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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 September 30, 1999 Commission File No. 0-26068
ACACIA RESEARCH CORPORATION
(Exact name of registrant as specified in its charter)
California 95-4405754
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(State or other jurisdiction of
incorporation organization) (I.R.S. Employer Identification No.)
55 South Lake Avenue, Pasadena CA 91101
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (626) 396-8300
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 / /
At NOVEMBER 12, 1999 11,554,840 shares of common stock, no par value, of the
Registrant were outstanding.
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ACACIA RESEARCH CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets.................... 3
Consolidated Statements of Operations.......... 4
Consolidated Statements of Cash Flows.......... 5
Notes to Consolidated Financial Statements..... 6
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 10
Item 3. Quantitative and Qualitative Disclosures About
Market Risk................................... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................. 18
Item 2. Changes in Securities......................... 18
Item 3. Defaults Upon Senior Securities............... 18
Item 4. Submission of Matters to a Vote of Security
Holders....................................... 18
Item 5. Other Information............................. 18
Item 6. Exhibits and Reports on Form 8-K.............. 18
SIGNATURE................................................... 19
ACACIA RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
(UNAUDITED)
SEPTEMBER 30, 1999 DECEMBER 31, 1998
------------------ -----------------
ASSETS
Current assets
Cash and cash equivalents................................. $12,442 $ 7,508
Management fees and other receivables..................... 31 239
Receivables from affiliates............................... 128 27
Prepaid expenses.......................................... 191 96
Income tax receivable..................................... -- 110
------- -------
Total current assets................................ 12,792 7,980
Equipment, furniture, and fixtures, net..................... 951 530
Notes receivable, net....................................... 29 38
Investment in affiliates, at equity......................... 2,600 3,481
Partnership interests, at equity............................ 1,344 1,832
Patents, net of accumulated amortization.................... 3,821 4,610
Goodwill, net of accumulated amortization................... 1,139 1,158
Other assets, net of accumulated amortization............... 137 140
------- -------
$22,813 $19,769
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses..................... $ 779 $ 366
------- -------
Total current liabilities........................... 779 366
Cash received in advance of private placement............... 3,272 --
Other liabilities........................................... 240 240
Notes payable, net of discount.............................. 1,281 1,222
------- -------
Total liabilities................................... 5,572 1,828
------- -------
Minority interests.......................................... 519 --
------- -------
Stockholders' equity
Common stock, no par value; 30,000,000 shares authorized;
11,105,550 shares in 1999 and 10,190,815 shares in 1998
issued and outstanding.................................. 31,981 26,737
Warrants to purchase common stock......................... 40 100
Accumulated deficit....................................... (15,299) (8,896)
------- -------
Total stockholders' equity.......................... 16,722 17,941
------- -------
$22,813 $19,769
======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
(UNAUDITED) (UNAUDITED)
NINE MONTHS ENDED THREE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
1999 1998 1999 1998
-------------- -------------- -------------- --------------
Revenues:
Capital management fee income........... $ 116 $ 118 $ 25 $ 44
----------- ---------- ----------- -----------
Total revenues.......................... 116 118 25 44
----------- ---------- ----------- -----------
Operating expenses:
Research and development expenses....... 2,190 1,288 1,150 514
Marketing, general, and administrative
expenses.............................. 2,602 1,990 827 726
Amortization of patents and goodwill.... 1,205 1,156 417 398
----------- ---------- ----------- -----------
Total operating expenses................ 5,997 4,434 2,394 1,638
----------- ---------- ----------- -----------
Operating loss.......................... (5,881) (4,316) (2,369) (1,594)
----------- ---------- ----------- -----------
Other income (expense):
Interest income......................... 217 196 73 115
Interest expense........................ (123) (88) (41) (42)
Equity in income (loss) of
partnerships.......................... (47) 22 (98) (60)
Equity in losses of affiliates.......... (906) (469) (285) (266)
----------- ---------- ----------- -----------
Total other expense..................... (859) (339) (351) (253)
----------- ---------- ----------- -----------
Loss before income taxes and minority
interests............................... (6,740) (4,655) (2,720) (1,847)
Provision for income taxes................ (20) -- -- --
----------- ---------- ----------- -----------
Loss before minority interests............ (6,760) (4,655) (2,720) (1,847)
Minority interests........................ 357 315 357 68
----------- ---------- ----------- -----------
Net loss.................................. $ (6,403) $ (4,340) $ (2,363) $ (1,779)
=========== ========== =========== ===========
Loss per common share
Basic................................... $ (0.61) $ (0.50) $ (0.22) $ (0.18)
Diluted................................. $ (0.61) $ (0.50) $ (0.22) $ (0.18)
Weighted average number of common and
potential common shares outstanding used
in computation of loss per share
Basic................................... 10,436,987 8,727,572 10,748,875 10,004,549
Diluted................................. 10,436,987 8,727,572 10,748,875 10,004,549
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
SEPTEMBER 30, 1999 SEPTEMBER 30, 1998
------------------- -------------------
Cash flows from operating activities:
Net loss.................................................... $(6,403) $(4,340)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 1,362 1,275
Equity in loss of affiliates and partnerships............. 953 447
Minority interest in net loss............................. (357) (315)
Compensation expense relating to stock options/warrants... 127 212
Provision for write-down of notes and interest
receivable.............................................. 9 --
Changes in assets and liabilities, net of effects of
acquisitions:
Management fees and other receivables, prepaid expenses,
patents and other assets................................ 118 74
Accounts payable, accrued expenses and other
liabilities............................................. 412 (45)
------- -------
Net cash used in operating activities..................... (3,779) (2,692)
------- -------
Cash flows from investing activities:
Advances to affiliates.................................... (101) (17)
Capital contribution to equity investment................. (25) --
Purchase of additional equity in consolidated
subsidiary.............................................. (31) --
Withdrawals from partnerships............................. 500 --
Purchase of equity investment............................. -- (2,552)
Purchase of partnership interest.......................... (59) (1,023)
Capitalized expenditures.................................. (548) (227)
------- -------
Net cash used in investing activities..................... (264) (3,819)
------- -------
Cash flows from financing activities:
Proceeds in advance of private placement.................. 3,272 --
Proceeds from notes payable............................... -- 1,400
Payments of debt issuance costs........................... -- (144)
Proceeds from exercise of stock options and warrants...... 4,134 3,676
Capital contributions from minority shareholders of
subsidiaries............................................ 1,571 161
Proceeds from note receivable secured by common stock..... -- 194
Proceeds from sale of common stock, net of issuance
costs................................................... -- 8,393
------- -------
Net cash provided by financing activities................. 8,977 13,680
------- -------
Increase in cash and cash equivalents..................... 4,934 7,169
Cash and cash equivalents, beginning...................... 7,508 1,367
------- -------
Cash and cash equivalents, ending......................... $12,442 $ 8,536
======= =======
Supplemental schedule of non-cash investing and financing
activities:
Issuance of common stock for additional equity in
consolidated subsidiaries and affiliates................ $ 288 $ 3,035
Increase in equity investment due to receipt of affiliate
stock as payment on note receivable..................... -- 240
Increase of common stock to satisfy legal settlement
payable................................................. -- 226
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
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 with intellectual property rights, most of
which are involved in developing new or unproven technologies. There is no
assurance that any or all such technologies will be successful, and even if
successful, that the development of such technologies can be commercialized.
At September 30, 1999, the Company had significant economic interests in
seven companies and takes an active role in each enterprise's growth and
advancement. These companies are: CombiMatrix Corporation ("CombiMatrix"),
Greenwich Information Technologies LLC ("Greenwich Information Technologies"),
MerkWerks Corporation ("MerkWerks"), Signature-mail.com LLC ("Signature-
mail.com"), Soundbreak.com Incorporated ("Soundbreak.com"), Soundview
Technologies Incorporated ("Soundview Technologies"), and Whitewing Labs, Inc.
("Whitewing Labs").
The Company, doing business as Acacia Capital Management, is a general
partner in two private investment partnerships and is an investment advisor to
two offshore private investment corporations. Management anticipates closing
this division during the fourth quarter of 1999. Costs associated with exiting
this business are not expected to be material.
In July 1999, the Company received $2.1 million in proceeds from the
exercise of common stock purchase warrants to purchase 420,264 shares of the
Company's common stock.
In August 1999, CombiMatrix completed a private equity financing raising
gross proceeds of $4 million through the sale of 2 million shares of CombiMatrix
common stock. The Company invested $2.3 million in this private placement and
acquired 1.15 million shares. As a result of the transaction, the Company
increased its equity ownership in CombiMatrix from 52.7% to 53.4%. The
acquisition was accounted for under the purchase method.
In September 1999, the Company purchased 10,000 shares of Series A
Convertible Preferred Stock of Soundbreak.com for $1 million, which represented
100% of the outstanding preferred stock at September 30, 1999. The Company also
owns 98.8% of the 5 million outstanding shares of Soundbreak.com's common stock
at September 30, 1999. The remaining 1.2% of common stock is owned by certain
key employees and directors of the Company, who were granted 60,000 shares,
resulting in $30,000 of compensation expense.
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 September
30, 1999 and the consolidated results of operations and cash flows for the three
and nine months ended September 30, 1999 and 1998. This interim financial
information and notes thereto should be read in conjunction with the Company's
Annual Report on Form 10-K for the year ended December 31, 1998. 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.
6
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS--Certain reclassifications of prior year's amounts have
been made to conform to the 1999 presentation.
3. NOTES RECEIVABLE
As of September 30, 1999 and December 31, 1998, the Company held promissory
notes currently due and payable from individuals related to the sale of a
portion of the Company's investment in Whitewing Labs. These notes generally
bear interest at 5% per annum and are generally secured by the common stock
sold. As of September 30, 1999 and December 31, 1998, two promissory notes
secured by the common stock of Whitewing Labs were valued at the estimated
market value of the collateral held by the Company.
Notes receivable consist of the following at September 30, 1999 and December
31, 1998:
(IN THOUSANDS) SEPTEMBER 30, 1999 DECEMBER 31, 1998
-------------- ------------------- ------------------
Notes Receivable............................ $ 319 $ 319
Less: Reserve for Write-down................ (290) (281)
----- -----
$ 29 $ 38
===== =====
4. NOTES PAYABLE
In March 1998, CombiMatrix completed a private debt financing raising gross
proceeds of $1.45 million through the issuance of 290 units, each unit
consisting of one $5,000 principal unsecured promissory note ("Subordinated
Note") and common stock purchase warrants to purchase 500 shares of common
stock. Each Subordinated Note bears interest at the rate of 6% per annum on the
outstanding principal balance. Accrued interest is due and payable annually on
January 15th of each year until the Subordinated Notes are paid in full.
However, interest that has accrued to date will be paid to those Noteholders
electing to convert their outstanding principal balance into CombiMatrix Common
Stock. Each common stock purchase warrant entitles the holder to purchase one
share of CombiMatrix common stock at an exercise price of $2.00, subject to
adjustment, during a period of three years, expiring in March 2001. In
accordance with APB Opinion No. 14, "Accounting for Convertible Debt and Debt
Issued with Stock Purchase Warrants," $850 of each unit issued has been
attributed to the warrants included in each unit resulting in debt discount. The
Company invested $50,000 in this private placement. Under the terms of the
Subordinated Note offering, if, prior to the maturity date of the Subordinated
Notes, CombiMatrix completed an offering of its common stock or senior
securities convertible into its common stock with gross proceeds exceeding
$500,000, the holders of the Subordinated Notes would be offered the opportunity
to acquire shares of CombiMatrix common stock in exchange for the then
outstanding principal amount of the Subordinated Notes. In August 1999,
CombiMatrix completed a private equity financing raising gross proceeds of $4
million (see Note 1). As a result, on October 14, 1999, CombiMatrix offered the
note holders the opportunity to convert the outstanding principal balance of
notes payable into CombiMatrix common stock on the same terms of CombiMatrix
Private Placement that closed in August 1999. Such offer expires 60 days from
the date of notice.
7
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. COMMON STOCK SPLIT
On March 17, 1998, the Company announced that its Board of Directors
declared a two-for-one split of the Company's common stock in the form of a
stock dividend of one share of common stock for each share outstanding. The
Company distributed the stock dividend on June 12, 1998, for each share held of
record at the close of business on May 29, 1998. All references to number of
common shares and per share information in the consolidated financial statements
and related footnotes have been adjusted as appropriate to reflect the stock
split for all periods presented.
6. SEGMENT INFORMATION
The Company has three reportable segments: Investment Activities, including
investment advisory services and investments in development stage companies,
CombiMatrix, and Soundbreak.com.
The Company provides investment advisory services, and also provides
management services to, and makes direct investments in, emerging corporations
with intellectual property rights, most of which are involved in developing new
or unproven technologies.
CombiMatrix is developing a proprietary method to synthesize DNA, peptides
and chemical libraries on an active semiconductor chip with electrochemically
generated reagents.
Soundbreak.com is preparing for the launch of its lifestyle Internet site
that will combine 24-hour worldwide Webcast highlighting new music hosted by
on-air DJ's with rich graphics, a music and merchandise store and other
features.
Material intercompany transactions and transfers have been eliminated in
consolidation. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies.
The table below presents information about the Company's reportable segments
for the nine months ended September 30, 1999 and 1998.
1999
(in thousands)
INVESTMENT
ACTIVITIES COMBIMATRIX SOUNDBREAK OTHER TOTAL
---------- ----------- ---------- -------- --------
Management fee income....................... $ 116 $ -- $ -- $ -- $ 116
Amortization of Patents and Goodwill........ 1,195 -- -- 10 1,205
Interest income............................. 194 20 3 -- 217
Interest expense............................ -- 123 -- -- 123
Equity in losses of affiliates.............. 906 -- -- -- 906
Equity in income of partnerships............ 47 -- -- -- 47
Loss before minority interest and income
taxes..................................... 4,223 1,772 493 252 6,740
Segment assets.............................. 15,408 2,634 4,600 171 22,813
Investments in affiliates, at equity........ 2,600 -- -- -- 2,600
Partnerships interests, at equity........... 1,334 -- -- -- 1,334
Capital expenditures........................ 95 28 413 12 548
8
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SEGMENT INFORMATION (CONTINUED)
1998
INVESTMENT
ACTIVITIES COMBIMATRIX SOUNDBREAK OTHER TOTAL
---------- ----------- ---------- -------- --------
Management fee income....................... $ 118 $ -- $ -- $ -- $ 118
Amortization of Patents and Goodwill........ 1,137 -- -- 19 1,156
Interest income............................. 156 36 -- 4 196
Interest expense............................ 1 87 -- -- 88
Equity in losses of affiliates.............. 469 -- -- -- 469
Equity in income of partnerships............ 22 -- -- -- 22
Loss before minority interest and income
taxes..................................... 3,066 1,105 -- 484 4,655
Segment assets.............................. 17,131 3,850 -- 257 21,238
Investments in affiliates, at equity........ 3,913 -- -- -- 3,913
Partnerships interests, at equity........... 1,632 -- -- -- 1,632
Capital expenditures........................ 160 62 -- 5 227
7. SUBSEQUENT EVENTS
On October 7, 1999 Soundbreak.com completed a private equity financing
raising $6.5 million through the sale of 65,505 shares of Series B Convertible
Preferred Stock. The Series B Preferred Stock have no voting rights. The Company
invested $1 million in this private placement. At September 30, 1999,
Soundbreak.com had received $3.3 million in advance of the closing, which is
included as a liability in the accompanying consolidated balance sheet.
On October 20, 1999, the Company issued a warrant call to all holders of a
series of common stock purchase warrants, which expires on November 19, 1999. If
all affected warrants are exercised, 1,148,872 shares would be issued in
exchange for $10 million.
On November 11, 1999, Soundbreak.com entered into a lease commitment for
approximately 13,500 square feet of new office space. This lease commitment
provides for minimum monthly lease payments of $36,000 for a period of 60
months.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 Year
2000 readiness, capital expenditures, earnings, litigation, regulatory matters,
markets for products and services, liquidity and capital resources, accounting
matters, and strategic plans regarding Acacia Capital Management. 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.
GENERAL
The following discussion is based primarily on the consolidated balance sheet of
the Company as of September 30, 1999, and on the operations of the Company for
the period from January 1, 1999 to September 30, 1999. The discussion compares
the activities for the nine and three months ended September 30, 1999 to the
activities for the nine and three months ended September 30, 1998.
This information should be read in conjunction with the accompanying
consolidated financial statements and notes thereto.
RESULTS OF OPERATIONS
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
REVENUES
CAPITAL MANAGEMENT FEES. During the nine months ended September 30, 1999,
capital management fee income, which includes performance fee income, was
$116,000 as compared to capital management fee income of $118,000 generated
during the nine months ended September 30, 1998.
The Company may share management fees or direct a certain amount of
brokerage to a broker in return for the broker's referral of prospective
clients in relation to its investment advisory business. The Company may
also employ consultants to whom it will pay cash or a portion of the
advisory fees paid by clients referred to the Company by such consultants.
Management anticipates closing the money management division and related
investment funds during the fourth quarter of 1999.
10
OPERATING EXPENSES
Total operating expenses increased to $6.0 million during the nine months ended
September 30, 1999 from $4.4 million during the nine months ended September 30,
1998 primarily due to expenses relating to the expansion of CombiMatrix's
research and development efforts, expenses relating to the start-up activities
of Soundbreak.com, expenses relating to the Company's move to larger office
facilities (including an increase in the Company's monthly lease payments), an
increase in the Company's business development activities, plus an increase in
the Company's head count and higher wages.
RESEARCH AND DEVELOPMENT EXPENSES. The Company incurred research and
development expenses of $2.2 million for the nine months ended
September 30, 1999, compared to expenses of $1.3 million during the nine
months ended September 30, 1998. Such expenses for the nine months ended
September 30, 1999 are comprised of expenses incurred by CombiMatrix of $1.6
million, expenses incurred by Soundbreak.com of $491,000, expenses incurred
by MerkWerks of $97,000, and expenses incurred by Soundview Technologies of
$22,000. Research and development expense for the nine months ended
September 30, 1998 are comprised of expenses incurred by CombiMatrix of
$993,000, expenses incurred by MerkWerks of $173,000, and expenses incurred
by Soundview Technologies of $122,000. No expenses are attributable to
Soundbreak.com during 1998, as it did not begin operations until 1999.
During the nine months ended September 30, 1999, CombiMatrix's expenses
primarily increased due to an increase in the number of CombiMatrix
personnel as it expanded its research and development efforts.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. For the nine months ended
September 30, 1999, marketing, general and administrative expenses increased
to $2.6 million as compared to $2.0 million for the nine months ended
September 30, 1998. During the nine months ended September 30, 1999, these
expenses increased due to general expansion of the Company, including an
increase in business development expenses as the Company explores new
business opportunities, an increase in office expenses relating to the
Company's move to larger office facilities, and an increase in salaries and
fringe benefits primarily due to an increase in the number of Company
personnel as well as higher wages and payroll expenses. Expenses incurred
during the nine months ended September 30, 1999 also include a write-down of
$9,000 relating to two promissory notes held by the Company, which are
secured by Whitewing Labs stock. The notes, which are currently past due,
have been written down to the estimated market value price of the collateral
held by the Company. Soundview Technologies' marketing, general and
administrative expenses were $121,000 for the nine months ended
September 30, 1999 and $167,000 for the nine months ended September 30,
1998.
Marketing, general and administrative expenses include expenses incurred in
the use of consultants in which a portion of the compensation has been paid
in equity securities (stock options or warrants). The Company is required to
record the fair value of such securities as they vest. Using option
valuation techniques, the Company incurred an expense of approximately
$127,000 for the nine months ended September 30, 1999 and $212,000 for the
nine months ended September 30, 1998.
AMORTIZATION OF PATENTS AND GOODWILL. The Company reported amortization
expenses relating to patents and goodwill of $1.2 million during the nine
months ended September 30, 1999 which was approximately equal to the amount
during the nine months ended September 30, 1998. As a result of the
Company's purchase of additional equity interests in Soundview Technologies
in June 1997 and January 1998, in MerkWerks in January 1998 and June 1999,
and in CombiMatrix in August 1999, the Company is incurring amortization
expenses each quarter for periods ranging from two to five years relating to
the intangible assets acquired. Amortization expenses at or above the
current level are expected to continue for the foreseeable future.
11
OTHER INCOME (EXPENSE)
The Company reported other expense of $859,000 for the nine months ended
September 30, 1999 compared to other income of $339,000 for the nine months
ended September 30, 1998.
INTEREST INCOME. During the nine months ended September 30, 1999, interest
income was $217,000 as compared to interest income during the nine months
ended September 30, 1998 of $196,000. The increase is due to the Company
having higher cash balances in the nine months ended September 30, 1999 as
compared to the nine months ended September 30, 1998.
INTEREST EXPENSE. Interest expense in the nine months ended September 30,
1999 was $123,000 as compared to $88,000 during the nine months ended
September 30, 1998. The expense incurred during the nine months ended
September 30, 1999 is primarily attributable to CombiMatrix and relates to
three-year 6% unsecured subordinated promissory notes issued by CombiMatrix
in a private offering completed in March 1998. Warrants to purchase
CombiMatrix common stock were also issued in this private placement. For
financial statement purposes, the proceeds from the private placement were
allocated between the warrants and the notes resulting in a discount on the
notes. Such discount is amortized over the terms of the notes and treated as
additional interest expense. As a result, reported interest is higher than
the cash amount of interest that will actually be paid to the noteholders.
These notes mature in March 2001, but are currently the subject of an
exchange offer. See Note 4 of Notes to Consolidated Financial Statements.
Interest that has accrued to date on these notes will be paid to those
Noteholders electing to convert their outstanding principal balance into
CombiMatrix Common Stock.
EQUITY IN LOSS OF PARTNERSHIPS. The Company reported equity in loss of
partnerships of $47,000 for the nine months ended September 30, 1999,
compared to equity in income of partnerships of $22,000 for the nine months
ended September 30, 1998. The decrease was a result of losses generated by
the partnerships' investment activities.
EQUITY IN LOSSES OF AFFILIATES. The Company reported equity in losses of
affiliates of $906,000 in the nine months ended September 30, 1999, compared
to equity in losses of affiliates of $469,000 in the nine months ended
September 30, 1998. Losses during the nine months ended September 30, 1999
are comprised of a loss of $538,000 for the Company's investment in
Signature-mail.com, a loss of $206,000 for the Company's investment in
Greenwich Information Technologies, and a loss of $162,000 for the Company's
investment in Whitewing Labs, as determined by the equity method of
accounting. Losses for the nine months ended September 30, 1998 are
comprised of a loss of $284,000 for the Company's investment in
Signature-mail.com, a loss of $114,000 for the Company's investment in
Greenwich Information Technologies, and a loss of $71,000 for the Company's
investment in Whitewing Labs, as determined by the equity method of
accounting.
MINORITY INTERESTS
Minority interests in the loss of consolidated subsidiaries increased to
$357,000 in the nine months ended September 30, 1999 as compared to $315,000 in
the nine months ended September 30, 1998. The increase in minority interest
relates to the CombiMatrix private placement. Shareholders participated in the
losses of CombiMatrix for the nine months ended September, 1999.
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED SEPTEMBER 30, 1999 AND SEPTEMBER 30, 1998
REVENUES
CAPITAL MANAGEMENT FEES. During the three months ended September 30, 1999,
capital management fee income was $25,000 as compared to capital management
fee income of $44,000 generated
12
during the three months ended September 30, 1998. The decrease in capital
management fee income derived from the four investment funds managed by the
Company during the three months ended September 30, 1999 was primarily a
result of lower returns generated by the funds' investment activities and a
decrease in money under management.
The Company also earns quarterly management fees that are based on a
percentage of the amount of money invested in the funds under management.
The Company may share management fees or direct a certain amount of
brokerage to a broker in return for the broker's referral of prospective
clients in relation to its investment advisory business. The Company may
also employ consultants to whom it will pay cash or a portion of the
advisory fees paid by clients referred to the Company by such consultants.
Management anticipates closing the money management division and related
investment funds during the fourth quarter of 1999.
OPERATING EXPENSES
Total operating expenses increased to $2.4 million during the three months ended
September 30, 1999 from $1.6 million during the three months ended
September 30, 1998 primarily due to expenses relating to the expansion of
CombiMatrix's research and development efforts, expenses related to the start-up
activities of Soundbreak.com, the Company's move to larger office facilities
(including an increase in the Company's monthly lease payments), an increase in
the Company's business development activities, and an increase in the Company's
head count and higher wages. Management expects operating expenses to continue
to increase for the foreseeable future as both the Company and a number of its
affiliates seek to increase their staffing levels and expand their operations.
RESEARCH AND DEVELOPMENT EXPENSES. The Company incurred research and
development expenses of $1.2 million for the three months ended
September 30, 1999, compared to expenses of $514,000 during the three months
ended September 30, 1998. Such expenses for the three months ended
September 30, 1999 are comprised of expenses incurred by CombiMatrix of
$635,000, expenses incurred by Soundbreak.com of $491,000, and expenses
incurred by MerkWerks of $25,000. Research and development expense for the
three months ended September 30, 1998 are comprised of expenses incurred by
CombiMatrix of $386,000, expenses incurred by MerkWerks of $90,000, and
expenses incurred by Soundview Technologies of $38,000. No expenses are
attributable to Soundbreak.com during 1998, as it did not begin operations
until 1999. During the three months ended September 30, 1999, CombiMatrix's
expenses increased due to an increase in the number of CombiMatrix personnel
as it expanded its research and development efforts.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three months ended
September 30, 1999, marketing, general and administrative expenses increased
to $827,000 as compared to $726,000 for the three months ended
September 30, 1998. During the three months ended September 30, 1999, these
expenses increased due to general expansion of the Company, including an
increase in office expenses relating to the Company's move to larger office
facilities, and an increase in salaries and fringe benefits.
Marketing, general and administrative expenses include expenses incurred in
the use of consultants in which a portion of the compensation has been paid
in equity securities (stock options or warrants). The Company is required to
record the fair value of such securities as they vest. Using option
valuation techniques, the Company incurred an expense of approximately
$77,000 in the three months ended September 30, 1999 and $163,000 in the
three months ended September 30, 1998.
AMORTIZATION OF PATENTS AND GOODWILL. The Company reported amortization
expenses relating to patents and goodwill of $417,000 during the three
months ended September 30, 1999 as compared
13
to $398,000 during the three months ended September 30, 1998. As a result of
the Company's purchase of additional equity interests in Soundview
Technologies in June 1997 and January 1998, and in MerkWerks in
January 1998 and June 1999, the Company is incurring amortization expenses
each quarter for periods ranging from two to five years relating to the
intangible assets acquired. Amortization expenses at or above the three
months ended September 30, 1999 level are expected to continue for the
foreseeable future.
OTHER INCOME (EXPENSE)
The Company reported other expenses of $351,000 for the three months ended
September 30, 1999 compared to other income of $253,000 for the three months
ended September 30, 1998.
INTEREST INCOME. During the three months ended September 30, 1999, interest
income was $73,000 as compared to interest income during the three months
ended September 30, 1998, of $115,000. The decrease is due to the Company
having lower average cash balances in the three months ended September 30,
1999 as compared to the three months ended September 30, 1998.
INTEREST EXPENSE. Interest expense in the three months ended September 30,
1999 was $41,000 as compared to $42,000 during the three months ended
September 30, 1998. The expense incurred during the three months ended
September 30, 1999 is primarily attributable to CombiMatrix and relates to
three-year 6% unsecured subordinated promissory notes issued by CombiMatrix
in a private offering completed in March 1998. Warrants to purchase
CombiMatrix common stock were also issued in this private placement. For
financial statement purposes, the proceeds from the private placement were
allocated between the warrants and the notes resulting in a discount on the
notes. Such discount is amortized over the terms of the notes and treated as
additional interest expense. As a result, reported interest is higher than
the cash amount of interest that will actually be paid to the noteholders.
Subject to certain terms and conditions, these notes are due and payable in
March 2001. Interest that has accrued to date on these notes will be paid to
those Noteholders electing to convert their outstanding principal balance
into CombiMatrix Common Stock.
EQUITY IN LOSS OF PARTNERSHIPS. The Company reported equity in loss of
partnerships of $98,000 for the three months ended September 30, 1999,
compared to $60,000 for the three months ended September 30, 1998. The
decrease was a result of losses generated by the partnerships' investment
activities.
EQUITY IN LOSSES OF AFFILIATES. The Company reported equity in losses of
affiliates of $285,000 in the three months ended September 30, 1999,
compared to equity in losses of affiliates of $266,000 in the three months
ended September 30, 1998. Losses during the three months ended
September 30, 1999 are comprised of a loss of $149,000 for the Company's
investment in Signature-mail.com, a loss of $70,000 for the Company's
investment in Greenwich Information, and a loss of $66,000 for the Company's
investment in Whitewing Labs, as determined by the equity method of
accounting. Losses for the three months ended September 30, 1998 are
comprised of a loss of $183,000 for Signature-mail.com, a loss of $43,000
for the Company's investment in Whitewing Labs, and a loss of $40,000 for
the Company's investment in Greenwich Information Technologies, as
determined by the equity method of accounting.
14
MINORITY INTERESTS
Minority interests in the loss of consolidated subsidiaries increased to
$357,000 in the three months ended September 30, 1999 as compared to $68,000 in
the three months ended September 30, 1998. The increase in minority interest
relates to the CombiMatrix private placement. Shareholders participated in the
losses of CombiMatrix for the quarter ended September 30, 1999.
INFLATION
Inflation has not had a significant impact on the Company.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1999, the Company had cash and cash equivalents of $12.4
million and working capital of $12.0 million on a consolidated basis.
In November 1999, Soundbreak.com entered into a lease commitment for
approximately 13,500 square feet of new office space. To meet its expected
increased needs, Soundbreak.com incurred expenses to upgrade its computer and
telephone systems in conjunction with the move as well as expenses incurred
specific to the move. This lease commitment provides for minimum monthly lease
payments of $36,000 for a period of 60 months.
In May 1998, the Company entered into a lease commitment for office space to
increase and replace its existing office space. This lease commitment provides
for minimum monthly lease payments of $12,000 for a period of 60 months as
compared to the Company's previous monthly lease payment of approximately
$3,000. The Company moved into the new, larger office space in December 1998.
The Company has no other material commitments for capital expenditures at the
present time.
Warrants issued by the Company in private placements completed in March 1998,
and April 1998 contain call and redemption provisions should the closing bid of
the Company's common stock exceed $10.00, and $12.50, respectively for twenty or
more consecutive trading days. The exercise price for the common stock
underlying the warrants is $7.50, and $9.25 per share, respectively. On October
20, 1999, the Company issued a warrant call to all holders of a series of Common
Stock Purchase Warrants, which expires November 19, 1999. If all affected
warrants are exercised, 1,148,872 shares would be issued in exchange for $10
million.
In July 1999, the Company exercised its redemption rights with respect to the
Common Stock Purchase Warrants purchased in a private placement of securities
completed in December 1997 and received $2 million in such exercise.
In August 1999, CombiMatrix completed a $4 million private equity financing of
which the Company contributed $2.3 million.
In September 1999, the Company purchased 10,000 shares of Series A Convertible
Preferred Stock of Soundbreak.com for $1 million, which represented 100% of the
outstanding preferred stock at September 30, 1999. On October 7, 1999
Soundbreak.com completed a private placement equity financing raising $6.5
million through the sale of 65,505 shares of Series B Convertible Preferred
Stock. The Company invested $1 million in this private placement. At September
30, 1999, Soundbreak.com had received $3.3 million in advance of the closing,
which is included as a liability in the Company's consolidated balance sheet.
The Company has no committed lines of credit or other committed funding.
However, the Company anticipates that existing working capital reserves will
provide sufficient funds for its operating expenses for at least the next twelve
months in the absence of making any major new investments. The Company intends
to seek additional financing to fund new or existing businesses. There can be no
assurance that
15
the Company will not encounter unforeseen difficulties that may deplete its
capital resource 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 will be available on favorable
terms, if at all. Such financing transactions may be dilutive to existing
investors.
YEAR 2000 ISSUES
Many of the world's computer systems (including those in non-information
technology equipment and systems) currently record years in a two-digit format,
rather than four, to define the applicable year. Computer systems that recognize
a date using "00" as the year 1900 rather than the year 2000 may produce errors
or system failures. In addition, the fact that the Year 2000 is a non-standard
leap year may create difficulties for some systems. A few systems may also be
affected by certain dates in the month of September 1999. Because the activities
of many businesses are affected by dates or are date-related, the inability to
use such date information correctly could lead to business disruption in the
U.S. and internationally (the "Year 2000" Issue). The potential costs and
uncertainties associated with the Year 2000 Issue will depend on a number of
factors, including software, hardware and the nature of the industry in which a
company operates. Additionally, companies must coordinate with other entities
with which they electronically interact.
The following discussion contains forward-looking statements within the meaning
of the "safe harbor" provisions of the Private Securities Litigation Reform Act
of 1995, including the following: estimated timetables for implementation and
completion of the phases of the Company's Year 2000 plan; projections of
expenditures regarding the Year 2000 plan; statements regarding the possible
effects of the Year 2000 Issue on the Company's business and that of third
parties with whom the Company does business; and possible contingency plans of
the Company. The statements contained in this section are also "Year 2000
Readiness Disclosures" as provided for in the Year 2000 Information and
Readiness Disclosure Act.
The Company has been reviewing its systems and programs to identify those
subject to the Year 2000 Issue, and is in the process of upgrading and/or
modifying its affected internal systems to achieve compliance. In addition, the
Company is working with its major external suppliers to assess their compliance
and remediation efforts and the Company's exposure to them. The Company is in
various stages of reviewing, testing and making software repairs and upgrades to
those systems and programs that it believes will be affected by the Year 2000
Issue. Because the Year 2000 project is an ongoing company-wide endeavor, the
state of the Company's and its majority-owned subsidiaries', MerkWerks,
CombiMatrix, Soundview Technologies, and Soundbreak.com ("Subsidiaries"),
progress changes daily. With the exception of the financial figures, which are
provided as of September 30, 1999, the information contained in this disclosure
is made as of NOVEMBER 12, 1999 which is the latest practical date for providing
such information. The Company is monitoring and assisting minority-owned
affiliates, Signature-mail.com and Greenwich Information Technologies, in
addressing the Year 2000 Issue as it applies to their businesses. The Company's
other minority-owned affiliate, Whitewing Labs, is a publicly traded company.
Information pertaining to the Year 2000 Issue as it applies to Whitewing Labs is
available in its reports filed with the SEC.
Although the Company relies on computer technology to conduct business and has
the potential to be affected by the Year 2000 Issue, most of the Company's
internal systems are not affected. However, due to the interdependent nature of
computer systems, the Company and its Subsidiaries may be adversely impacted by
the Year 2000 Issue depending on whether it, its Subsidiaries, or other entities
not affiliated with the Company address this issue successfully.
The Company's Year 2000 compliance plan is comprised of four phases: Assessment,
Remediation, Testing and Implementation.
16
The Assessment phase includes preparing an inventory of systems that the Company
anticipates will be affected by the Year 2000 Issue as well as creating a
strategy to evaluate and address potential problems. The Company has completed
its final Assessment of its important internal systems.
In the Remediation phase, software corrections, upgrades, software patches, and
bug fixes will be made to remedy identified Year 2000 deficiencies in software,
hardware, operating systems, network devices and phone systems. The Remediation
phase also includes sending questionnaires requesting Year 2000 compliance
assurances to vendors of such systems. The Company's important internal systems
have completed in the Remediation phase. However, the Company's Subsidiaries
have just begun the Remediation phase. The Company expects that the
Subsidiaries' Remediation phase of their important components will be completed
by December 31, 1999. Certain systems that are insignificant to the Company's
and its Subsidiaries' operations may not be made Year 2000 compliant by
December 31, 1999, but the Company does not anticipate that this would have a
materially adverse impact on the Company's or Subsidiaries' business, results of
operations or financial condition.
Testing will be conducted on both existing and new systems which may be affected
by the Year 2000 Issue as well as systems that have been fixed, upgraded or
otherwise altered in the Remediation phase during 1999.
Other than third-party long distance telephone and data lines and public utility
suppliers of electrical power, the Company's business operations are not heavily
dependent on non-information technology ("non-IT") components, systems or
third-party vendors. Most of these non-IT systems cannot easily be tested for
Year 2000 compliance; however, the Company does not believe that the failure of
any of its non-IT systems, other than electrical or long distance data and voice
lines, would have a materially adverse effect upon its business, results of
operation or financial condition.
The Company has completed its Year 2000 contingency plan. However, alternatives
to use of normal systems or supplies of electricity or long distance voice and
data lines are limited. A broader failure of third-party systems, in particular,
externally managed data lines, communication systems, telephone or electrical
systems would materially and adversely affect the Company's ability to carry on
business operations in any regular fashion. Although the Company has
investigated alternative solutions, it is not clear that an adequate contingency
plan can be developed for such failures.
Based upon current information, the Company estimates that the total cost of
implementing its Year 2000 plan, including costs associated with the
redeployment of existing personnel who have and will spend significant
administrative time and effort in addressing the Year 2000 Issue, will not be
material. Direct Year 2000 costs incurred to date by the Company have not been
material. However, Year 2000 cost estimates may change as the Year 2000
approaches, during which time the Company's and its Subsidiaries' Year 2000
readiness efforts are expected to become more defined. Costs incurred related to
making the Company's and its Subsidiaries' systems Year 2000 compliant are being
expensed in the period in which they are incurred.
The Company's expectations about future costs and the timely completion of its
Year 2000 modifications are subject to uncertainties that could cause actual
results to differ materially from what has been discussed above. Factors that
could influence the amount of future costs and the effective timing of
remediation efforts include, the success of the Company in identifying computer
programs and non-information technology systems that are subject to the Year
2000 Issue, the nature and amount of programming and testing required to upgrade
or replace each of the affected programs and systems, the nature and amount of
testing, the rate and magnitude of related labor and consulting costs, and the
success of the Company's external counterparties and suppliers in addressing the
Year 2000 Issue.
17
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not a party to derivative financial instruments at or during the
nine month period ended September 30, 1999. The Company's financial instruments,
other than instruments carried on the equity basis, are its fixed notes payable
of $1.3 million, which are discussed in Note 4 to the September 30, 1999
consolidated financial statements.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
SALES OF UNREGISTERED SECURITIES
In June 1999, the Company completed a series of related transactions, which
resulted in the acquisition by the Company of additional equity ownership in
MerkWerks in exchange for issuances of 60,107 shares of the Company's common
stock. A total of 15 transactions were completed. The Company's sales of these
shares of its common stock were exempt from registration, as private placements,
under Section 4(2) of the Securities Act of 1933, as amended, and Rule 506 under
Regulation D promulgated thereunder.
WARRANT CALL
In June 1999, the Company exercised its redemption rights with respect to all
outstanding Common Stock Purchase Warrants purchased in a private placement of
securities completed in December 1997. All were exercised prior to the
redemption time (July 28, 1999). The Company received approximately $2.1 million
in cash as proceeds from the exercise of Common Stock Purchase Warrants for
420,264 shares of Common Stock. The shares issued were privately placed to the
holders of the Common Stock Purchase Warrants in accordance with Section 4
(2) of the Securities Act of 1933, as amended, and Rule 506 under Regulation D.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
10.11 Lease Agreement dated November 11, 1999 between Soundbreak.com
Incorporated and 8730 Sunset Towers and related Guaranty.
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None.
18
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/ PETER FRANK
- -----------------
Peter Frank
CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL OFFICER)
Date: November 15, 1999
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