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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 June 30, 1996 Commission File No. 0-26068
ACACIA RESEARCH CORPORATION
A California Corporation
IRS Employer Identification No. 95-4405754
12 S. Raymond Avenue, Pasadena, California 91105
Telephone (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
-------- --------.
At June 30, 1996, 1,915,172 shares of common stock of the Registrant were
outstanding.
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Finocchiaro & Company
Certified Public Accountant
150 East Colorado Blvd., Suite 201
Pasadena, California 91105
Telephone (818) 449-6300 Telecopier (818) 449-6299
To the Stockholders and the Board of Directors
Acacia Research Corporation
The accompanying consolidated balance sheets of Acacia Research Corporation as
of June 30, 1996 and December 31, 1995, and the related consolidated statements
of operations for the six and three months ended June 30, 1996 and 1995, and
cash flows for the six months ended June 30, 1996 and 1995 were not audited by
us, and we do not express an opinion on them.
/s/ Finocchiaro & Co.
Pasadena, California
August 12, 1996
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ACACIA RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
June 30, 1996 and December 31, 1995
(Unaudited)
June 30, 1996 December 31, 1995
---------------- -----------------
ASSETS
Current Assets
Cash and cash equivalents $ 935,243 $ 788,611
Notes receivable 1,399,750 1,846,000
Receivables from affiliates 149,950 176,885
Other receivables 158,606 74,994
Prepaid expenses 17,926 12,948
Deferred tax benefit 31,670 15,820
--------------- ----------------
Total current assets 2,693,145 2,915,258
Equipment, furniture, and fixtures 92,276 63,569
Other assets
Equity in unconsolidated subsidiaries, at equity 919,512 0
Investment in unconsolidated subsidiary, at cost 1,233,000 0
Partnership interests, at equity 1,104,023 821,023
Deferred tax benefit 898,511 659,721
Organization costs, net of accumulated amortization
of $2,613 and $2,045 3,073 3,641
--------------- ----------------
Total Assets $ 6,943,540 $ 4,463,212
=============== ================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 84,279 $ 129,066
Deficit interest in unconsolidated subsidiary, at equity 0 114,247
Income taxes payable 414,692 110,471
--------------- ----------------
Total current liabilities 498,971 353,784
Deferred tax liability 294,949 4,195
--------------- ----------------
Total other liabilities 793,920 357,979
Commitments and contingencies
Minority interest 0 10,796
Stockholders' equity
Common stock, no par value, 10,000,000 shares authorized,
1,915,172 shares in 1996 and 1,837,672 shares in 1995
issued and outstanding, 25,000 shares unissued in 1995 4,346,381 3,934,877
Retained earnings 1,947,241 367,812
Less stock subscription receivable (144,002) (208,252)
--------------- ----------------
Total stockholders' equity 6,149,620 4,094,437
--------------- ----------------
Total Liabilities and Stockholders' Equity $ 6,943,540 $ 4,463,212
=============== ================
The accompanying notes are an integral part of these financial statements.
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ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Six Months Ended and For the Three Months Ended June 30, 1996 and 1995
(Unaudited)
Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995
---------------- ----------------
Revenues
Gains on sales of securities, net $ 722,117 $ 626,000
Unrealized gain attributable to issuance of common stock by affiliate 1,066,408 0
Equity in earnings of investments (50,431) 200,000
Management fees 1,421,612 250
Interest income 53,628 15,560
------------ -----------
Total revenues 3,213,334 841,810
Marketing, general, and administrative 899,790 505,052
------------ -----------
Income before minority interest and taxes 2,313,544 336,758
Minority interest in net loss of consolidated subsidiary (10,796) 0
------------ -----------
Income before provision for income taxes 2,324,340 336,758
Provision for income taxes 744,988 800
------------ -----------
Net Income $ 1,579,352 $ 335,958
Earnings per common share
Primary $0.59 $0.14
Fully diluted $0.59 $0.14
Weighted average shares outstanding
Primary 2,664,376 2,457,050
Fully diluted 2,664,376 2,457,050
Three Months Ended Three Months Ended
June 30, 1996 June 30, 1995
------------------ ------------------
Revenues
Gains on sales of securities, net $ 169,751 $ 375,000
Unrealized gain attributable to issuance of common stock by affiliate 0 0
Equity in earnings of investments (223,633) 200,000
Management fees 1,415,387 250
Interest income 25,712 6,967
------------ ------------
Total revenues 1,387,217 582,217
Marketing, general, and administrative 474,009 244,505
------------ ------------
Income before minority interest and taxes 913,208 337,712
Minority interest in net loss of consolidated subsidiary (4,911) 0
------------ ------------
Income before provision for income taxes 918,119 337,712
Provision for income taxes 222,266 0
------------ ------------
Net Income $ 695,853 $ 337,712
============ ============
Earnings per common share
Primary $0.26 $0.14
Fully diluted $0.26 $0.14
Weighted average shares outstanding
Primary 2,705,092 2,457,050
Fully diluted 2,705,092 2,457,050
The accompanying notes are an integral part of these financial statements.
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ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Six Months Ended June 30, 1996 and 1995
(Unaudited)
Six Months Ended Six Months Ended
June 30, 1996 June 30, 1995
---------------- ----------------
Cash flows from operating activities:
Net income $ 1,579,352 $ 335,958
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 9,755 3,723
Deferred taxes 318,296 0
Undistributed (earnings) loss of affiliate 50,431 (200,000)
Gain on sales of securities (722,117) (626,000)
Minority interest in net loss (10,796) 0
Unrealized gain attributable to issuance of
common stock by affiliate (1,066,408) 0
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable,
prepaid expenses, and other assets (88,590) 9,977
Increase (decrease) in accounts payable,
accrued expenses, payroll taxes payable,
and other liabilities 255,800 (28,386)
---------------- ----------------
Net cash provided (used) by operating activities 325,723 (504,728)
Cash flows from investing activities:
Purchase of equity investments (1,700,000) (250,000)
Proceeds from sales of securities 889,117 626,000
Payment received on advances to affiliate 414,247 200,000
Advances to affiliate (387,312) (10,368)
Notes receivable 0 (375,000)
Payments received on notes receivable 446,250 0
Capitalized expenditures (37,893) 0
---------------- ----------------
Net cash used by investing activities (375,591) 190,632
Cash flows from financing activities:
Compensation from stock options 0 4,500
Issuance costs 0 (56,991)
Proceeds from sale of common stock 196,500 400,290
---------------- ----------------
Net cash provided by financing activities 196,500 347,799
---------------- ----------------
Increase (decrease) in cash and cash equivalents 146,632 33,703
Cash and cash equivalents, beginning 788,611 361,021
---------------- ----------------
Cash And Cash Equivalents, Ending $ 935,243 $ 394,724
================ ================
The accompanying notes are an integral part of these financial statements.
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ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Nature of business- Acacia Research Corporation (the "Company") was
incorporated on January 25, 1993 under the laws of the state of
California. The Company provides traditional capital management
services, and also provides management services to and makes direct
investments in new emerging corporations. The Company has significant
economic interests in four 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, and Soundview Technologies Incorporated. In addition, as
a registered investment advisor, the Company is a general partner in
two private investment partnerships, Acacia Capital Partners, L.P. and
Acacia Growth Fund, L.P., and is an investment advisor to two offshore
investment corporations, Acacia USA Fund and Acacia USA Growth Fund.
The Company is diversified, and each business segment is operated
independently.
Principles of consolidation - The accompanying consolidated financial
statements for the six months ended June 30, 1996 include the accounts
of the Company and its 69% owned subsidiary, MerkWerks Corporation, a
business developed by the Company. All intercompany transactions and
balances have been eliminated in consolidation. Investments in
companies in which the Company maintains an ownership interest of 20%
to 50%, or exercises significant influence over operating and
financial policies, are accounted for under the equity method. The
equity method is also used to account for the investment in companies
in which the Company's controlling interest in considered to be
temporary (See Note 6). The cost method is used where the Company
maintains ownership of greater than 5% and less than 20%, and does
not exercise significant influence over the investment.
Cash and cash equivalents - The Company considers all highly liquid
investments with original maturities of ninety days or less when
purchased to be cash equivalents. The Company invests excess cash in
money market accounts.
Equipment, furniture, and fixtures - Equipment, furniture, and
fixtures are recorded at cost. Major additions and improvements are
capitalized. When equipment, furniture, and fixtures are sold or
otherwise disposed of, the asset account and related depreciation
account are relieved, and any gain or loss is included in income for
the period of sale or disposal. Depreciation is computed on a
straight-line basis.
Organization costs - Organization costs are recorded at cost and are
amortized on a straight-line basis over a period of five years.
Earnings per common share - Earnings per common share has been
computed based upon the weighted average number of shares actually
outstanding plus the shares that would be outstanding assuming
conversion of common stock options and warrants, which are considered
to be common stock equivalents. Common stock equivalents include
shares issuable upon the assumed exercise of stock options using the
treasury stock method. The weighted average number of shares
outstanding also includes all common stock, stock options and warrants
issued by the Company. These shares have been included pursuant to
SEC rules as if they had been outstanding for all periods presented.
Restatement of prior periods - Financial statements for the period
ended June 30, 1995 have been restated to reflect the change in
accounting for the Company's investment in Whitewing Labs to the
equity method. The Company's ownership interest was reduced, through
sales of the Company's holdings in the investment and additional stock
issued by Whitewing Labs during 1995, from 100% of common equity to
38% while maintaining an overall voting interest of 55% as of December
31, 1995. Whitewing Labs completed a public offering of common stock
in February of 1996 further reducing the Company's control
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ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
of its affiliate. As a result of these transactions, the Company has
restated the prior periods financial statements to reflect the
accounting for its investment in Whitewing Labs on the equity method
in accordance with generally accepted accounting principles. This
restatement increased the earnings per common share for the three
months ended June 30, 1995 from $0.02 per share to $0.14 per share,
and earnings for the six months ended June 30, 1995 increased from
$0.05 to $0.14 per share.
Presentation- For financial statement reporting purposes 1995 items
have been reported in a manner consistent with the 1996 presentation.
2. EQUIPMENT, FURNITURE, AND FIXTURES
Equipment, furniture, and fixtures consist of the following at June 30,
1996 and December 31, 1995:
1996 1995
------------- --------------
Computer equipment $ 63,746 $ 45,730
Furniture and fixtures 53,958 34,260
------------ -------------
117,704 79,990
Accumulated depreciation (25,428) (16,421)
------------ --------------
Total Equipment, Furniture, and Fixtures $ 92,276 $ 63,569
============ ============
Depreciation expense for the six months ended June 30, 1996 and 1995
was $9,186 and $3,397, respectively.
3. COMMITMENTS AND CONTINGENCIES
Lease obligations - As of June 30, 1996, the equipment, furniture, and
fixtures account included assets in the amount of $8,661 financed by
capital lease agreements which will expire in 1996 and 1999.
Accumulated depreciation includes $2,196 of amortization related to
assets financed by capital lease agreements. The amortization of
assets under capital lease agreements have been included in
depreciation expense.
The Company leases office facilities under operating leases through
December 1998, with options to renew the leases at a rate determined
by the Consumer Price Index at the time of renewal. The Company's
current minimum monthly lease payment is $2,168. Rent expense for the
six months ended June 30, 1996 and 1995 were approximately $16,254 and
$13,123, respectively.
At June 30, 1996, the future minimum lease payments for capital and
operating leases equalled the following:
CAPITAL OPERATING
----------- ---------
1996 $ 1,350 $ 13,008
1997 2,358 26,016
1998 2,358 26,016
1999 1,965 -
---------- ----------
Totals 8,031 65,040
Less interest portion (1,966) -
---------- ----------
Minimum lease payments $ 6,065 $ 65,040
========== ==========
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ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. STOCK OPTIONS AND WARRANTS
During 1993, the Company adopted a stock option plan (the "1993 Plan")
which authorizes the granting of both options intended to qualify as
"incentive stock options" under Section 422A of the Internal Revenue
Code of 1986 ("Incentive Stock Options") and stock options which are
not intended to so qualify ("Nonstatutory Options") to officers,
directors, employees, consultants, and others expected to provide
significant services to the Company or its subsidiaries. The 1993
Plan, which covers an aggregate of 1,000,000 shares of common stock,
was approved by the Board of Directors in October, 1993. The Company
has reserved 1,000,000 shares of common stock in connection with the
1993 Plan. Under the terms of the 1993 Plan, options may be exercised
upon terms approved by the Board of Directors of the Company, and
expire at a maximum of ten years from the date of grant. Incentive
Stock Options are granted at prices equal to or greater than fair
market value at the date of grant. Nonstatutory Stock Options are
generally granted at prices equal to or greater than 85% of the fair
market value at the date of grant. At June 30, 1996 all shares
available for grant under the 1993 Plan had been granted, and at
December 31, 1995, there were 1,775 shares reserved for future grants
of common stock options.
In March of 1996, the Board of Directors adopted the 1996 Executive
Stock Bonus Plan (the "Bonus Plan"), which was approved by a vote of
the shareholders in May of 1996. The Bonus Plan grants one-time
options to purchase an aggregate of 360,000 shares of common stock of
the Company to directors, officers and other key employees performing
services for the Company and its affiliates. Under each option
agreement of the Bonus Plan, 25% of the options become exercisable on
each of the first four anniversaries of the grant date. The options
granted under the Bonus Plan expire in March 2001.
During April of 1996, the Board of Directors adopted the Acacia 1996
Stock Option Plan (the "1996 Plan"), which was approved by the
shareholders in May of 1996. The Company has reserved 250,000 shares
of common stock for issuance under the 1996 Plan. The 1996 Plan
provides for the grant of Nonqualified Stock Options and Incentive
Stock Options to key employees including officers of the Company and
its Subsidiaries and certain other individuals. The 1996 Plan also
provides for the automatic grant of Nonqualified Stock Options to
non-employee directors upon initial election to the Board of Directors
and thereafter on an annual basis under the Non-Employee Director
Program. These options are generally exercisable six months to one
year after grant, and expire five years after grant for directors or
up to ten years after grant for key employees. At June 30, 1996,
options to purchase 20,000 shares of common stock had been issued
under the 1996 Plan with 230,000 shares reserved for further grants of
options.
The following is a summary of common stock options:
WEIGHTED
SHARES PRICES AVERAGE
-----------------------------------
1996
Balance at January 1, 1996 890,725 $1.50-$5.25 $2.66
Options granted 411,775 $4.90-$10.13 $6.24
Options exercised (52,500) $1.50-$5.25 $2.52
Options cancelled (10,000) $5.00 $5.00
-------- ----------- ----
Balance at June 30, 1996 1,240,000 $1.50-$10.13 $3.83
========= =========== ====
Exercisable at June 30, 1996 768,000 $1.50-$5.50 $2.44
======== ========== ====
As of June 30, 1996 and December 31, 1995 the Company had 100,000
warrants outstanding. The warrants are exercisable at $2.00 per
share, and expire on January 1, 2000.
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ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. NOTES RECEIVABLE
As of June 30, 1996, the Company holds promissory notes from
individuals generally related to the sale of common stock owned by the
Company in Whitewing Labs, and MerkWerks Corporation, in the amount of
$1,378,750, and unsecured notes in the amount of $21,000. These notes
generally bear interest at 5% per annum and are generally secured by
the common stock sold and personally guaranteed by the holder. The
value of the collateral is approximately $1,242,000 for the secured
notes as of June 30, 1996. Accrued interest receivable on notes
receivable amounts to approximately $47,700 as of June 30, 1996 and
approximately $13,200 as of December 31, 1995.
The following is a summary of notes receivable at June 30, 1996:
Notes receivable due from shareholder, secured $ 460,000
Notes receivable, secured 918,750
Notes receivable, unsecured 21,000
------------
Total Notes Receivable $ 1,399,750
===========
6. INVESTMENTS, AT EQUITY
Investments carried at equity, and the Company's ownership in each
consist of the following at June 30, 1996 and December 31, 1995:
1996 1995
---- ----
Whitewing Labs 19% 38%
Acacia Capital Partners, L.P. 51% 60%
CombiMatrix Corporation 55% 0%
Acacia Growth Fund, L.P. 61% 0%
The investment in Whitewing Labs is reported using the equity method.
The Company maintains an ownership percentage of 19.4% as of June 30,
1996, and officers of the Company hold significant positions on the
Board of Directors of Whitewing Labs. The investment in Whitewing
Labs is carried on the financial statements at value of $881,676 on
June 30, 1996 and at $0 as of December 31, 1995. As of June 30, 1996
Whitewing Labs had total assets of approximately $4,850,000, and net
shareholder's equity of approximately $4,540,000. Whitewing Labs' net
sales for the six months ended June 30, 1996 were $1,923,442 compared
to $1,220,930 for the previous six months ended June 30, 1995. The
market value of the Company's investment in Whitewing Labs is
approximately $2,200,000 based upon the closing market price of $4.06
per share as of June 28, 1996. The Company reported an unrealized
gain on the issuance of common stock by Whitewing Labs during the
quarter ended March 31, 1996. The gain included in these financial
statements is based upon the increase in the value of the Company's
ownership interest in the net equity of Whitewing Labs as a result of
the public offering in February of 1996. Common stock was offered by
Whitewing Labs at $5 per share which is in excess of the Company's
cost per share which resulted in a increase in the book value of the
Company's interest in Whitewing Labs despite the reduction in
ownership to 19.4%.
The Company records its investment in Acacia Capital Partners, L.P. at
equity as its control is temporary, and in accordance with
authoritative pronouncements regarding investments in partnerships.
The Company's capital account with respect to Acacia Capital Partners,
L.P. is $617,771 at June 30, 1996 and was $821,023 on December 31,
1995, and the total net assets of the partnership are $1,211,949 and
$1,365,742 as of June 30, 1996 and December 31, 1995, respectively.
The decrease in the Company's
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ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INVESTMENTS, AT EQUITY (continued)
investment in this partnership is attributable primarily to the
transfer of $300,000 of its investment to the Acacia Growth Fund, L.P.
during the quarter ended June 30, 1996. Acacia Capital Partners, L.P.
is a California limited partnership that invests primarily in mid-cap
and large-cap U.S. equity securities.
In March of 1996 the Company acquired a majority interest in
CombiMatrix Corporation. The Company reports its ownership interest in
CombiMatrix Corporation under the equity method as its control is
considered to be temporary based upon planned offerings of common stock
by CombiMatrix Corporation. The Company carries its investment in
CombiMatrix Corporation at a cost of $37,836 as of June 30, 1996, and
has also made advances to the unconsolidated subsidiary of $119,995
through the balance sheet date. As of June 30, 1996, CombiMatrix
Corporation had total assets of $669,821, and net shareholders' equity
of $520,705. There have been no revenues earned by CombiMatrix
Corporation in its development stage.
On April 1, 1996 the Company acquired an equity interest in the Acacia
Growth Fund, L.P. As of June 30, 1996, the Company has invested a
total of $500,000 in this partnership. The Company's capital account
as of June 30, 1996 amounted to $486,252. The total net assets of the
partnership are $801,464 as of June 30, 1996. Acacia Growth Fund,
L.P. is a California limited partnership that invests primarily in
mid-cap and large-cap U.S. equity securities.
7. INVESTMENTS, AT COST
In late March of 1996 the Company entered into an agreement with
Soundview Technologies Incorporated. Under the terms of the agreement
the Company would receive up to a 32% interest in the common stock of
Soundview Technologies in return for the Company's raising capital and
offering management assistance to Soundview Technologies. During the
quarter ended June 30, 1996 the Company received a management fee in
the form of common stock in the amount of $1,400,000 for these
services. As of June 30, 1996 the Company carries its investment of
16.4% of Soundview Technologies at $1,233,000.
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ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. PROVISION FOR INCOME TAXES
Provision for income taxes consists of the following:
FEDERAL STATE TOTAL
----------------------------------------------
JUNE 30, 1996
Current $ 331,649 $ 95,043 $ 426,692
Deferred 247,156 71,140 318,296
JUNE 30, 1995
Current - 800 800
Deferred - - -
The tax effects of temporary differences and carryforwards that give
rise to significant portions of deferred assets and liabilities
consist of the following.:
DEFERRED TAX ASSETS: 1996 1995
--------------------------------
Nonstatutory stock options $ 898,512 $ 619,258
Tax basis of investments at equity - 40,463
State income tax deductions 31,670 15,820
----------- -----------
Gross deferred tax assets $ 930,182 $ 675,541
=========== ===========
DEFERRED TAX LIABILITIES:
Excess basis in investments at equity $ 681,177 -
Equipment, furniture & fixtures 4,196 4,195
---------- -----------
Deferred tax liabilities $ 685,373 $ 4,195
========== ===========
The Company believes that all deferred tax assets as of June 30, 1996
and December 31, 1995 are more likely than not to be realizable.
9. COMMON STOCK SUBSCRIPTIONS
As of June 30, 1996, the Company has a $50,000 unsecured promissory
note receivable from an individual. The note was issued in connection
with the purchase of 25,000 shares of common stock. The note bears
interest at 4% per annum. Other receivables include approximately
$4,900 of interest due on this note. The Company expects to receive
full payment from the individual, and no adjustment has been made to
the carrying value of this note.
The Company also has promissory notes in the amount of $94,002 in
connection with the purchase of 16,167 shares of common stock. These
notes bear interest at 5% per annum. Interest receivable in the
amount of $3,000 has been accrued on these notes.
10. RECEIVABLES FROM AFFILIATES
Receivables from affiliates consist of a promissory note with a
balance of $114,247 at December 31, 1995 bearing interest at 8% per
annum. At December 31, 1995 other receivables included approximately
$43,000 of interest receivable on this note. All outstanding amounts
due on this note were received during the period ended March 31, 1996.
Also included in receivables from affiliates at June 30, 1996 and
December 31, 1995 are advances for the benefit of CombiMatrix
Corporation, and Whitewing Labs. Advances to these companies totalled
$149,950 and $62,638, at June 30, 1996 and December 31, 1995,
respectively.
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ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for the periods ended June 30, 1996 and 1995 for interest
was $960 and $113. The Company paid cash for income taxes in the
amount of $123,000 in 1996.
12. CONCENTRATION OF CREDIT RISK
Notes receivable at June 30, 1996 subject the Company to concentration
of credit risk due to notes in the amount of $1,318,750 being due from
two individuals. The risk is limited as these notes are collateralized
by common stock with a value of approximately $1,154,000 and personally
guaranteed by the holders as of June 30, 1996.
The Company maintains its cash balances with financial and brokerage
institutions located in Southern California. As of June 30, 1996 the
Company maintained balances of $646,287 in excess of insured amounts
with these institutions.
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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, 1996, and on the operations of the Company for
the period from January 1, 1996 to June 30, 1996. The following discussion
compares the activities for the six months ended June 30, 1996 to the
activities for the six months ended June 30, 1995.
This information should be read in conjunction with the accompanying
consolidated financial statements and notes thereto. These financial
statements include all adjustments which are, in the opinion of management,
necessary to reflect the fair statement of the results for the interim periods
presented, and all such adjustments are of a normal recurring nature.
RESULTS OF OPERATIONS - SIX MONTHS ENDED JUNE 30, 1996 AND 1995
REVENUES
The Company reported quarterly revenues of $3,213,334 in the six
months ended June 30, 1996, an increase of $2,371,524, over revenues
of $841,810 for the six months ended June 30, 1995.
Gains on Sales of Securities, Net. Net gains on sales of securities
increased from $626,000 for the six months ended June 30, 1995 to
$722,117 for the six months ended June 30, 1996, which represents an
increase of $96,117 or 15.4%. Such gain for the six months ended June
30, 1996 is comprised primarily of gains on sales of shares of
CombiMatrix Corporation, and, to a lesser extent, of gains on sales of
shares of MerkWerks Corporation. The year earlier gain of $626,000
represented a gain from sales of shares of Whitewing Labs. The
Company is prohibited from selling shares of Whitewing Labs without
the consent of Cohig & Associates, Inc., until February 9, 1997,
pursuant to its agreement with Cohig & Associates, Inc. relating to
Whitewing Labs' initial public offering. Furthermore, the timing and
extent of any sales of securities are subject to substantial
fluctuation from quarter to quarter.
Unrealized Gain Attributable on Issuance of Common Stock by Affiliate.
In February 1996, shares of Whitewing Labs 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 19.4%.
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 when they become publicly offered entities.
Equity in Earnings of Investments. The Company reported losses
attributable to equity in earnings of investments of $50,431 for the
period ended June 30, 1996, compared to revenues of $200,000 for the
year-earlier period. Such losses for the period ended June 30, 1996
are comprised of a gain of $85,532 on the Company's capital investment
as a partner of Acacia Capital Partners, L.P. offset by a loss of the
Company's share of net losses of CombiMatrix Corporation of $49,730, a
loss of $13,748 on the Company's capital investment as a partner of
Acacia Growth Fund, L.P., and a loss of $70,785, as determined by the
equity method of accounting, for the Company's investment in Whitewing
Labs.
Management Fees. For the six months ended June 30, 1996, management
fee income increased to $1,421,612 over management fee income of $250
generated during the first six months in 1995. Of the total of
$1,421,612 in management fees earned for the six month period,
approximately $22,000 was derived from three of the four investment
funds managed by the Company. Two of
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these funds, Acacia Capital Partners, L.P. and Acacia USA Fund, have
been managed by the Company during the full six month period in 1996.
The third fund, Acacia Growth Fund, L.P. was not formed until April
1996. Acacia USA Growth Fund, the fourth fund, was formed in June
1996 and, therefore, has not generated management fees during the six
month period ended June 30, 1996. The balance of $1,400,000 of
management fee revenue recorded during the six months ended June 30,
1996 was paid to the Company by Soundview Technologies Incorporated
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. At June 30, 1996, the Company retained 1,233,000 of
these shares.
EXPENSES
Marketing, general and administrative expenses increased from $505,052
for the six months ended June 30, 1995 to $899,790 for the six months
ended June 30, 1996. This increase is primarily due to increased
costs of operating a public company including additional accounting
legal, printing, and other professional costs which were not incurred
in 1995. However, marketing, general and administrative expenses as a
percent of total revenue decreased from 60% in the period ended June
30, 1995 to 28% in the period ended June 30, 1996.
PROVISION FOR INCOME TAXES
For the six month period ended June 30, 1996, the Company recorded an
income tax provision of $744,988, as compared to an income tax
provision of $800 for the same period in fiscal 1995. This increase
is primarily due to the deferred tax liability associated with the
unrealized gain on the issuance of Whitewing Labs stock and amounts
currently payable that are associated with the management fee earned
by the Company for its management and consulting services to Soundview
Technologies
INFLATION
Inflation has not had a significant impact on the Company.
LIQUIDITY AND CAPITAL RESOURCES
As of June 30, 1996, the Company had cash and cash equivalents of
$935,243, working capital of $2,194,174, and a ratio of current assets
to current liabilities of 5.4 to 1. As of June 30, 1996, the Company
had no indebtedness.
For the first six months of fiscal 1996, the Company had $325,723 of
positive cash flow from operations as compared to a negative cash flow
of $504,728 from operations in the related period in fiscal 1995. The
Company anticipates that the collection of notes receivable will
provide a portion of cash flows in the third quarter in addition to
anticipated revenue generated from the Company's other activities.
The Company anticipates that revenues from operations will continue to
provide necessary funds for its operating expenses. The Company
anticipates that cash generated from operations, together with working
capital reserves, will be adequate to fund recurring capital
expenditures during fiscal 1996 and for the foreseeable future.
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PART II - OTHER INFORMATION
ITEM I. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGE IN SECURITIES
None.
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 14, 1996. The business at
the meeting was the election of directors, ratification of the Company's 1996
Stock Option Plan, and the ratification of the Company's 1996 Executive Bonus
Plan. All of the proposals were adopted.
The number of votes for and withheld for each director were as follows:
Name For Withheld
- ---- --- --------
R. Bruce Stewart 1,856,800 2,000
Brooke P. Anderson 1,856,800 2,000
Fred A. de Boom 1,856,800 2,000
Paul R. Ryan 1,856,800 2,000
Edward W. Frykman 1,856,800 2,000
The number of votes for, against, and abstaining for the Company's 1996 Stock
Option Plan were as follows:
For Against Abstaining
--- ------- ----------
1,285,290 42,050 100
The number of votes for, against, and abstaining for the Company's 1996
Executive Bonus Plan were as follows:
For Against Abstaining
--- ------- ----------
1,179,873 42,450 105,017
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ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
Exhibit 3.2 Amended and Restated Bylaws
(b) Reports on Form 8-K
None.
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
President and Treasurer (Principle Financial Officer)
Date: August 13, 1996
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