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 March 31, 1999 Commission File No. 0-26068
ACACIA RESEARCH CORPORATION
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(Exact name of registrant as specified in its charter)
California 95-4405754
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(State or other jurisdiction (I.R.S. Employer
of incorporation organization) Identification No.)
55 South Lake Avenue, Pasadena CA 91101
- ---------------------------------------- ------------------
(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 May 12, 1999 10,310,815 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 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...............16
PART II. OTHER INFORMATION
Item 1. Legal Proceedings........................................................16
Item 2. Changes in Securities....................................................16
Item 3. Defaults Upon Senior Securities..........................................16
Item 4. Submission of Matters to a Vote of Security Holders......................16
Item 5. Other Information........................................................16
Item 6. Exhibits and Reports on Form 8-K.........................................16
SIGNATURE....................................................................................16
PART I. FINANCIAL INFORMATION
ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS
ACACIA RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
(Unaudited)
March 31, 1999 December 31, 1998
--------------- ------------------
ASSETS
Current assets
Cash and cash equivalents .................................... $ 6,553,000 $ 7,508,000
Management fees and other receivables ........................ 28,000 239,000
Receivables from affiliates .................................. 29,000 27,000
Prepaid expenses ............................................. 118,000 96,000
Income tax receivable ........................................ -- 110,000
------------- -------------
Total current assets ................................ 6,728,000 7,980,000
Equipment, furniture, and fixtures, net 585,000 530,000
Notes receivable, net .......................................... 29,000 38,000
Investment in affiliates, at equity ............................ 3,047,000 3,481,000
Partnership interests, at equity ............................... 1,912,000 1,832,000
Patents, net of accumulated amortization ....................... 4,343,000 4,610,000
Goodwill, net of accumulated amortization ...................... 1,057,000 1,158,000
Other assets, net of accumulated amortization .................. 128,000 140,000
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$ 17,829,000 $ 19,769,000
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable and accrued expenses ....................... $ 267,000 $ 366,000
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Total current liabilities .......................... 267,000 366,000
Other liabilities ............................................. 240,000 240,000
Notes payable, net of discount................................. 1,241,000 1,222,000
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Total liabilities .................................. 1,748,000 1,828,000
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Stockholders' equity
Common stock, no par value; 30,000,000 shares authorized;
10,310,815 shares in 1999 and 10,190,815 shares in 1998
issued and outstanding .................................... 26,881,000 26,737,000
Warrants to purchase common stock ........................... 100,000 100,000
Accumulated deficit ......................................... (10,900,000) (8,896,000)
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Total stockholders' equity ......................... 16,081,000 17,941,000
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$ 17,829,000 $ 19,769,000
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
3
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three Months Ended
--------------------------------
March 31, 1999 March 31, 1998
--------------------------------
Revenues:
Capital management fee income $ 61,000 $ 31,000
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Total Revenues 61,000 31,000
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Operating Expenses:
Research and development expenses 469,000 368,000
Marketing, general and administrative expenses 832,000 485,000
Amortization of patents and goodwill 390,000 383,000
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Total Operating Expenses 1,691,000 1,236,000
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Operating Loss (1,630,000) (1,205,000)
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Other income (expense):
Interest income 72,000 16,000
Interest expense (41,000) (1,000)
Equity in income of partnerships 44,000 54,000
Equity in losses of affiliates (433,000) (38,000)
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Total other income (expense) (358,000) 31,000
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Loss before income taxes and minority interests (1,988,000) (1,174,000)
Provision for income taxes (16,000) --
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Loss before minority interests (2,004,000) (1,174,000)
Minority interests -- 177,000
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Net loss $ (2,004,000) $ (997,000)
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Loss per common share
Basic ($0.20) ($0.15)
Diluted ($0.20) ($0.15)
Weighted average number of common and potential
common shares outstanding used in computation
of loss per share
Basic 10,209,926 6,673,402
Diluted 10,209,926 6,673,402
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
CONSOLIDATED FINANCIAL STATEMENTS.
4
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31, 1999 March 31, 1998
-------------- --------------
(Unaudited)
Cash flows from operating activities:
Net loss $ (2,004,000) $ (997,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 439,000 404,000
Amortization of discount on notes payable 20,000 --
Equity in (income) loss of affiliates and partnerships 389,000 (16,000)
Minority interest in net loss -- (177,000)
Compensation expense relating to stock options/warrants 24,000 16,000
Provision for write-down of notes and interest receivable 9,000 --
Changes in assets and liabilities, net of effects of acquisitions:
Management fees and other receivables, prepaid expenses,
patents and other assets 278,000 143,000
Accounts payable, accrued expenses, accrued compensation,
and other liabilities (99,000) (137,000)
------------ ------------
Net cash used in operating activities (944,000) (764,000)
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Cash flows from investing activities:
Advances to affiliates (2,000) (27,000)
Proceeds from note receivable secured by common stock -- 101,000
Purchase of partnership interest (37,000) --
Capitalized expenditures (92,000) (12,000)
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Net cash (used in) provided by investing activities (131,000) 62,000
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Cash flows from financing activities:
Proceeds from notes payable -- 1,400,000
Proceeds from exercise of stock options and warrants 120,000 471,000
Capital contributions from minority
shareholders of subsidiaries -- 139,000
Proceeds from sale of common stock, net of issuance costs -- 3,431,000
------------ ------------
Net cash provided by financing activities 120,000 5,441,000
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(Decrease) increase in cash and cash equivalents (955,000) 4,739,000
Cash and cash equivalents, beginning 7,508,000 1,367,000
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Cash and cash equivalents, ending $ 6,553,000 $ 6,106,000
------------ ------------
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Supplemental schedule of non-cash investing and financing activities:
Issuance of common stock for additional equity in consolidated
subsidiaries and affiliates $ -- $ 3,035,000
Discount on notes payable from issuance of subsidiary's warrants $ -- $ 238,000
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
is a diversified company that makes direct investments in and provides
management services to emerging businesses 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 March 31, 1999, the Company had significant economic interests in seven
enterprises and takes an active role in each enterprise's growth and
advancement. These enterprises are: CombiMatrix Corporation ("CombiMatrix"),
Greenwich Information Technologies LLC ("Greenwich Information
Technologies"), MerkWerks Corporation ("MerkWerks"), Signature-mail.com llc
("Signature-mail.com"), Soundview Technologies Incorporated ("Soundview
Technologies"), Whitewing Labs, Inc. ("Whitewing Labs"), and Acacia Capital
Management. 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.
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
on March 31, 1999 and the consolidated results of operations and cash
flows for the three months ended March 31, 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.
RECLASSIFICATIONS - Certain reclassifications of prior year's amounts have
been made to conform to the 1999 presentation.
3. NOTES RECEIVABLE
As of March 31, 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 March 31, 1999 and December 31, 1998, two
promissory notes secured by the common stock of Whitewing Labs were valued
at the market value of the collateral held by the Company.
Notes receivable consist of the following at March 31, 1999 and December
31, 1998:
March 31, 1999 December 31, 1998
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Notes Receivable ................. $319,000 $319,000
Less: Reserve for Write-down ..... (290,000) (281,000)
-------------- -----------------
$ 29,000 $ 38,000
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Interest receivable on these notes amounted to approximately $10,000, as
of March 31, 1999 and December 31, 1998, and is included in management
fees and other receivables in the consolidated balance sheets.
6
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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. Principal shall be due and
payable in full on the third anniversary of each Subordinated Note.
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. If,
prior to the maturity date of the Subordinated Notes, CombiMatrix has an
offering of its common stock or senior securities convertible into its
common stock that has gross proceeds exceeding $500,000 that does not
involve certain exempt transactions, the holders of the Subordinated
Notes shall be offered the opportunity to acquire shares of CombiMatrix
common stock in exchange for the then outstanding principal amount of the
Subordinated Notes. Holders will be entitled to only one opportunity to
exchange Subordinated Notes into CombiMatrix common stock.
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 or about 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 two reportable segments: Investment Activities, including
investment advisory services and investments in development stage
companies, and CombiMatrix.
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 engages in a highly specialized and focused research effort in
combinatorial chemistry. It seeks to streamline the drug discovery process
and has demonstrated the preliminary feasibility of its proprietary
technologies.
The Company evaluates segment performance based on fees earned, and cost
versus earnings potential of future completed products or services.
Material intercompany transactions and transfers
7
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 three months ended March 31, 1999 and 1998.
1999 Investment
Activities CombiMatrix Other Total
- -----------------------------------------------------------------------------------------------
Management fee income $61,000 -- -- $61,000
Amortization of patents and goodwill 387,000 -- 3,000 390,000
Interest income 63,000 9,000 -- 72,000
Interest expense -- 41,000 -- 41,000
Equity in losses of affiliates 433,000 -- -- 433,000
Equity in income of partnerships 44,000 -- -- 44,000
Loss before minority interests and
income taxes 1,372,000 482,000 86,000 1,940,000
Segment assets 17,079,000 567,000 183,000 17,829,000
Investments in affiliates, at equity 3,047,000 -- -- 3,047,000
Partnerships interests, at equity 1,912,000 -- -- 1,912,000
Capital expenditures 70,000 22,000 -- 92,000
1998 Investment
Activities CombiMatrix Other Total
- ----------------------------------------------------------------------------------------------
Management fee income $31,000 -- -- $31,000
Amortization of patents and goodwill 379,000 -- 4,000 383,000
Interest income 13,000 3,000 -- 16,000
Interest expense -- 1,000 -- 1,000
Equity in losses of affiliates 38,000 -- -- 38,000
Equity in income of partnerships 54,000 -- -- 54,000
Loss before minority interests and
income taxes 730,000 304,000 140,000 1,174,000
Segment assets 14 529,000 1,411,000 165,000 16,105,000
Investments in affiliates, at equity 1,552,000 -- -- 1,552,000
Partnerships interests, at equity 643,000 -- -- 643,000
Capital expenditures -- 12,000 -- 12,000
7. SUBSEQUENT EVENTS
In April 1999, Whitewing Labs began trading on the NASD OTC Bulletin Board
system under the ticker symbol WWLI as a result of not meeting its net
tangible asset requirement for continued listing in addition to a bid price
deficiency. The stock had previously traded on the Nasdaq Small Cap
system. Whitewing Labs remains a reporting company under Securities and
Exchange Commission ("SEC") rules and will continue to file quarterly,
annual and other reports with the SEC.
8
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, 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.
GENERAL
The following discussion is based primarily on the consolidated balance sheet
of the Company as of March 31, 1999, and on the operations of the Company for
the period from January 1, 1999 to March 31, 1999. The discussion compares the
activities for the three months ended March 31, 1999 to the activities for the
three months ended March 31, 1998.
This information should be read in conjunction with the accompanying
consolidated financial statements and notes thereto. In April 1998, the Company
acquired a 25% interest in a new affiliate company, Signature-mail.com (formerly
Internet Software LLC). The Company accounts for this investment using the
equity method.
RESULTS OF OPERATIONS
REVENUES
CAPITAL MANAGEMENT FEES. During the three months ended March 31, 1999,
capital management fee income, which includes performance fee income,
was $61,000 as compared to capital management fee income of $31,000
generated during the three months ended March 31, 1998. The increase in
capital management fee income derived from the four investment funds
managed by the Company during the three months ended March 31, 1999 was
primarily a result of the Company collecting a performance fee on the
twelve-month anniversary of a partner in one of the domestic investment
funds. Performance fees for the four private investment funds managed
by the Company are generally paid to the Company at the end of the
Company's (and the four funds') fiscal year. However, in regard to the
Company's two domestic private investment funds, performance fees may
not be paid until a partner has been invested in one of these funds for
a period of twelve months. Therefore, a performance fee may be paid to
the Company on the twelve-month anniversary of a partner's investment
in a domestic private investment fund and thereafter at the end of the
fiscal year. The Company also earns quarterly management fees that are
based on a percentage of the amount of money invested in the funds
under management.
9
RESULTS OF OPERATIONS (continued)
REVENUES (continued)
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.
OPERATING EXPENSES
Total operating expenses increased to $1,691,000 during the three months ended
March 31, 1999 from $1,236,000 during the three months ended March 31, 1998
primarily due to 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, an increase in the
Company's head count and higher wages, and expenses relating to the expansion of
CombiMatrix's research and development efforts.
RESEARCH AND DEVELOPMENT EXPENSES. The Company incurred research and
development expenses of $469,000 for the three months ended March 31,
1999, compared to expenses of $368,000 during the three months ended
March 31, 1998. Such expenses for the three months ended March 31, 1999
are comprised of expenses incurred by CombiMatrix of $418,000, expenses
incurred by MerkWerks of $41,000, and expenses incurred by Soundview
Technologies of $10,000. Research and development expenses for the
three months ended March 31, 1998 are comprised of expenses incurred by
CombiMatrix of $296,000, expenses incurred by MerkWerks of $42,000, and
expenses incurred by Soundview Technologies of $30,000. During the
three months ended March 31, 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 March 31, 1999, marketing, general and administrative expenses
increased to $832,000 as compared to $485,000 for the three months
ended March 31, 1998. During the three months ended March 31, 1999, the
Company's 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, an increase in business development
expenses as the Company explores new business opportunities, 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 three months ended March 31,
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
market value price of the collateral held by the Company. Soundview
Technologies' marketing, general and administrative expenses were
$31,000 in the three months ended March 31, 1999 and $61,000 for
the three months ended March 31, 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 $24,000 in the three months ended
March 31, 1999 and $16,000 in the three months ended March 31, 1998.
10
RESULTS OF OPERATIONS (continued)
OPERATING EXPENSES (continued)
AMORTIZATION OF PATENTS AND GOODWILL. The Company reported amortization
expenses relating to patents and goodwill of $390,000 during the three
months ended March 31, 1999 as compared to $383,000 during the three
months ended March 31, 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, the Company is incurring
amortization expenses each quarter for periods ranging from three to
five years relating to the intangible assets acquired. Amortization
expenses at or above the three months ended March 31, 1999 level is
expected to continue for the foreseeable future.
OTHER INCOME (EXPENSE)
The Company reported other expense of $358,000 for the three months
ended March 31, 1999 compared to other income of $31,000 for the three months
ended March 31, 1998.
INTEREST INCOME. During the three months ended March 31, 1999, interest
income was $72,000 as compared to interest income during the three
months ended March 31, 1998, of $16,000. The increase is due to the
Company having higher cash balances in the three months ended March 31,
1999 as compared to the three months ended March 31, 1998.
INTEREST EXPENSE. Interest expense in the three months ended March
31, 1999 was $41,000 as compared to $1,000 during the three months
ended March 31, 1998. The expense incurred during the three months
ended March 31, 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 on these notes is
payable each year on January 15 during the term of each note.
EQUITY IN INCOME OF PARTNERSHIPS. The Company reported equity in income
of partnerships of $44,000 for the three months ended March 31, 1999,
compared to $54,000 for the three months ended March 31, 1998.
EQUITY IN LOSSES OF AFFILIATES. The Company reported equity in losses
of affiliates of $433,000 in the three months ended March 31, 1999,
compared to equity in losses of affiliates of $38,000 in the three
months ended March 31, 1998. Losses during the three months ended March
31, 1999 are comprised of a loss of $37,000 for the Company's
investment in Whitewing Labs, a loss of $77,000 for the Company's
investment in Greenwich Information Technologies, and a loss of
$319,000 for the Company's investment in Signature-mail.com, as
determined by the equity method of accounting. Losses for the three
months ended March 31, 1998 are comprised of a loss of $4,000 for the
Company's investment in Whitewing Labs, and a loss of $34,000 for the
Company's investment in Greenwich Information Technologies, as
determined by the equity method of accounting. No earnings or losses
are attributable to Signature-mail.com during the three months ended
March 31, 1998 as the Company made this investment in April 1998.
11
MINORITY INTERESTS
There were no minority interests in losses of consolidated subsidiaries
in the three months ended March 31, 1999 as compared to $177,000 in the three
months ended March 31, 1998. As of December 31, 1998, all minority interest
balances were depleted.
INFLATION
Inflation has not had a significant impact on the Company.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 1999, the Company had cash and cash equivalents of
$6,553,000 and working capital of $6,461,000 on a consolidated basis. In May
1998, the Company entered into a lease commitment for new 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. To meet the Company's increased needs, the Company incurred
expenses specific to the move during the three months ended March 31, 1999.
The Company has no other material commitments for capital expenditures at the
present time.
Warrants issued by the Company in private placements completed in
November 1997, March 1998, and April 1998 contain call and redemption
provisions should the closing bid of the Company's Common Stock exceed $7.50,
$10.00, and $12.50, respectively for twenty or more consecutive trading days.
The exercise price for the Common Stock underlying the warrants are $5.75,
$7.50, and $9.25 per share, respectively. In the event the requirements to
call the warrants are satisfied, the Company may call such warrants and the
Company expects that most, if not all, holders to exercise such warrants in
response. There can be no assurance that the closing bid price of the
Company's Common Stock will exceed all such thresholds or that, if so, the
Company will decide to call the warrants.
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 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.
12
YEAR 2000 ISSUES (continued)
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 Corporation, CombiMatrix Corporation, and Soundview
Technologies Corporation ("Subsidiaries"), progress changes daily. With the
exception of the financial figures, which are provided as of March 31, 1999,
the information contained in this disclosure is made as of May 14, 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, particularly with regard to the Company's investment
advisory services, 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.
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,
however, final Assessment of its Subsidiaries' important internal systems is
expected to be completed by June 30, 1999.
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
majority of the Company's internal systems have completed the Remediation
phase. However, the Company's Subsidiaries either have not yet begun or have
just begun the Remediation phase. The Company expects that the Subsidiaries'
Remediation of their important components will be completed by July 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.
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YEAR 2000 ISSUES (continued)
The Company's investment advisory services is dependent upon a
complex worldwide network of information technology systems that contain date
fields, including data feeds to the Company's internal systems as well as
stock market links. The Company's ability to minimize the effects of the Year
2000 Issue is highly dependent upon the efforts of third parties. The failure
of organizations such as securities exchanges, securities clearing
organizations, banks, vendors, clients or governmental regulatory agencies to
resolve their own processing issues with respect to the Year 2000 Issue in a
timely manner could have a materially adverse effect on the Company's
business, results of operations, or financial condition, threatening the
Company's ability to manage client assets, communicate information to
clients, management of fund portfolios on a day-to-day basis, and comply with
federal securities laws as well as compromise record-keeping and other
compliance systems. The Securities Industry Association recently conducted
Beta tests that were run in "future time" and employed test scripts to check
functionality. These tests resulted in problems completing a minimal amount
of mock trades due to Year 2000 changes. An industry-wide simulation is
underway, which should provide the Company with more information to assess
potential risks in this area.
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. The Company is conducting an assessment of
Company managed or leased non-IT components including building, mechanical, air
conditioning, electrical, security and conveyance systems for Year 2000
compliance. 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 is beginning to develop a contingency plan, which it
expects to complete by July 1999. However, alternatives to use of normal
systems, especially those systems relevant to the Company's investment advisory
services, 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' ability to carry on business
operations in any regular fashion. Although the Company is investigating
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 to 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. The Company has incurred, to date, less than $5,000 in direct Year
2000 costs. 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 relating
to making the Company's and its Subsidiaries' systems Year 2000 compliant are
being expensed in the period in which they are incurred. Future costs are not
expected to exceed $10,000.
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.
14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company was not a party to derivative financial instruments at
or during the three month period ended March 31, 1999. The Company's
financial instruments, other than instruments carried on the equity basis,
are its fixed notes payable of $1,241,000 which are discussed in Note 4 to
the March 31, 1999 consolidated financial statements.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None.
ITEM 2. CHANGES IN SECURITIES
None.
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
3.2 Amended and Restated Bylaws
27 Financial Data Schedule
(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
Chief Financial Officer (principal financial officer)
Date: May 14, 1999
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