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, 1997 Commission File No. 0-26068
ACACIA RESEARCH CORPORATION
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(Exact name of registrant as specified in its charter)
California 95-4405754
- ---------------------------------------- ------------------
(State or other jurisdiction (I.R.S. Employer
of incorporation organization) Identification No.)
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: (626) 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 September 30, 1997, 2,863,872 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.......................................................... 14
2
ITEM 1. FINANCIAL STATEMENTS
ACACIA RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEET
September 30, 1997 and December 31, 1996
(Unaudited) (Restated)
September 30, 1997 December 31, 1996
------------------ -----------------
ASSETS
Current Assets
Cash and cash equivalents $ 1,306,959 $ 292,701
Distributions receivable 0 400,000
Notes receivable 776,147 820,500
Receivables from affiliates 0 52,592
Other receivables 212,599 295,546
Prepaid expenses 49,811 165,390
Deferred income taxes 0 272
------------ -----------
Total current assets 2,345,516 2,027,001
Equipment, furniture, and fixtures 223,281 202,049
Other assets
Investments in unconsolidated subsidiaries, at equity 1,244,149 2,451,684
Partnership interests, at equity 553,941 625,405
Patent 3,940,936 53,637
Goodwill, net of accumulated amortization 262,403 0
Deferred income taxes 127,660 0
Organization costs, net of accumulated amortization 22,456 3,169
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Total assets $ 8,720,342 $ 5,362,945
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 110,672 $ 90,599
Legal settlement payable 435,000 0
Notes payable 911,588 552,500
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Total current liabilities 1,457,260 643,099
Deferred income taxes 150,996 193,503
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Total liabilities 1,608,256 836,602
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Commitments and contingencies
Minority interest 167,797 380,329
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Stockholders' equity
Common stock, no par value, 10,000,000 shares authorized,
2,863,872 shares in 1997 and 1,970,672 shares in 1996
issued and outstanding 8,758,337 4,081,993
Warrants to purchase common stock 83,732 0
(Accumulated deficit) retained earnings (1,897,780) 152,773
Less stock subscription receivable 0 (88,752)
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Total stockholders' equity 6,944,289 4,146,014
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Total liabilities and stockholders' equity $ 8,720,342 $ 5,362,945
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SEE ACCOMPANYING NOTES.
3
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
For the Nine Months and the Three Months Ended September 30, 1997
and 1996
(Unaudited)
Nine Months Ended Three Months Ended
(Restated) (Restated)
Sept. 30, 1997 Sept. 30, 1996 Sept. 30, 1997 Sept. 30, 1996
------------------------------ -------------------------------
Revenues
Gains on sales of securities, net $ 50,000 $ 870,307 $ 0 $ 148,190
Unrealized gain attributable to issuance
of common stock by affiliate 0 1,066,408 0 0
Equity in losses of investees (160,034) (313,290) (16,722) (61,626)
Management fees 389,437 1,430,207 48,890 8,595
Interest income 37,516 89,580 17,184 31,627
------------------------------ -------------------------------
Net revenues 316,919 3,143,212 49,352 126,786
------------------------------ -------------------------------
Marketing, general, and administrative expenses 1,488,195 1,152,913 572,350 293,631
Research and development expenses 552,726 228,935 243,229 95,362
Amortization of patent and goodwill 199,213 1,171 194,877 776
Legal settlement expense 460,000 0 0 0
------------------------------ -------------------------------
Total expenses 2,700,134 1,383,019 1,010,456 389,769
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(Loss) income before minority interest and
taxes (2,383,215) 1,760,193 (961,104) (262,983)
Minority interest in net loss of consolidated
subsidiary (165,866) (83,906) (52,240) (32,904)
------------------------------ -------------------------------
(Loss) income before provision for
income taxes (2,217,349) 1,844,099 (908,864) (230,079)
(Benefit) provision for income taxes (166,796) 831,750 971 (61,495)
------------------------------ -------------------------------
Net (loss) income ($2,050,533) $ 1,012,349 ($909,835) ($168,584)
------------------------------ -------------------------------
------------------------------ -------------------------------
(Loss) earnings per common share
Primary ($0.89) $0.38 ($0.32) ($0.09)
Fully diluted ($0.89) $0.38 ($0.32) ($0.09)
Weighted average number of common and common
equivalent shares for computation of (loss)
income per share
Primary 2,312,438 2,670,234 2,800,486 1,924,574
Fully diluted 2,312,438 2,670,234 2,800,486 1,924,574
SEE ACCOMPANYING NOTES.
4
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1997 and 1996
(Unaudited)
Nine Months Ended Nine Months Ended
Sept. 30, 1997 Sept. 30, 1996
----------------- -----------------
Cash flows from operating activities:
Net (loss) income $(2,050,553) $ 1,012,349
Adjustments to reconcile net income to net
cash (used in) provided by operating activities:
Legal settlement expense 435,000 0
Depreciation and amortization 252,169 21,554
Deferred income taxes (169,895) 497,109
Gain on sales of securities 0 (870,307)
Equity in losses of affiliates 160,034 313,290
Minority interest in net loss (165,866) (83,906)
Unrealized gain attributable to issuance of common stock by affiliate 0 (1,066,408)
Issuance of warrants for services 83,732 0
Changes in assets and liabilities:
(Increase) decrease in accounts receivable, prepaid expenses,
and other assets 179,239 (483,432)
Increase (decrease) in accounts payable, accrued expenses, and
income taxes payable 20,073 46,252
----------------- -----------------
Net cash (used in) operating activities (1,256,067) (613,499)
Cash flows from investing activities:
Contribution of capital by minority stockholders 534,937 0
Purchase of equity investments 0 (3,000,000)
Payment received on advances to affiliates 52,592 414,247
Advances to affiliates 0 (371,833)
Distributions from partnerships 400,000 0
Proceeds from sales of securities 0 1,624,051
Payments for other receivables 0 (50,554)
Payments received on notes receivable 44,353 446,250
Payment for purchase of Soundview Technologies, net of cash acquired (131,604) 0
Capitalized expenditures (58,822) (130,859)
----------------- -----------------
Net cash used in (provided by) investing activities 841,456 (1,068,698)
Cash flows from financing activities:
Payments on notes payable (540,912) 0
Proceeds from note payable 0 800,000
Proceeds from exercise of stock options 429,750 0
Proceeds from issuance of common stock 0 646,470
Issuance costs 0 (34,650)
Collection of subcription receivable 88,752 0
Proceeds from sale of common stock 1,451,279 222,750
----------------- -----------------
Net cash provided by financing activities 1,428,869 1,634,570
----------------- -----------------
Increase in cash and cash equivalents 1,014,258 (47,627)
Cash and cash equivalents, beginning 292,701 788,611
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Cash and cash equivalents, ending $ 1,306,959 $ 740,984
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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. ("Whitewing Labs"), MerkWerks
Corporation ("MerkWerks"), CombiMatrix Corporation ("CombiMatrix"),
Soundview Technologies Incorporated ("Soundview Technologies"), and
Greenwich Information Technologies LLC (Greenwich Information
Technologies"). 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.
On July 6, 1997, the Company purchased from two individuals, a total of
2,625,000 shares (the "Soundview Shares") of common stock of Soundview
Technologies at total purchase price of $4,225,000, consisting of a total
of 400,000 shares of common stock of the Company, $500,000 in cash, and the
issuance of non-recourse promissory notes to each of the two individuals in
the aggregate principal amount of $900,000. (See Note 5) The Soundview
Shares represent 35% of the outstanding capital stock of Soundview
Technologies. As a result of the transaction, the Company now owns 51.4%
of the outstanding common stock of Soundview Technologies. The acquisition
was accounted for under the purchase method. Goodwill, representing the
excess of purchase price over the fair value of the net assets acquired,
amounted to $274,818 and is amortized over the estimated remaining life
of five years. The patent acquired is amortized over its estimated
remaining useful life of approximately five years. The results of
operations of Soundview Technologies have been consolidated with those of
the Company since the date of the acquisition (see Note 2).
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, 1997 and the consolidated results of operations and cash
flows for the three and nine months ended September 30, 1997 and September
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 nine
months ended September 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 nine months ended
September 30, 1997 and the three months ended September 30, 1997 and
1996 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 three and nine months ended September 30, 1997 and 1996, assuming
the application of SFAS 128, are as follows:
For Three Months Ended
----------------------
September 30, 1997 September 30, 1996
------------------ ------------------
Basic (loss) earnings per share ($0.32) ($0.09)
Diluted (loss) earnings per share ($0.32) ($0.09)
For Nine Months Ended
----------------------
September 30, 1997 September 30, 1996
------------------ ------------------
Basic (loss) earnings per share ($0.89) $0.54
Diluted (loss) earnings per share ($0.89) $0.38
6
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
STOCK BASED COMPENSATION. The Company has adopted the disclosure only
provisions of Financial Accounting Standard (FAS) No. 123, "Accounting for
Stock-Based Compensation" for its employee stock option plans. Accordingly,
the Company continues to account for stock-based compensation under APB
No. 25, "Accounting for Stock Issued to Employees" and related
interpretations. Stock options and warrants granted to non-employees
use the fair value based method prescribed by FAS 123 to measure
compensation expenses.
RESTATEMENT OF 1996 AND 1997 FINANCIAL INFORMATION. As a result of the
Soundview Technologies acquisition (see Note 1), the Company's
consolidated balance sheet as of December 31, 1996 and its operating
results for the three and nine months ended September 30, 1996 and for
the six months ended June 30, 1997, have been restated to account for
the Company's investment in Soundview Technologies on the equity method
to reflect the Company's 16.4% ownership interest from Soundview
Technologies' inception (March 1996) through June 30, 1997. Previously,
the Company accounted for its investment in Soundview Technologies
during this period on the cost method.
RECLASSIFICATIONS - Certain amounts in the 1996 financial
statements have been reclassified to conform to the current period's
presentation.
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 until 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. Subsequent to the balance sheet date,
options to purchase 29,500 shares of the Company's common stock were
exercised by the Hodges, which resulted in total profits to the Hodges
from such exercise of $172,844.
4. NOTES RECEIVABLE
As of September 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 September 30, 1997 and
December 31, 1996:
1997 1996
---------- ----------
Notes receivable, secured $1,335,397 $1,379,750
Notes receivable, unsecured - 21,000
--------- ---------
1,335,397 1,379,750
Less: allowance for losses (559,250) (559,250)
--------- ---------
Total notes receivable $ 776,147 $ 820,500
---------- ----------
---------- ----------
7
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. NOTES RECEIVABLE (continued)
Interest receivable on these notes amounted to approximately $102,300, and
$85,500, as of September 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. Such actions may result in
write-offs exceeding the previous write-down of $559,250.
5. NOTES PAYABLE
As of September 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 ("GIT Note") and two notes payable to two
individuals in connection with the purchase of additional equity in
Soundview Technologies ("Soundview Notes"). The GIT Note had a principal
balance of $275,000 as of September 30, 1997 and bears interest at 6.5% per
annum. The GIT Note calls for monthly principal payments of $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 the GIT Note.
The Soundview Notes were issued on July 6, 1997 with an aggregate principal
amount of $900,000, bearing interest at 6.07% per annum. The Notes are due
and payable on November 15, 1997 and are secured by a pledge of 843,750
shares (in the aggregate) of Soundview Technologies common stock pursuant
to two Pledge Agreements between the Company on the one hand, and each of
the two individuals on the other, dated July 6, 1997. As of September 30,
1997, the principal balance of the Soundview Notes was $636,588.
6. 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
GENERAL
The following discussion is based primarily on the consolidated balance sheet of
the Company as of September 30, 1997, and on the operations of the Company for
the period from January 1, 1997 to September 30, 1997. The following discussion
compares the activities for the nine and three months ended September 30, 1997
to the activities for the nine and three months ended September 30, 1996,
respectively. This information should be read in conjunction with the
accompanying consolidated financial statements and notes thereto.
On July 6, 1997, the Company purchased from two individuals, a total of
2,625,000 shares (the "Soundview Shares") of common stock, $0.001 par value per
share, of Soundview Technologies pursuant to a Common Stock Purchase Agreement
among the Company and the two individuals dated July 6, 1997. The Soundview
Shares represented 35% of the outstanding capital stock of Soundview
Technologies. As a result of the transaction, the Company owns 51.4% of the
outstanding common stock of Soundview Technologies. The purchase price for the
Soundview Shares consisted of a total of 400,000 shares of common stock of the
Company, $500,000 in cash and the issuance of non-recourse promissory notes to
each of the two individuals in the aggregate principal amount of $900,000 (the
"Notes"). A portion of the proceeds of a private offering of equity securities
(common stock and warrants) of the Company completed in June 1997 was used to
fund the cash component of the transaction. The Notes are due and payable on
November 15, 1997 and bear interest at the rate of 6.07% per annum. The Notes
are secured by a pledge of 843,750 shares (in the aggregate) of Soundview
Technologies common stock pursuant to two Pledge Agreements between the Company
on the one hand, and each of the two individuals on the other, dated July 6,
1997 (the "Pledge Agreements"). Pursuant to the Common Stock Purchase
Agreement, the Company and the two individuals entered into an Amended and
Restated Stockholders' Agreement to provide for elections of directors and other
matters relating to Soundview Technologies. In addition, as part of the
transaction, Soundview Technologies entered into five-year employment agreements
with each of the two individuals. Also, the Company agreed to promptly file and
maintain a registration statement with the Securities and Exchange Commission
covering the proposed resale of shares of the Company's common stock by the two
individuals. This registration was filed and declared effective by the
Securities and Exchange Commission in September 1997.
As a result of the Company's increased ownership position in Soundview
Technologies, the Company has restated financial statements for the year
ended December 31, 1996, the three and nine month periods ended September 30,
1996, and the six month period ended June 30, 1997 to report the Company's
16.4% ownership interest in Soundview Technologies during these periods on
the equity method. Subsequent to the Company attaining a majority position in
Soundview Technologies, beginning with the three month period ended September
30, 1997, the Company's financial statements include the accounts of
Soundview Technologies on a consolidated basis.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
REVENUES
The Company reported net revenues of $316,919 in the nine months ended
September 30, 1997 compared to revenues of $3,143,212 for the nine months
ended September 30, 1996.
GAINS ON SALES OF SECURITIES, NET. Net gains on sales of securities
decreased from $870,307 for the nine months ended September 30, 1996 to
$50,000 for the nine months ended September 30, 1997. Such gain for the
nine months ended September 30, 1997 is comprised of gains on sales of
interests in CombiMatrix. The year-earlier gain of $870,307 represents a
gain primarily from sales of shares of CombiMatrix, and to a lesser
extent of MerkWerks and Soundview Technologies. During the nine 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 to 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.
9
RESULTS OF OPERATIONS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996 (continued)
REVENUES (CONTINUED)
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 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 may have future gains of this
nature with respect to other subsidiaries if they engage in an initial
public offering.
EQUITY IN LOSSES OF INVESTEES. The Company reported equity in losses of
investees of $160,034 for the nine months ended September 30, 1997,
compared to losses of $313,290 for the year-earlier period. Such losses
for the period ended September 30, 1997 are comprised of a gain of
$119,756 on the Company's capital investments as a general partner in
two private investment partnerships offset by a loss of $167,508 for
the Company's investment in Whitewing Labs, a loss of $44,319 for the
Company's investment in Soundview Technologies, and a loss of $67,963 for
the Company's investment in Greenwich Information Technologies, as
determined by the equity method of accounting.
MANAGEMENT FEES. For the nine months ended September 30, 1997, management
fee income, which includes a performance fee income, was $389,437 as
compared to management fee income of $1,430,207 generated during the first
nine months in 1996.
Of the total of $1,430,207 in management fees earned for the nine month
period ended September 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 $30,000 of management fee income recorded
during the nine months ended September 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 nine 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
nine month period ended September 30, 1996.
The increase in management fee income derived from the four investment
funds managed by the Company during the nine months ended September 30,
1997 of $389,437, as compared to approximately $30,000 for the period
ended September 30, 1996, was primarily a result of performance fees
realized from one of the investment funds and, to some extent, an
increase of assets under management.
10
RESULTS OF OPERATIONS (CONTINUED)
NINE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996 (continued)
EXPENSES
Total expenses increased from $1,383,019 for the nine months ended
September 30, 1996 to $2,700,134 for the nine months ended September 30,
1997. The increase is due primarily to costs associated with the
Company's efforts in further developing its business enterprises and
exploring new opportunities for the Company and its affiliates,
amortization expenses incurred in connection with the Company's purchase
of an additional 35% interest in Soundview Technologies and, to some
extent, costs incurred in the litigation and settlement of a lawsuit, as
well as expenses incurred by CombiMatrix for a full nine month period in
1997 compared to approximately six months of the same period in 1996.
The Company also incurred a one-time charge of $460,000 relating to a legal
settlement. 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.
PROVISION FOR INCOME TAXES
For the nine month period ended September 30, 1997, the Company recorded a
benefit of $166,766 as compared to a tax expense of $831,750 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
nine months ended September 30, 1997 of $167,767.
THREE MONTHS ENDED SEPTEMBER 30, 1997 AND SEPTEMBER 30, 1996
REVENUES
The Company reported net revenues of $49,352 in the three months ended
September 30, 1997 compared to net revenues of $126,786 for the three
months ended September 30, 1996.
GAINS ON SALES OF SECURITIES, NET. Net gains on sales of securities
decreased from $148,190 for the three months ended September 30, 1996 to $0
for the comparable period ended September 30, 1997.
EQUITY IN LOSSES OF INVESTEES. The Company reported equity in losses
of investees of $16,722 for the three months ended September 30, 1997,
compared to losses of $61,626 for the year-earlier period. Such losses
for the three months ended September 30, 1997 are comprised of a gain
of $22,764 on the Company's capital investments as a general partner in
two private investment partnerships offset by a loss of $25,074 for the
Company's investment in Whitewing Labs, and a loss of $14,412 for the
Company's investment in Greenwich Information Technologies, as determined
by the equity method of accounting.
MANAGEMENT FEES. For the three months ended September 30, 1997, management
fee income, which includes performance fee income, was $48,890 as
compared to management fee income of $8,595 generated during the three
months ended September 30, 1996. The increase in management fee income
during the three months ended September 30, 1997 was primarily a result
of an increase of assets under management in the four investment funds
managed by the Company.
EXPENSES
Total expenses increased from $389,769 for the three months ended September
30, 1996 to $1,010,456 for the three months ended September 30, 1997. This
increase is primarily due to the Company's purchase of a majority interest
in Soundview Technologies whereby the Company is incurring amortization
expenses of approximately $200,000 each quarter for a period of
approximately five years relating to the intangible assets acquired. In
addition, effective July 6, 1997, the Company's financial statements
include the accounts of Soundview Technologies on a consolidated
basis. During the three month period ended September 30, 1997, Soundview
Technologies incurred expenses of approximately $120,000. The Company's
reported expenses during the period ended September 30, 1997 also include
an increase of approximately $100,000 attributable to its consolidated
subsidiary, CombiMatrix, due to increased activity in the development of
CombiMatrix's proprietary technologies.
The balance of the increase in expenses is primarily due to expenses
incurred in the use of consultants in which a portion of the compensation
has been paid in equity securities (stock options and/or warrants) and the
Company is required to value such securities as such securities vest.
Using option valuation techniques, the Company incurred an expense of
approximately $84,000. (See Note 2 in the Notes to Consolidated Financial
Statement.)
PROVISION FOR INCOME TAXES
For the three month period ended September 30, 1997, the Company recorded
a tax expense of $971 as compared to a benefit of $61,495 for the same
period in fiscal 1996.
INFLATION
Inflation has not had a significant impact on the Company.
11
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 1997, the Company had cash and cash equivalents of
$1,306,958, working capital of $888,256, and a ratio of current assets to
current liabilities of 1.6 to 1 on a consolidated basis. The Company has no
material commitments for capital expenditures at the present time.
During the period ended September 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 interest at 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
September 30, 1997, the Company has paid $250,000 towards the note and has a
principal balance owing of $275,000.
The Company also issued two non-recourse promissory notes to two individuals
in the aggregate principal amount of $900,000 in connection with the
Company's purchase of a majority control of Soundview Technologies. These
notes are due and payable on November 15, 1997 and bear interest at the rate
of 6.07% per annum. The notes are secured by a pledge of 843,750 shares (in
the aggregate) of Soundview Technologies common stock pursuant to two Pledge
Agreements between the Company on the one hand, and each of the two
individuals on the other, dated July 6, 1997. As of September 30, 1997, the
Company has paid $263,412 towards these notes.
The Company anticipates that revenues from operations and working capital
reserves will not provide sufficient funds for its operating expenses in the
next twelve months. The Company will seek additional financing to fund
operating expenses, debt repayment, and new business opportunities. In
addition, there can be no 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 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 three and nine months ended September 30,
1997 and 1996, assuming the application of SFAS 128, are as follows:
For Three Months Ended
----------------------
September 30, 1997 September 30, 1996
------------------ ------------------
Basic (loss) earnings per share ($0.32) ($0.09)
Diluted (loss) earnings per share ($0.32) ($0.09)
For Nine Months Ended
----------------------
September 30, 1997 September 30, 1996
------------------ ------------------
Basic (loss) earnings per share ($0.89) $0.54
Diluted (loss) earnings per share ($0.89) $0.38
12
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.
ITEM 2. CHANGES IN SECURITIES
SALES OF UNREGISTERED SECURITIES
In connection with the Company's purchase of an additional 35% interest in
Soundview Technologies, the Company issued 400,000 shares of the Company's
common stock to two individuals who were accredited investors. The issuance of
these shares was exempt from registration, as a private placement, under Section
4(2) of the Securities Act of 1933.
Additionally, on July 2, 1997, the Company granted options to purchase 24,000
shares and 4,000 shares, respectively, of the Company's common stock (in each
case subject to vesting), at exercise prices of $7.00 per share, in
connection with services provided to the Company by two consultants each of
whom were accredited investors. 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
None.
ITEM 5. OTHER INFORMATION
None.
13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
Current report event date July 6, 1997, as Amended by Form 8-K/A on
September 19, 1997
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: November 13, 1997
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