,277 295,546
Prepaid expenses 155,265 219,027
Deferred tax benefit 0 272
------------------ -------------------
Total current assets 2,955,656 1,980,638
Equipment, furniture, and fixtures 206,839 202,049
Other assets
Investments in unconsolidated subsidiaries,
at equity 1,283,635 1,494,671
Investment in unconsolidated subsidary, at cost 1,233,000 1,233,000
Partnership interests, at equity 504,389 625,405
Deferred tax benefit 127,660 0
Organization costs, net of accumulated amortization 2,842 3,169
------------------ -------------------
Total assets $ 6,314,021 $ 5,638,932
------------------ -------------------
------------------ -------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 113,708 $ 90,599
Income taxes payable 0 0
Legal settlement payable 435,000 0
Note payable 375,000 552,500
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Total current liabilities 923,708 643,099
Deferred tax liability 150,996 193,503
------------------ -------------------
Total liabilities 1,074,704 836,602
Commitments and contingencies
Minority interest 401,360 380,329
Stockholders' equity
Common stock, no par value, 10,000,000
shares authorized, 2,381,372 shares in
1997 and 1,970,672 shares in 1996
issued and outstanding 5,528,087 4,081,993
(Accumulated deficit) retained earnings (667,639) 428,760
Less stock subscription receivable (31,492) (88,752)
------------------ -------------------
Total stockholders' equity 4,828,956 4,422,001
------------------ -------------------
Total liabilities and stockholders' equity $ 6,314,021 $ 5,638,932
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SEE ACCOMPANYING NOTES
3
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
For the Six Months Ended and For the Three Months Ended June 30, 1997 and 1996
(Unaudited)
Six Months Ended Three Months Ended
June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996
-------------------------------- ---------------------------------
Revenues
Gains on sales of securities, net $50,000 $722,117 $0 $169,751
Unrealized gain attributable to issuance of common stock
by affiliate 0 1,066,408 0 0
Equity (losses) in earnings of investees (98,993) (701) 15,694 (175,467)
Management fees 340,547 1,421,612 308,345 1,415,387
Interest income 20,332 57,953 5,417 30,037
-------------------------------- ---------------------------------
Total revenues, net of investment income 311,886 3,267,389 329,456 1,439,708
Legal settlement expense 460,000 0 0 0
Marketing, general, and administrative 1,229,678 993,251 517,156 565,966
-------------------------------- ---------------------------------
(Loss) income before minority interest and taxes (1,377,792) 2,274,138 (187,700) 873,742
Minority interest in net loss of consolidated subsidiary (113,626) (51,002) (43,842) (44,377)
-------------------------------- ---------------------------------
(Loss) income before provision for income taxes (1,264,166) 2,325,140 (143,858) 918,119
(Benefit) provision for income taxes (167,767) 893,245 (127,660) 366,014
-------------------------------- ---------------------------------
Net (loss) income ($1,096,399) $1,431,895 ($16,198) $552,105
-------------------------------- ---------------------------------
-------------------------------- ---------------------------------
(Loss) earnings per common share
Primary ($0.53) $0.54 ($0.01) $0.20
Fully diluted ($0.53) $0.54 ($0.01) $0.20
Weighted average number of common and common equivalent
shares for computation of (loss) income per share
Primary 2,063,862 2,664,376 2,049,390 2,705,092
Fully diluted 2,063,862 2,664,376 2,049,390 2,705,092
SEE ACCOMPANYING NOTES
4
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1997 and 1996
(Unaudited)
Six Months Ended Six Months Ended
June 30, 1997 June 30, 1996
----------------- -----------------
Cash flows from operating activities:
Net (loss) income $ (1,096,399) $ 1,431,895
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Legal settlement expense 435,000 0
Depreciation and amortization 25,580 14,000
Deferred taxes (65,571) 315,367
Gain on sales of securities 50,000 (722,117)
Undistributed (earnings) loss of affiliates (98,993) (701)
Minority interest in net loss (113,626) (51,002)
Unrealized gain attributable to issuance of common stock by affiliate 0 (1,066,408)
Changes in assets and liabilities:
(Increase) decrease in accounts receivable,
prepaid expenses, and other assets 154,680 (222,026)
Increase (decrease) in accounts payable,
accrued expenses, and income taxes payable 23,109 286,556
----------------- -----------------
Net cash (used in) provided by operating activities (686,220) (14,436)
Cash flows from investing activities:
Purchase of equity investments (50,000) (1,600,000)
Payment received on advances to affiliates 57,180 414,247
Advances to affiliates (4,588) (267,317)
Distributions receivable 400,000 0
Proceeds from sales of securities 300,000 1,039,117
Payments received on notes receivable 21,000 446,250
Capitalized expenditures (27,313) (102,057)
----------------- -----------------
Net cash used in (provided by) investing activities 696,279 (69,760)
Cash flows from financing activities:
Payments on notes payable (177,500) 0
Proceeds from sale of stock by subsidiary 180,000 511,820
Proceeds from sale of common stock 1,503,354 196,500
----------------- -----------------
Net cash provided by financing activities 1,505,854 708,320
----------------- -----------------
Increase in cash and cash equivalents 1,515,913 624,124
Cash and cash equivalents, beginning 292,701 788,611
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Cash and cash equivalents, ending $ 1,808,614 $ 1,412,735
----------------- -----------------
----------------- -----------------
SEE ACCOMPANYING NOTES
5
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Acacia Research Corporation (the "Company") was incorporated on January 25,
1993 under the laws of the State of California. The Company provides
investment advisory services, and also provides management services to, and
makes direct investments in, emerging corporations. The Company has
significant economic interests in five companies that it has formed and
takes an active role in each company's growth and advancement. These
companies are: Whitewing Labs, Inc., MerkWerks Corporation, CombiMatrix
Corporation, Soundview Technologies Incorporated, and Greenwich Information
Technologies LLC. In addition, as a registered investment advisor, the
Company is a general partner in two private investment partnerships, and is
an investment advisor to two offshore investment corporations.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - In the opinion of management, the accompanying
unaudited consolidated financial statements contain all adjustments, which
consist only of normal recurring adjustments necessary to present fairly
the consolidated financial position of the Company and its subsidiaries at
June 30, 1997 and the consolidated results of operations and cash flows
for the three and six months ended June 30, 1997 and June 30, 1996. This
interim financial information and notes thereto should be read in
conjunction with the Company's Annual Report on Form 10-K/A for the year
ended December 31, 1996. The Company's consolidated results of operations
and cash flows for interim periods are not necessarily indicative of the
results to be expected for any other interim period or the full year.
(LOSS) INCOME PER COMMON SHARE - Income per common share for the three and
six months ended June 30, 1996 has been computed based on the weighted
average number of common shares outstanding plus the common shares that
would be outstanding assuming conversion of common stock options and
warrants, which are considered to be common stock equivalents, using the
treasury stock method. Loss per common share for the three and six months
ended June 30, 1997 has been computed based on the weighted average number
of common shares outstanding, and excludes common stock equivalents because
the effect of their inclusion on the loss per common share computation is
anti-dilutive.
NEW PRONOUNCEMENTS - In February 1997, the Financial Accounting Standards
Board issued Statement of Financial Accounting Standards No. 128, "Earnings
Per Share" ("SFAS 128"). SFAS 128 establishes new standards for computing
and presenting earnings per share ("EPS") and supersedes APB Opinion No.
15, "Earnings Per Share." SFAS 128 replaces the presentation of primary
EPS with a presentation of basic EPS. It also requires dual presentation
of basic and diluted EPS on the face of the income statement for all
entities with complex capital structures, and requires a reconciliation of
the numerator and denominator of the basic EPS computation to the numerator
and denominator of the diluted EPS computation. SFAS 128 becomes effective
for the Company for the year ending December 31, 1997. Pro forma results
for the second quarter of 1997 and 1996, assuming the application of SFAS
128, are as follows:
For Three Months Ended
----------------------
June 30, 1997 June 30, 1996
------------- -------------
Basic (loss) earnings per share ($0.01) $0.29
Diluted (loss) earnings per share ($0.01) $0.20
RESTATEMENT OF 1996 AND THE THREE MONTHS ENDED MARCH 31, 1997. The
Company's consolidated financial statements for the year ended December 31,
1996, including the period ended June 30, 1996, and the three months ended
March 31, 1997, have been restated to include the accounts of CombiMatrix
Corporation on a consolidated basis. The Company's ownership interest in
CombiMatrix exceeded 50% as of December 31, 1996, but was expected to
decline below 50% based on planned offerings of common stock by
CombiMatrix Corporation and, therefore, was previously reported under the
equity method. However, the Securities and Exchange Commission has
determined that the exception for temporary control is applicable only
if control is likely to be lost in the near term as a result of the
probable occurrence of events that lie outside of the Company's control.
6
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. COMMITMENTS AND CONTINGENCIES
LITIGATION SETTLEMENT - On May 7, 1997, the Company entered into a
Settlement Agreement terminating a lawsuit brought by Ann P. Hodges, a
former director of the Company, and her husband Christopher D. Hodges. The
suit alleged that the Company breached a contract with Ann Hodges by
improperly refusing to permit her to exercise an option to purchase 100,000
shares of common stock of the Company, and sought $950,000 in damages from
the Company. Under the terms of the Settlement Agreement, the Hodges have
received $25,000 in cash and options to purchase 120,600 shares of the
Company's Common Stock at an exercise price equal to $4.25 per share. The
underlying shares will vest over a period of 18 months, and remain
exercisable to the extent the Hodges realize total profits of up to
$475,000 (measured as the aggregate difference between the market value of
the shares on the date of exercise and the exercise price). If, following
the exercise or termination of the option, the Hodges have not realized
profits of $475,000, the Company would be obligated to make a cash payment
to the Hodges equal to the shortfall. For the purposes of these financial
statements, the estimated fair value of this settlement is $460,000, less
the $25,000 cash they have received.
4. NOTES RECEIVABLE
As of June 30, 1997 and 1996, the Company held promissory notes from
individuals related to the sale of common stock owned by the Company in
Whitewing Labs, Inc. These notes generally bear interest at 5% per annum
and are generally secured by the common stock sold.
The following is a summary of notes receivable at June 30, 1997 and
December 31, 1996:
1997 1996
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Notes receivable due from stockholders, secured $ 560,000 $ 560,000
Notes receivable, secured 798,750 798,750
Notes receivable, unsecured - 21,000
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1,358,750 1,379,750
Less: allowance for losses (559,250) (559,250)
------- ---------
Total notes receivable $ 799,500 $ 820,500
------- ---------
------- ---------
Interest receivable on these notes amounted to approximately $102,300, and
$85,500, as of June 30, 1997 and December 31, 1996, respectively.
The Company currently holds two promissory notes and one demand note, which
are secured by Whitewing Labs, Inc. common stock. The makers of these
notes have been delinquent in payments of principal of and interest on
these notes. The Company recorded a write-down of $559,250 on two of these
notes in December 1996 to reflect the then current market value of the
Whitewing Labs, Inc. common stock held by the Company as collateral for the
repayment of the notes. Although the Company continues to pursue the
collection of amounts owing with respect to the three notes, should the
Company not recover the amounts owing through routine collection
procedures, the Company may consider foreclosing on the collateral or
pursuing other available legal resources.
5. NOTE PAYABLE
As of June 30, 1997, the Company has a note payable to Greenwich
Information Technologies LLC in connection with the purchase of an equity
interest in that entity. This note has a balance of $375,000 as of June
30, 1997 and bears interest at 6.5% per annum. The note calls for monthly
principal payments of $25,000 to $50,000 per month, with the final payment
due in December 1997. The Company has pledged a portion of its membership
interest in Greenwich Information Technologies as security for this note.
7
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. COMMON STOCK SUBSCRIPTIONS
Common stock subscriptions as of June 30, 1997 and December 31, 1996
consist of promissory notes due from individuals on the purchase of common
stock and the exercise of stock options. These notes generally bear
interest at 4% to 5% per annum. The notes are due in full in 1997. As of
June 30, 1997 and December 31, 1996 the outstanding balances due on these
notes were $31,492 and $88,752, respectively. Other receivables with
respect to these notes include an interest receivable of $6,700 in 1997,
and $5,700 in 1996. During July 1997, approximately $26,786 has been
received toward the outstanding principal balance of $31,492.
7. RECEIVABLES FROM AFFILIATES
Receivables from affiliates generally represent advances to the Company's
affiliates. At December 31, 1996, receivables from affiliates include
advances to Whitewing Labs, Inc. of approximately $27,000 and Soundview
Technologies of approximately $20,000. As of June 30, 1997, Whitewing
Labs, Inc. and Soundview Technologies have paid advances due to the
Company in full.
8. GAIN ON ISSUANCE OF STOCK BY EQUITY INVESTEE
In February 1996, Whitewing Labs, Inc. issued approximately, 1.1 million
shares of common stock as part of a public offering of its common stock.
The issuance of stock reduced the Company's ownership interest from
approximately 38% to approximately 18%. This transaction resulted in a
noncash pretax gain of approximately $1.1 million for the Company.
8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
The following discussion is based primarily on the consolidated balance sheet
of the Company as of June 30, 1997, and on the operations of the Company for
the period from January 1, 1997 to June 30, 1997. The following discussion
compares the activities for the six and three months ended June 30, 1997 to
the activities for the six and three months ended June 30, 1996. This
information should be read in conjunction with the accompanying consolidated
financial statements and notes thereto.
RESULTS OF OPERATIONS
REVENUES
SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
The Company reported revenues of $311,886 in the six months ended June 30,
1997 compared to revenues of $3,267,389 for the six months ended June 30,
1996.
GAINS ON SALES OF SECURITIES, NET. Net gains on sales of securities
decreased from $722,117 for the six months ended June 30, 1996 to $50,000
for the six months ended June 30, 1997. Such gain for the six months ended
June 30, 1997 is comprised of gains on sales of interests in CombiMatrix
Corporation. However, the Company continued to maintain a 51% ownership
interest as of June 30, 1997. The year-earlier gain of $722,117 represents
a gain primarily from sales of shares of CombiMatrix Corporation, and to a
lesser extent of MerkWerks Corporation and Soundview Technologies
Incorporated. During the six month period ended in 1997, the Company sold
a smaller portion of its assets, focusing instead on the development of its
various business interests. During the comparable period ended in 1996,
the Company sold a larger portion of its holdings primarily to raise the
capital necessary to acquire interests in new companies as well as provide
working capital for ongoing operations. Until the Company generates
sufficient revenue from operations of its various business concerns, the
Company, from time to time, may sell a portion of its equity interests when
that interest has appreciated to a value that management believes is
prudent and market conditions are favorable. However, the Company intends
to retain significant interests in its current and future holdings.
UNREALIZED GAIN ATTRIBUTABLE ON ISSUANCE OF COMMON STOCK BY AFFILIATE. In
February 1996, shares of Whitewing Labs, Inc. were sold in an initial
public offering. This initial public offering of shares reduced the
Company's ownership interest in Whitewing Labs from 38.3% to 18.4%. As a
result of this offering, under generally accepted accounting principles,
the Company reported an unrealized gain of $1,066,408, representing an
increase in the book value of the shares of Whitewing Labs that the Company
retained following the initial public offering. Management does not
anticipate recognizing any similar gain in relation to shares of Whitewing
Labs. However, the Company does anticipate future gains of this nature
with respect to other subsidiaries if they become publicly offered
entities.
EQUITY (LOSSES) IN EARNINGS OF INVESTMENTS. The Company reported losses
attributable to earnings of investments of $98,993 for the six months ended
June 30, 1997, compared to losses of $701 for the year-earlier period.
Such losses for the period ended June 30, 1997 are comprised of a gain of
$96,992 on the Company's capital investments as a general partner in two
private investment partnerships offset by a loss of $142,434 for the
Company's investment in Whitewing Labs, and a loss of $53,551 for the
Company's investment in Greenwich Information Technologies, as determined
by the equity method of accounting.
MANAGEMENT FEES. For the six months ended June 30, 1997, management fee
income, which includes a performance fee income, was $340,547 over
management fee income of $1,421,612 generated during the first six months
in 1996. The Company derived management fees in the period ended June 30,
1997 primarily from four investment funds managed by the Company.
Of the total of $1,421,612 in management fees earned for the six month
period ended June 30, 1996, $1,400,000 was paid to the Company by Soundview
Technologies through the issuance of 1,400,000 shares of Soundview
Technologies' common stock to the Company for providing management and
consulting services, including assisting Soundview Technologies in raising
$1,000,000 through the sale of Soundview Technologies' common stock at
$1.00 per share.
9
RESULTS OF OPERATIONS (CONTINUED)
REVENUES (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996 (continued)
The balance of approximately $22,000 of management fee income recorded
during the six months ended June 30, 1996 was derived from four investment
funds managed by the Company. Two of these funds had been managed by the
Company during the full six month period in 1996. The third fund and
fourth fund were formed in April 1996 and June 1996, respectively and,
therefore, generated limited management fees during the six month period
ended June 30, 1996.
THREE MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
The Company reported revenues of $329,456 in the three months ended June
30, 1997 compared to revenues of $1,439,708 for the three months ended June
30, 1996.
GAINS ON SALES OF SECURITIES, NET. Net gains on sales of securities
decreased from $169,751 for the three months ended June 30, 1996 to $0
for the comparable period ended June 30, 1997, as reported by the Company
during the 1997 period.
EQUITY (LOSSES) IN EARNINGS OF INVESTMENTS. The Company reported gains
attributable to earnings of investments of $15,694 for the three months
ended June 30, 1997, compared to losses of $175,467 for the year-earlier
period. Such earnings for the three months ended June 30, 1997 are
comprised of a gain of $58,897 on the Company's capital investments as a
general partner in two private investment partnerships offset by a loss of
$24,254 for the Company's investment in Whitewing Labs, and a loss of
$18,949 for the Company's investment in Greenwich Information Technologies,
as determined by the equity method of accounting.
MANAGEMENT FEES. For the three months ended June 30, 1997, management fee
income, which includes a performance fee income, was $308,345 over
management fee income of $1,415,387 generated during the three months ended
June 30, 1996. The Company derived management fees in the period ended
June 30, 1997 primarily from four investment funds managed by the Company.
Of the total of $1,415,387 in management fees earned for the three month
period ended June 30, 1996, $1,400,000 was paid to the Company by Soundview
Technologies through the issuance of 1,400,000 shares of Soundview
Technologies' common stock to the Company for providing management and
consulting services, including assisting Soundview Technologies in raising
$1,000,000 through the sale of Soundview Technologies' common stock at
$1.00 per share.
The balance of approximately $15,000 of management fee income recorded
during the three months ended June 30, 1996 was derived from four
investment funds managed by the Company.
EXPENSES
SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
Marketing, general and administrative expenses increased from $993,251 for
the six months ended June 30, 1996 to $1,229,678 for the six months ended
June 30, 1997. This increase is primarily due to legal, accounting,
printing, and other costs associated with the Company's efforts in further
developing its business enterprises and exploring new opportunities for the
Company and its affiliates and, to some extent, costs incurred in the
litigation and settlement of a lawsuit as well as expenses incurred by
CombiMatrix Corporation for a full six month period in 1997 compared to
approximately three months of the same period in 1996.
10
RESULTS OF OPERATIONS (CONTINUED)
EXPENSES (CONTINUED)
SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996 (continued)
The Company also incurred a one-time charge of $460,000 relating to a legal
settlement, which has been offset by a $25,000 cash payment. Management of
the Company believes that settling this litigation on the agreed upon terms
prevented unnecessary litigation costs as well as the unnecessary diversion
of Company resources and was in the best interests of the Company.
THREE MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
Marketing, general and administrative expenses decreased from $565,966 for
the three months ended June 30, 1996 to $517,156 for the three months ended
June 30, 1997. This decrease is primarily due the absence of legal fees
associated with the commencement of private investment funds as well as
decreases in consulting fees.
PROVISION FOR INCOME TAXES
SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
For the six month period ended June 30, 1997, the Company recorded a
benefit of $167,767 as compared to an income tax expense of $893,245 for
the same period in fiscal 1996. In the current tax year, the Company has
generated a net operating loss, which results in a tax benefit for the
six months ended June 30, 1996 of $167,767.
THREE MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996
For the three month period ended June 30, 1997, the Company recorded a
benefit of $127,660 as compared to an income tax expense of $366,014 for
the same period in fiscal 1996. The difference is attributable to losses
during the three months ended June 30, 1997 versus income generated during
the three months ended June 30, 1996.
INFLATION
Inflation has not had a significant impact on the Company.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1997, the Company had cash and cash equivalents of $1,808,614,
working capital of $2,031,948, and a ratio of current assets to current
liabilities of 3.2 to 1. During the period ended June 30, 1997, the Company
issued a Promissory Note to Greenwich Information Technologies LLC in the
principal amount of $525,000, whereby the Company will make payments to
Greenwich Information Technologies of a minimum of $25,000 each month from
February 1, 1997 through July 1, 1997; $50,000 each month from August 1, 1997
to December 1, 1997; and pay the outstanding principal plus any accrued and
unpaid interest by December 31, 1997. The Note bears a simple interest rate
of 6.5% per annum. The Company also executed a Pledge Agreement in connection
with the Promissory Note whereby the Company pledged a portion of its
membership interest in Greenwich Information Technologies, while retaining
voting and distribution rights to such membership interest, in order to
secure the Company's obligations under the Promissory Note. Should the
Company default on the Promissory Note, the Company could lose a substantial
portion of its membership interest. As of June 30, 1997, the Company has
paid $150,000 towards the note and has a principal balance owing of $375,000.
The Company anticipates that although revenues from operations, together with
working capital reserves may provide necessary funds for its operating expenses
in the foreseeable future, the Company may also seek additional financing to
fund these expenses as well as new business opportunities. In addition, there
can be no
11
assurance that the Company will not encounter unforeseen difficulties
that may deplete its capital resources more rapidly than anticipated. Any
efforts to seek additional funds could be made through equity, debt, or other
external financing and there can be no assurance that additional funding, if
necessary, will be available on favorable terms, if at all. Moreover, the
development and expansion of the Company's business could place significant
demands on the Company's infrastructure, and may require the Company to hire
additional personnel, to implement additional operating and financial controls,
install additional reporting and management information systems, and otherwise
improve and expand the Company's business. The Company's future operating
results will depend on management's ability to manage future growth, and there
can be no assurance that efforts to manage future growth will be successful.
NEW PRONOUNCEMENT
In February 1997, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS
128 establishes new standards for computing and presenting earnings per share
("EPS") and supersedes APB Opinion No. 15, "Earnings Per Share." SFAS 128
replaces the presentation of primary EPS with a presentation of basic EPS. It
also requires dual presentation of basic and diluted EPS on the face of the
income statement for all entities with complex capital structures, and requires
a reconciliation of the numerator and denominator of the basic EPS computation
to the numerator and denominator of the diluted EPS computation. SFAS 128
becomes effective for the Company for the year ending December 31, 1997. Pro
forma results for the second quarter of 1997 and 1996, assuming the application
of SFAS 128, are as follows:
For Three Months Ended
----------------------
June 30, 1997 June 30, 1996
----------------------------
Basic (loss) earnings per share ($0.01) $0.29
Diluted (loss) earnings per share ($0.01) $0.20
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
Reference is made in particular to the description of the Company's plans and
objectives for future operations, assumptions underlying such plans and
objectives, and other forward-looking statements included in this report. Such
statements may be identified by the use of forward-looking terminology such as
"may," "will," "expect," "believe," "estimate," "anticipate," "intend,"
"continue," or similar terms, variations of such terms or the negative of such
terms. Such statements are based on management's current expectations and are
subject to a number of factors and uncertainties, which could cause actual
results to differ materially from those described in the forward-looking
statements. Such statements address future events and conditions concerning
capital expenditures, earnings, litigation, regulatory matters, markets for
products and services, liquidity and capital resources, and accounting matters.
Actual results in each case could differ materially from those anticipated in
such statements by reason of factors such as future economic conditions, changes
in consumer demand, legislative, regulatory and competitive developments in
markets in which the Company and its affiliates operate, and other circumstances
affecting anticipated revenues and costs. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based. Additional factors that
could cause such results to differ materially from those described in the
forward-looking statements are set forth in connection with the forward-looking
statement.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
12
ITEM 2. CHANGES IN SECURITIES
SALES OF UNREGISTERED SECURITIES
In June 1997, the Company sold 290,200 units at a purchase price of $5.00 per
unit, each unit representing one common stock purchase warrant and one share
of the Company's common stock, to 37 accredited investors. Each common stock
purchase warrant entitles its holder to purchase one share of the Company's
common stock at an exercise price of $7.50 per share, subject to adjustment,
and expires on June 8, 2000. Finders involved in this transaction received
finders fees at a rate of $0.50 per unit placed and one finder warrant per
ten units placed. Each finder warrant may be exercised prior to June 8, 2000
for one share of the Company's common stock at an exercise price of $5.50 per
share, subject to adjustment. The Company's sale of these units was exempt
from registration, as a private placement, under Section 3(b) of the
Securities Act of 1933 and Regulation D promulgated thereunder.
Additionally, in June 1997, the Company issued warrants representing the
right to purchase 100,000 shares of the Company common stock, (subject to
vesting) at an exercise price of $6.00 per share, to Cruttenden Roth
Incorporated in connection with financial consulting services provided by
that firm, and the Company granted an option to purchase 12,000 shares of the
Company's common stock (subject to vesting) at an exercise price of $5.00 per
share, in connection with services provided to the Company by a consultant.
Each of these transactions was exempt from registration, as a private
placement, under Section 4(2) of the Securities Act of 1933.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on May 22, 1997. The business at
the meeting was the ratification of a proposed amendment to the Company's
Bylaws to change the number of directors from five, as specified therein, to
a variable number which shall be not less than five nor more than nine, to be
determined by resolution of the Board of Directors, and the election of
directors. Each of the proposals was adopted.
The number of votes for and withheld for the amendment to the Bylaws were as
follows:
For Against Abstaining
------------------------------------------------------
1,095,235 9,920 4,800
The number of votes for and withheld for each director were as follows:
Name For Withheld
- ---- --- --------
R. Bruce Stewart 1,855,372 4,350
Brooke P. Anderson 1,855,372 4,350
Fred A. de Boom 1,855,372 4,350
Paul R. Ryan 1,855,372 4,350
Edward W. Frykman 1,855,372 4,350
ITEM 5. OTHER INFORMATION
None.
13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
3.2 Amended and Restated Bylaws
10.6 Legal Settlement between the Company and Ann P. Hodges and
Christopher D. Hodges
10.7 Agreement between the Company and Cruttenden Roth Incorporated
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
Current report event date July 21, 1997
14
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ACACIA RESEARCH CORPORATION
By: /s/ R. BRUCE STEWART
-------------------------------------------------
R. Bruce Stewart
Chief Financial Officer (principal financial officer)
Date: August 14, 1997
15