<PAGE> 1
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, 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 September 30, 1996, 1,930,672 shares of common stock of the Registrant were
outstanding.
<PAGE> 2
ACACIA RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
September 30, 1996 and December 31, 1995
<TABLE>
<CAPTION>
(Unaudited)
September 30, 1996 December 31, 1995
----------------- ----------------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 391,708 $ 788,611
Accounts receivable 353,557 0
Notes receivable 1,399,750 1,846,000
Receivables from affiliates 175,729 176,885
Other receivables 135,929 74,994
Prepaid expenses 37,615 12,948
Deferred tax benefit 24,978 15,820
---------- ----------
Total current assets 2,519,266 2,915,258
Equipment, furniture, and fixtures 101,520 63,569
Other assets
Equity in unconsolidated subsidiaries, at equity 1,699,987 0
Investment in unconsolidated subsidary, at cost 1,233,000 0
Partnership interests, at equity 932,321 821,023
Deferred tax benefit 1,340,491 659,721
Organization costs, net of accumulated amortization
of $2,899 and $2,045 2,787 3,641
---------- ----------
Total Assets $7,829,372 $4,463,212
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 35,351 $ 129,066
Deficit interest in unconsolidated subsidiary, at equity 0 114,247
Income taxes payable 242,322 110,471
Note payable 800,000 0
---------- ----------
Total current liabilities 1,077,673 353,784
Deferred tax liability 250,310 4,195
---------- ----------
Total liabilities 1,327,983 357,979
Commitments and contingencies
Minority interest 0 10,796
Stockholders' equity
Common stock, no par value, 10,000,000 shares authorized,
1,930,672 shares in 1996 and 1,837,672 shares in 1995
issued and outstanding 4,798,226 3,934,877
Retained earnings 1,844,165 367,812
Less stock subscription receivable (141,002) (208,252)
---------- ----------
Total stockholders' equity 6,501,389 4,094,437
---------- ----------
Total Liabilities and Stockholders' Equity $7,829,372 $4,463,212
========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
<PAGE> 3
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Nine Months Ended and For the Three Months Ended September 30, 1996 and
1995
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
Sept. 30, 1996 Sept. 30, 1995 Sept. 30, 1996 Sept. 30, 1995
-------------- -------------- -------------- --------------
<S> <C> <C> <C> <C>
Revenues
Gains on sales of securities, net $870,307 $1,413,000 $148,190 $787,000
Unrealized gain attributable to issuance of
common stock by affiliate 1,066,408 0 0 0
Equity in earnings of investments (144,168) 200,000 (93,737) 0
Management fees 1,430,207 1,362 8,595 1,112
Interest income 81,008 18,366 27,380 2,806
---------- ---------- --------- ---------
Total revenues 3,303,762 1,632,728 90,428 790,918
Marketing, general, and administrative 1,212,746 834,882 312,956 329,830
---------- ---------- --------- ---------
Income before minority interest and taxes 2,091,016 797,846 (222,528) 461,088
Minority interest in net loss of consolidated subsidiary (10,796) 0 0 0
---------- ---------- --------- ---------
Income before provision for income taxes 2,101,812 797,846 (222,528) 461,088
Provision for income taxes 625,535 800 (119,453) 0
---------- ---------- --------- ---------
Net Income $1,476,277 $797,046 ($103,075) $461,088
---------- ---------- --------- ---------
Earnings per common share
Primary $0.55 $0.32 ($0.04) $0.18
Fully diluted $0.55 $0.32 ($0.04) $0.18
Weighted average shares outstanding
Primary 2,670,234 2,503,319 2,700,948 2,594,349
Fully diluted 2,670,234 2,503,319 2,700,948 2,594,349
</TABLE>
The accompanying notes are an integral part of these financial statements.
3
<PAGE> 4
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended September 30, 1996 and 1995
(Unaudited)
<TABLE>
<CAPTION>
Nine Months Ended Nine Months Ended
Sept. 30, 1996 Sept. 30, 1995
----------------- -----------------
<S> <C> <C>
Cash flows from operating activities:
Net income $ 1,476,277 $ 797,046
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 15,679 6,425
Deferred taxes 291,694 0
Undistributed (earnings) loss of affiliate 144,168 (200,000)
Gain on sales of securities (870,307) (1,413,000)
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 (439,159) (538)
Increase (decrease) in accounts payable,
accrued expenses, payroll taxes payable,
and other liabilities 38,136 (14,380)
----------- -----------
Net cash (used) by operating activities (420,716) (824,447)
Cash flows from investing activities:
Purchase of equity investments (3,000,000) (500,000)
Proceeds from sales of securities 1,624,051 1,413,000
Payment received on advances to affiliate 414,247 200,000
Advances to affiliate (430,893) (80,435)
Notes receivable 0 (1,055,000)
Payments received on notes receivable 446,250 0
Capitalized expenditures (52,592) (15,965)
----------- -----------
Net cash used by investing activities (998,937) (38,400)
Cash flows from financing activities:
Proceeds from note payable 800,000 0
Proceeds from line of credit 0 2,000,000
Compensation from stock options 0 25,000
Issuance costs 0 (65,498)
Proceeds from sale of common stock 222,750 917,573
----------- -----------
Net cash provided by financing activities 1,022,750 2,877,075
----------- -----------
Increase (decrease) in cash and cash equivalents (396,903) 2,014,228
Cash and cash equivalents, beginning 788,611 361,021
----------- -----------
Cash and cash equivalents, ending $ 391,708 $ 2,375,249
=========== ===========
</TABLE>
The accompanying notes are an integral part of these financial statements.
4
<PAGE> 5
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 five companies that it has formed and takes an
active role in each company's growth and advancement. These companies
are: Whitewing Labs, Inc., MerkWerks Corporation, CombiMatrix
Corporation, Soundview Technologies Incorporated, and Greenwich
Information Technologies LLC. In addition, as a registered investment
advisor, the Company is a general partner in two private investment
partnerships and is an investment advisor to two offshore investment
corporations.
Principles of consolidation - The accompanying consolidated financial
statements for the nine months ended September 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 September 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 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
5
<PAGE> 6
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
common share for the nine months ended September 30, 1995 from $0.24
per share to $0.32 per share, and earnings for the three months ended
September 30, 1995 decreased from $0.19 to $0.18 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
September 30, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
1996 1995
------------- -------------
<S> <C> <C>
Computer equipment $ 70,938 $ 45,730
Furniture and fixtures 60,478 34,260
----------- -------------
131,416 79,990
Accumulated depreciation (29,896) (16,421)
------------ --------------
Total Equipment, Furniture, and Fixtures $ 101,520 $ 63,569
============= ============
</TABLE>
Depreciation expense for the nine months ended September 30, 1996 and
1995 was $14,826 and $5,935, respectively.
3. COMMITMENTS AND CONTINGENCIES
Lease obligations - As of September 30, 1996, the equipment,
furniture, and fixtures account included assets in the amount of
$6,609 financed by capital lease agreements which will expire in 1996
and 1999. Accumulated depreciation includes $1,431 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 $3,006. Rent expense for the
nine months ended September 30, 1996 and 1995 were approximately
$16,254 and $13,123, respectively.
At September 30, 1996, the future minimum lease payments for capital
and operating leases equalled the following:
<TABLE>
<CAPTION>
CAPITAL OPERATING
------- ---------
<S> <C> <C>
1996 $ 590 $ 9,018
1997 2,358 36,072
1998 2,358 36,072
1999 1,965 -
--------- ---------
Totals 7,271 81,162
Less interest portion (1,887) -
--------- ---------
Minimum lease payments $ 5,384 $ 81,162
========= =========
</TABLE>
Pending litigation - The Company is a defendant in a lawsuit filed by a
former director and employee for alleged breach of contract. The
lawsuit seeks damages of $950,000. Although the ultimate outcome of
this litigation cannot be predicted, the Company believes that the suit
is without merit and the Company intends to vigorously defend its
position.
6
<PAGE> 7
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 September 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 nine 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 September 30, 1996,
options to purchase 35,000 shares of common stock had been issued
under the 1996 Plan with 215,000 shares reserved for further grants of
options.
The following is a summary of common stock options:
<TABLE>
<CAPTION>
WEIGHTED
SHARES PRICES AVERAGE
------ ------ -------
<S> <C> <C> <C>
1996
Balance at January 1, 1996 890,725 $1.50-$5.25 $2.66
Options granted 426,775 $4.90-$10.13 $6.27
Options exercised (68,000) $1.50-$5.25 $2.52
Options cancelled (10,000) $5.00 $5.00
--------- ============ -----
Balance at September 30, 1996 1,239,500 $1.50-$10.13 $3.90
========= ============ =====
Exercisable at September 30, 1996 752,500 $1.50-$5.50 $2.45
======= ============ =====
</TABLE>
As of September 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.
7
<PAGE> 8
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. NOTES RECEIVABLE
As of September 30, 1996, the Company holds secured 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 generally are secured
by the common stock sold and are full recourse notes. The value of the
collateral is approximately $915,625 for the secured notes as of
September 30, 1996. Accrued interest receivable on notes receivable
amounts to approximately $65,200 as of September 30, 1996 and
approximately $13,200 as of December 31, 1995.
The following is a summary of notes receivable at September 30, 1996:
<TABLE>
<S> <C>
Notes receivable due from shareholder, secured $ 460,000
Notes receivable, secured 918,750
Notes receivable, unsecured 21,000
-------------
Total Notes Receivable $ 1,399,750
===========
</TABLE>
6. INVESTMENTS, AT EQUITY
Investments carried at equity, and the Company's ownership in each
consist of the following at September 30, 1996 and December 31, 1995:
<TABLE>
<CAPTION>
1996 1995
---- ----
<S> <C> <C>
Whitewing Labs 19% 38%
Acacia Capital Partners, L.P. 43% 60%
CombiMatrix Corporation 52% 0%
Acacia Growth Fund, L.P. 43% 0%
Greenwich Information Technologies LLC 30% 0%
</TABLE>
The investment in Whitewing Labs is reported using the equity method.
The Company maintains an ownership percentage of 19.4% as of September
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 a value of $799,558 on
September 30, 1996 and at $0 as of December 31, 1995. As of September
30, 1996 Whitewing Labs had total assets of approximately $4,349,065,
and net shareholders' equity of approximately $4,069,157. Whitewing
Labs' net sales for the nine months ended September 30, 1996 were
$2,736,285 compared to $2,268,045 for the previous nine months ended
September 30, 1995. The market value of the Company's investment in
Whitewing Labs is approximately $1,331,148 based upon the closing
market price of $2.50 per share as of September 30, 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, and in accordance with authoritative pronouncements regarding
investments in partnerships. The Company's capital account with respect
to Acacia Capital Partners, L.P. is $523,561 at September 30, 1996 and
was $821,023 on December 31, 1995. The decrease in the Company's
investment in this partnership is attributable primarily to the
transfer of $300,000 of its investment to another private investment
partnership managed by the Company as well as the withdrawal of
$100,000 during this same nine-month period. Acacia Capital Partners,
L.P. is a California limited partnership that invests primarily in
mid-cap and large-cap U.S. equity securities.
8
<PAGE> 9
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. INVESTMENTS, AT EQUITY (continued)
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 ($261) as of September 30,
1996, and has also made advances to the unconsolidated subsidiary of
$121,699 through the balance sheet date. As of September 30, 1996,
CombiMatrix Corporation had total assets of $583,482, and net
shareholders' equity of $448,139. 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. The Company's capital account in this partnership
as of September 30, 1996 amounted to $408,760. Acacia Growth Fund,
L.P. is a California limited partnership that invests primarily in
mid-cap and large-cap U.S. equity securities.
On September 11, 1996, the Company acquired an equity interest in
Greenwich Information Technologies LLC, a Delaware Limited Liability
Company. As of September 30, 1996, the Company maintained a 30%
ownership interest in this entity. The investment is carried on the
balance sheet at $900,960 as of September 30, 1996.
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
period ended September 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 September 30, 1996, the Company carries its investment
of 16.4% of Soundview Technologies at $1,233,000.
8. PROVISION FOR INCOME TAXES
Provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
------- ----- -----
<S> <C> <C> <C>
SEPTEMBER 30, 1996
Current $ 258,107 $ 75,734 $ 333,841
Deferred 221,451 70,243 291,694
SEPTEMBER 30, 1995
Current - 800 800
Deferred - - -
</TABLE>
The tax effects of temporary differences and carryforwards that give
rise to significant portions of deferred assets and liabilities
consist of the following:
<TABLE>
<CAPTION>
DEFERRED TAX ASSETS: 1996 1995
----- ----
<S> <C> <C>
Nonstatutory stock options $1,340,491 $ 619,258
Tax basis of investments at equity - 40,463
State income tax deductions 24,978 15,820
Gross deferred tax assets $1,365,469 $ 675,541
========== =========
</TABLE>
9
<PAGE> 10
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. PROVISION FOR INCOME TAXES (continued)
<TABLE>
<CAPTION>
DEFERRED TAX LIABILITIES:
<S> <C> <C>
Excess basis in investments at equity $ 246,114 $ -
Equipment, furniture & fixtures 4,196 4,195
------------- -----------
Deferred tax liabilities $ 253,010 $ 4,195
========== ==========
</TABLE>
The Company believes that all deferred tax assets as of September 30,
1996 and December 31, 1995 are more likely than not to be realizable.
9. COMMON STOCK SUBSCRIPTIONS
As of September 30, 1996, the Company had a $50,000 unsecured
promissory note receivable from an individual issued in connection
with the purchase of 25,000 shares of common stock. Subsequent to the
balance sheet date, the Company received all amounts due in connection
with this subscription.
The Company also has promissory notes in the amount of $91,002 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 $3,800 has been accrued on these notes. Subsequent to the
balance sheet date, the Company received $2,250 in connection with
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. All outstanding amounts due on this note were received during
the period ended March 31, 1996. Receivables from affiliates at
September 30, 1996 and December 31, 1995 are advances for the benefit
of CombiMatrix Corporation, Whitewing Labs, and the Company's private
investment partnerships. Advances to these companies totalled
$175,729 and $62,638, at September 30, 1996 and December 31, 1995,
respectively. Subsequent to the balance sheet date, the Company
received $121,699 in connection with these advances.
11. NOTE PAYABLE
As of September 30, 1996, the Company has a non-interest bearing note
payable to Greenwich Information Technologies LLC in the amount of
$800,000, which is in connection with the purchase of an equity
interest in that entity. This note is payable in full in December
1996.
12. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for the periods ended September 30, 1996 and 1995 for
interest was $1,090 and $159. The Company paid cash for income taxes
in the amount of $170,188 in 1996.
13. CONCENTRATION OF CREDIT RISK
Notes receivable at September 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
full recourse notes and are collateralized by common stock with a value
of approximately $859,375 as of September 30, 1996.
The Company maintains its cash balances with financial and brokerage
institutions located in Southern California. As of September 30, 1996
the Company maintained balances of $182,843 in excess of insured
amounts with these institutions.
10
<PAGE> 11
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 September 30, 1996, and on the operations of the Company for
the period from January 1, 1996 to September 30, 1996. The following discussion
compares the activities for the nine months and three months ended September 30,
1996 to the activities for the nine months and three months ended September 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
REVENUES
Nine Months Ended September 30, 1996 and 1995
The Company reported revenues of $3,303,762 in the nine months ended
September 30, 1996, an increase of $1,671,034, over revenues of
$1,632,728 for the nine months ended September 30, 1995.
Gains on Sales of Securities, Net. During the nine months ended
September 30, 1996, the Company increased its asset base by acquiring
interests in three new companies, CombiMatrix Corporation, Soundview
Technologies Incorporated, and Greenwich Information Technologies LLC.
Although the Company sold a limited amount of its interests in these
companies, the Company continues to maintain significant equity
positions in each. Net gains on sales of securities decreased from
$1,413,000 for the nine months ended September 30, 1995 to $870,307
for the nine months ended September 30, 1996, which represents a
decrease of $542,693 or 38.4%. Such gain for the nine months ended
September 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 and interests in Greenwich
Information Technologies LLC. The year earlier gain of $1,413,000
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 $144,168 for the
period ended September 30, 1996, compared to revenues of $200,000 for
the year-earlier period. Such losses for the period ended September
30, 1996 are comprised of a gain of $96,262 on the Company's capital
investments as a general partner in two private investment partnerships
offset by a loss of the Company's share of net losses of CombiMatrix
Corporation of $87,827 and a loss of $152,503 for the Company's
investment in Whitewing Labs, as determined by the equity method of
accounting.
11
<PAGE> 12
ACACIA RESEARCH CORPORATION
RESULTS OF OPERATIONS (continued)
REVENUES (continued)
Nine Months Ended September 30, 1996 and 1995 (continued)
Management Fees. For the nine months ended September 30, 1996,
management fee income increased to $1,430,207 over management fee
income of $1,362 generated during the first nine months in 1995. 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 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 September
30, 1996, the Company retained 1,233,000 of these shares.
The balance of approximately $30,000 of management and performance 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 have 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, have generated limited
management fees during the nine month period ended September 30, 1996.
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 consultant.
Three Months Ended September 30, 1996 and 1995
The Company reported revenues of $90,428 in the three months ended
September 30, 1996, a decrease of $700,490, from revenues of $790,918
for the three months ended September 30, 1995.
Gains on Sales of Securities, Net. Net gains on sales of securities
decreased from $787,000 for the three months ended September 30, 1995
to $148,910 for the three months ended September 30, 1996. Such gain
for the three months ended September 30, 1996 is comprised of gains on
sales of interests in Greenwich Information Technologies LLC. The
Company acquired 33.33% of Greenwich Information Technologies LLC for
$1,000,000 and maintained a 30% ownership interest as of September 30,
1996. The year earlier gain of $787,000 represents a gain from sales
of shares of Whitewing Labs. During the period ended in 1996, the
Company sold a smaller portion of its assets, focusing instead on the
development of its various business interests. During the period ended
in 1995, the Company sold a larger portion of its holdings primarily to
raise the capital necessary to acquire interests in new companies as
well as provide working capital for ongoing operations. Until the
Company generates sufficient revenue from operations of its various
business concerns, the Company, from time to time, may sell a portion
of its equity interests when that interest has appreciated to a value
that management believes is prudent and market conditions are
favorable. However, the Company intends to retain significant interests
in its current and future holdings.
Equity in Earnings of Investments. The Company reported losses
attributable to equity in earnings of investments of $93,737 for the
three months ended September 30, 1996, compared to no revenue for the
year-earlier period. Such losses for the period ended September 30,
1996 are comprised of a gain of $26,478 on the Company's capital
investments as a general partner in two private investment partnerships
offset by a loss of the Company's share of net losses of CombiMatrix
Corporation of $38,097 and a loss of $82,118 for the Company's
investment in Whitewing Labs, as determined by the equity method of
accounting.
Management Fees. For the three months ended September 30, 1996,
management fee income increased to $8,595 over management fee income of
$1,112 generated during the first nine months in 1995. The Company
derived management fees in the period ended September 30, 1996 from
four investment funds managed by the Company, three of which began
operations in 1996. Therefore, during the same period in 1995, the
Company derived management fees from only one of these funds. The
Company entered into a distribution agreement with an international
group during the period ended September 30, 1996. As part of this
agreement, the Company will retain all management fees, but will share
performance fees earned in those funds managed by the Company to which
the group provides its services.
12
<PAGE> 13
EXPENSES
Nine Months Ended September 30, 1996 and 1995
Marketing, general and administrative expenses increased from $834,882
for the nine months ended September 30, 1995 to $1,212,746 for the nine
months ended September 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 51% in the period
ended September 30, 1995 to 37% in the period ended September 30, 1996.
Three Months Ended September 30, 1996 and 1995
Marketing, general and administrative expenses decreased from $329,956
for the three months ended September 30, 1995 to $312,956 for the three
months ended September 30, 1996. Although in general the Company has
experienced increased costs since becoming a public company in June
1995, the Company did not incur certain expenses associated with the
raising of capital, which has occurred over previous quarters.
However, the Company had an additional expense of approximately $16,000
payable to the Nasdaq Stock Market in conjunction with the Company's
listing on the Nasdaq National Market System in July of 1996.
PROVISION FOR INCOME TAXES
Nine Months Ended September 30, 1996 and 1995
For the nine month period ended September 30, 1996, the Company
recorded an income tax provision of $625,535, 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.
Three Months Ended September 30, 1996 and 1995
For the three month period ended September 30, 1996, the Company
recorded a benefit of $119,453 as compared to no income tax expense for
the same period in fiscal 1995. The difference is attributable to
decreased revenue during the three months ended September 30, 1996
versus revenue generated during the three months ended September 30,
1995.
INFLATION
Inflation has not had a significant impact on the Company.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had cash and cash equivalents of
$391,708, working capital of $1,441,593, and a ratio of current assets
to current liabilities of 2.3 to 1. As of September 30, 1996, the
Company had issued a short-term non-interest bearing note in the amount
of $800,000, in connection with the investment by the Company in
Greenwich Information Technologies LLC.
For the first nine months of fiscal 1996, the Company had $420,716 of
negative cash flow from operations as compared to a negative cash flow
of $824,447 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 fourth quarter in addition to
anticipated revenue generated from the Company's other activities.
13
<PAGE> 14
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.
PART II - OTHER INFORMATION
ITEM I. LEGAL PROCEEDINGs
On August 16, 1996, Ann P. Hodges, a former director of the Company,
and her husband Christopher D. Hodges filed a legal action against the
Company in the United States District Court in Los Angeles, entitled
Christopher D. Hodges and Ann P. Hodges v. Acacia Research Corporation
and Whitewing Labs, Inc. (Case No. 96-5551 R(Ex). The suit alleges
that the Company breached a contract with the Hodges by improperly
refusing to permit them to exercise an option to purchase 100,000
shares of common stock in the Company. The Hodgeses seek $950,000 in
damages from the Company. Although the ultimate outcome of this
litigation cannot be predicted with certainty, the Company's management
does not believe that this matter will have a material adverse effect
on the Company's results of operations or financial position.
ITEM 2. CHANGE 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
None.
(b) Reports on Form 8-K
None.
14
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> SEP-30-1996
<CASH> 391,708
<SECURITIES> 0
<RECEIVABLES> 1,889,236
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,519,266
<PP&E> 131,416
<DEPRECIATION> 29,896
<TOTAL-ASSETS> 7,829,372
<CURRENT-LIABILITIES> 1,077,673
<BONDS> 0
0
0
<COMMON> 4,657,224
<OTHER-SE> 1,844,165
<TOTAL-LIABILITY-AND-EQUITY> 7,829,372
<SALES> 0
<TOTAL-REVENUES> 3,303,762
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,101,812
<INCOME-TAX> 625,535
<INCOME-CONTINUING> 1,476,277
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,476,277
<EPS-PRIMARY> 0.55
<EPS-DILUTED> 0.55
</TABLE>
