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U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1995
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Transition Period from N/A to N/A
Commission File No. 0-26068.
ACACIA RESEARCH CORPORATION
(Name of small business issuer in its charter)
CALIFORNIA 95-440574
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
12 SOUTH RAYMOND AVENUE, PASADENA, CALIFORNIA 91105 91105
(Address of principal executive offices) (Zip Code)
Issuer's Telephone Number: (818) 449-6431
Securities registered under Section 12(b) of the Exchange Act:
NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, WITHOUT PAR VALUE
(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 12 or 15(d) of the Exchange Act during the past 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 ___
Check if there is no disclosure of delinquent filers in response to
Item 405 of Regulation S-B is contained in this form, and no disclosure will be
contained to the best of registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-KSB or any amendment to this Form 10-KSB. [X]
The issuer's revenue for the year ended December 31, 1995 were $3,194,241.
The aggregate market value of the voting stock held by non-affiliates
as of March 20, 1996, computed by reference to the price at which the stock was
sold, or the average bid and asked prices of such stock, was $10,239,993.
DOCUMENTS INCORPORATED BY REFERENCE: The information required by Part III
of Form 10-KSB is incorporated herein by reference to registrant's definitive
proxy statement to be filed not later than 120 days after the end of the fiscal
year covered hereby.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
Acacia Research Corporation (the "Company"), incorporated in January
1993, provides traditional capital management services, and also provides
management services to and makes direct investments in new emerging
corporations. The Company is diversified with key management providing
oversight to each independent business segment.
In 1995, Whitewing Labs, a business established by the Company, filed
a registration statement for a public offering. In February 1996, the
registration statement became effective and Whitewing Labs began trading on the
Nasdaq Stock Market under the symbols WWLI and WWLI-W.
CAPITAL MANAGEMENT/ADVISORY SERVICES
The Company is a registered investment advisor currently managing two
domestic private investment partnerships whose limited partners are required to
be accredited investors. The Company is also the investment advisor to an
offshore investment corporation. The Company utilizes proprietary
stock-screening models developed and tested over a three-year period with an
investment by the Company of over $1 million. Client funds are invested
primarily in large-cap U.S. equities.
The Company began managing its first private investment partnership,
or hedge fund, Acacia Capital Partners, L.P. in 1995. In January 1996, the
Company became the investment advisor to an offshore fund, Acacia USA Fund.
The Company formed an additional private investment partnership, Acacia Growth
Fund, L.P., to commence in April 1996. The Company may manage additional
private investment partnerships and offshore investment funds in the future.
Stock Screening Models
The Company has developed three proprietary stock-screening models to
assess the investment potential of public companies. The models evaluate a
given stock from three separate perspectives: earnings growth, value, and
trading-price analysis.
The Earnings-Estimate Forecaster automatically updates all analyst
earnings-estimate revisions on a daily basis and compares actual stock price
movement with 30, 60, and 90 day changes in estimates.
The Valuation Model provides an estimate of the "fair market
value" for public companies based on a variety of considerations, including
consistency of past earnings growth, rate of return on equity, the present
value of its discounted cash flow, and management's history of translating
retained earnings into shareholder value.
The Trading-Range Analyzer identifies stocks with a defined price
range and calculates the current position within the trading-range. This model
is also used to determine breakout prices and support levels for stocks.
Proprietary Rights
The Company has not obtained, and in the future will not
necessarily apply for, patent or software copyright protection for any of the
proprietary stock-screening computer models it has or will develop. Management
believes that the Company's success will be dependent more upon the technical
competency and creativity of key personnel in concept and product development
and marketing than upon ownership of patents or software copyrights.
Consequently, in order to protect its proprietary concepts and computer models,
the Company intends to rely primarily on a combination of trade secret law and
non-disclosure agreements with its employees, consultants, and customers.
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Investment Strategy
Both Acacia Capital Partners, L.P. and Acacia USA Fund seek to
outperform the S&P 500 index by investing in equities, long and short, based on
results of the Company's three proprietary stock-screening models. The funds
use leverage, short sales, and options. Acacia Growth Fund, L.P. places a
significant emphasis on the Company's earnings-estimate forecaster model,
whereas Acacia Capital Partners, L.P. and Acacia USA Fund place primary
emphasis on the Company's valuation model.
In managing the funds, the Company may engage in short sales, hedging,
option trading, leverage and other strategies from time to time. These may
increase a fund's transaction costs, interest expense, and other costs and no
assurance can be given that short sales, hedging, leverage, and other techniques
and strategies will not result in material losses.
Domestic Private Investment Partnerships
Each private investment partnership has two general partners, the
Company and Paul R. Ryan. Paul R. Ryan is also a director and the Vice
President, Capital Management of the Company. The general partners will be
allocated on an annual basis (subject to certain exceptions) a performance fee
equal to 20% of the annual net profits attributable to each partner's
investment in the partnership. The general partners will be also be entitled
to annual management fees payable by each limited partner in an amount equal
to 1% of the value of that limited partner's capital account. These management
fees are payable quarterly in advance at the beginning of each quarter based on
the net asset value of the limited partner's capital account on the first day
of the quarter. The Company will receive three-fourths, and Mr. Ryan will
receive one-fourth of both the performance and management fees.
It is the general partners' intention to reinvest substantially all
income and gain allocable to the partners. Consequently, no distributions of
partnership cash are contemplated. On dissolution of a partnership, any assets
remaining after provision for all of the partnership's debts would be
distributed to all partners in proportion to their respective capital accounts
as of the end of the most recent quarter.
A partnership will also pay or reimburse the general partners for
certain costs and expenses incurred by or on behalf of the partnership,
including certain legal and accounting fees. Although a partnership will not
be obligated to reimburse the general partners for any of the general partners'
own operating, general and administrative, and overhead costs and expenses, some
or all of these expenses may be paid by securities brokerage firms that execute
securities trades for a partnership.
To date, the Company has used $750,000 of available cash to acquire a
partnership interest in Acacia Capital Partners, L.P., and will use $100,000 to
acquire a partnership interest in Acacia Growth Fund, L.P. The value of the
Company's investment in Acacia Capital Partners, L.P. was approximately
$821,023 at December 31, 1995. The Company expects to obtain a better return
on these investments than that offered on bank or other institutional interest
bearing deposits.
The capital invested by the Company in its limited partnerships are
subject to all of the risks to be encountered by all investors in a partnership
managed by the Company as a result of the investment strategy adopted for the
investment partnership, including the risks associated with short sales,
hedging, option trading, trading on margin, and other leverage transactions. No
assurance can be given that a partnership's investment strategy will not result
in material losses for the partnership. On the other hand, if the investment
partnership were profitable, the partners thereof, including the Company, would
be credited with partnership net income, and would therefore incur income tax
liability, even if they receive little or no cash distributions from the
partnership. Since the stated intention of the partnership is to reinvest
substantially all income and gain allocable to the partners thereof, it should
not be expected that distributions of partnership cash will be made to the
partners, including the Company, that could be used to pay any income tax on
partnership profits allocated to their respective accounts. The Company's
investment in a limited partnership is also subject to a significant lack of
liquidity, since there is no public market for interests in a limited
partnership and no such market can be expected to develop. The Company may,
however, on advance notice to the general partners, withdraw all or part (at
least $25,000) of its capital account as of any June 30 or December 31
following the first anniversary of the Company's admission to the partnership.
The general partners may waive these withdrawal restrictions for any limited
partner.
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Offshore Investment Funds
The Company is the investment advisor to Acacia USA Fund, a Cayman
Islands exempted company. Furman Selz Financial Services Limited, in Dublin,
Ireland, is the administrator, registrar, and transfer agent for this fund.
The Company will be allocated on an annual basis (subject to certain
exceptions) a performance fee equal to 20% of the annual net profits
attributable to the investment of each shareholder of Acacia USA Fund. The
Company will also be entitled to annual management fees payable by the fund in
an amount equal to 1% of the value of the fund's capital account. The Company
will receive three-fourths, and Mr. Ryan will receive one-fourth, of both the
performance and management fees. The Company will not be reimbursed by the
offshore fund for any of its expenses incurred in managing this fund's
investments. The assets of this offshore fund are exposed to many of the same
risks inherent in the Company's domestic private investment partnerships.
Competition
In attempting to raise funds for its investment advisory services, the
Company encounters competition from all other sources of investment management
and advice, including public mutual funds, other private investment funds,
money managers, and stock brokerages.
EMERGING BUSINESSES/AFFILIATES
The Company participates in the formation of emerging or start-up
companies in various business fields by arranging for and contributing capital
and providing management assistance. Potential ventures are evaluated based on
the ability of the business to become viable and reach a significant milestone
with the Company's initial investment in addition to its possessing an
opportunity large enough to become a free-standing public entity.
Development of emerging businesses are subject to all of the problems,
expenses, delays, and risks inherent in the establishment of a new business
enterprise, over many of which the Company has no control, including uncertain
market conditions and the absence of an operating history. Therefore, there can
be no assurance that the Company's plan of operations will be successful or that
the Company will be able to achieve or maintain profitable operations.
Whitewing Labs, Inc.
On July 29, 1993, the Company incorporated Whitewing Labs under the
laws of the state of California. The Company acquired 100% of the outstanding
stock of Whitewing Labs for a total of $100,000 in cash. Whitewing Labs
develops, or seeks to acquire through license, nutritional supplements that can
be directly marketed to the over age forty market in the United States. Products
are formulated with natural ingredients, and contain no preservatives,
synthetics, artificial colors, lactose, starch, or sugar. Whitewing Labs
currently markets 19 different products which are intended to offer alternatives
to conventional treatments for symptoms associated with the aging process.
Whitewing Labs began realizing revenue from product sales in October
1993, and incurred losses through the end of 1994 and for the six months ended
June 30, 1995, and reported net income of $20,695 on net sales of $3,474,206 for
the year ended December 31, 1995. Substantially all of Whitewing Labs' revenue
through December 31, 1995, have been attributable to its first product,
PROTSAFE(TM), which is formulated to alleviate the symptoms associated with
prostatitis. For the entire year of 1995, Whitewing Labs realized a profit
margin, after costs of goods sold and selling and advertising expenses, but
before general and administrative expenses, of approximately 63.2% on repeat
orders. Reorders from existing customers accounted for 17.6% of all net sales
generated for the year ended December 31, 1995. As of December 31, 1995,
Whitewing Labs' customer base numbered approximately 50,000.
As nutritional supplements, Whitewing Labs products are classified as
foods and do not require marketing approval from the U.S. Federal Drug
Administration ("FDA"), although they are subject to product labelling and
advertising guidelines established by the FDA and the Federal Trade Commission
("FTC"). The
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average price for a one month supply of a single product is between $24.95 and
$34.95. All of Whitewing Labs' products are manufactured, bottled, and labelled
for Whitewing Labs by Vita Minerals, Inc., an independent manufacturer of drugs
and vitamins for over 75 years. Vita Minerals' operations are subject to the
regulations of, and monitoring by, the FDA and various state and local
regulatory authorities. Whitewing Labs also relies on other independent
contractors to perform a number of additional tasks under its supervision,
including product development, advertising placement, direct mail preparation
and mailing, order receipt, credit card processing, and order fulfillment.
Although federal trademark registration has been granted for PROTSAFE(TM) and
Whitewing Labs intends to seek trademark protection for additional brand names,
its product formulations are protected only by common law concepts of
confidentiality and trade secrets.
The management of Whitewing Labs consists of Cynthia Kolke, a director
and President of Whitewing Labs; R. Bruce Stewart, Chairman of the Whitewing
Labs' Board and its Secretary and Treasurer; Fred A. de Boom, a director; and
William D. Fox, a director. Mr. Stewart is also the President, Treasurer, and
Chairman of the Board of the Company. Mr. de Boom is also a director of the
Company. Ms. Kolke has 26 years experience in sales and marketing in a number
of capacities, including Director of Marketing of The Service Bureau
Corporation, a division of IBM sold to Control Data in 1973; Vice President of
Sales for Light Signatures, an independent marketing consultant; and Operations
Manager of G.B. Data Systems, Inc., a direct mail, nutritional supplement
marketing company.
At December 31, 1995, the Company had made loans to Whitewing Labs
totalling $314,247, of which $200,000 was paid to the Company by Whitewing Labs
during 1995 and the balance paid to the Company in 1996. Between December 1994
and September 1995, the Company assisted Whitewing Labs in selling additional
equity in private transactions to raise gross proceeds of approximately $2.1
million. The Company sold a portion of its interest in Whitewing Labs during
1994 and 1995, but maintained voting control over approximately 65% of the
outstanding voting securities of Whitewing Labs, directly owning approximately
38%, as of December 31, 1995.
Whitewing Labs filed a registration statement in 1995 with the
Securities and Exchange Commission. In addition, as part of the proposed
offering, Whitewing Labs, Inc. was incorporated under the laws of the State of
Delaware, as a wholly-owned subsidiary of Whitewing Labs, a California
corporation, for the purpose of changing Whitewing Labs' state of incorporation
from California to Delaware (the "Reincorporation"). The offering was deemed
effective in February 1996 and the Reincorporation took place prior to the
consummation of the offering. In connection therewith, the holders of all of
Whitewing Labs' securities, including the Company, were entitled to receive or
purchase three shares of the Whitewing Labs, Inc. common stock for every two
shares of Whitewing Labs' common or preferred stock outstanding or issuable
upon exercise of outstanding stock options.
Whitewing Labs, Inc. conducted its initial public offering in February
1996, selling 1,035,000 shares of common stock at $5.00 per share and 1,035,000
common stock purchase warrants ("Warrants") at $0.20 per Warrant, generating
aggregate net proceeds of approximately $4.3 million. Two Warrants entitle the
holder to purchase one share of Whitewing Labs common stock at a price of $7.00
per share during the three year period ending February 8, 1999, and may be
redeemed by Whitewing Labs under certain circumstances.
Whitewing Labs' principal executive offices are located at 15455 San
Fernando Mission Boulevard, Suite 105, Mission Hills, California 91345,
telephone number (818) 898-2167.
MerkWerks Corporation
MerkWerks Corporation, was incorporated by the Company under the laws
of the state of California on September 11, 1995. MerkWerks Corporation is a
developmental stage company and is currently developing software for use with
CD-Recordable, or CD-R, computer drives for Macintosh, and possibly Windows,
platforms. It is anticipated that development of the software will be completed
shortly and marketing of the initial product through licensing or sale may
commence by the end of May 1996. Upon completion of this first product,
MerkWerks Corporation may begin development of other utility software products,
while continuing to support and enhance the initial product. Although there are
currently at least 22 CD-R software packages on the market, there appears to be
a need for better user features to enhance the usability of CD-R drives.
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The Company provided $100,000 in cash to MerkWerks Corporation in
exchange for 2,000,000 shares of its common stock, or 100% of the total
outstanding shares of MerkWerks Corporation. The Company has also loaned or
advanced on behalf of MerkWerks Corporation an aggregate of $70,636 as of
December 31, 1995. In December 1995 and January 1996, the Company sold
approximately 30% of its interest in MerkWerks Corporation for approximately
$600,000.
Other Developments
The Company has formed two additional corporations, both of which are
high-tech related. One company, Soundview Technologies Incorporated, was formed
under the laws of the state of Delaware in March 1996, and is involved in the
commercialization of patented technology that automatically screens
objectionable programming. Soundview Technologies Incorporated will initially
target V-chip and direct broadcast satellite (DBS) applications of its patented
technology. The other company is involved in chemical synthesis.
Competition
The Company expects to encounter competition in the area of business
opportunities from other entities having similar business objectives, such as
venture capital funds. Many of these potential competitors may possess greater
financial, technical, human, and other resources than that of the Company.
Regulation
The Company is registered as an "investment advisor" with the
Securities and Exchange Commission under the Investment Advisors Act of 1940,
and certified as an "investment advisor" by the California Commissioner of
Corporations under the California Corporate Securities Law of 1968, as amended.
Accordingly, the Company is required to maintain and preserve specified books
and records regarding its activities and make them available to regulatory
authorities for inspection. In the event that the Company fails to comply with
the rules of the regulatory bodies having jurisdiction over its activities as an
investment advisor, the Company could be prohibited from continuing its
operations and be subject to substantial monetary fines and penalties. The
Company has an affirmative obligation of good faith and full and fair disclosure
of all material facts to, as well as a duty to avoid misleading, each investment
limited partnership for which the Company acts as an investment advisor. In
addition, the Company is also required to provide, on an annual basis, a free
brochure that provides additional information about the Company, its investment
advisory services, and fees charged, and must promptly disclose any material
disciplinary actions taken by federal or California regulatory authorities
against the Company or any of its officers, directors or employees. The Company
also is subject to regulatory prohibitions against the use of certain
advertising, with special prohibitions applicable to the use of testimonials,
past specific recommendations, and the use of certain charts, graphs and
formulas. In the event that the Company failed to comply with rules and
regulations applicable to the conduct of "investment advisors," the Company
could be prohibited from continuing its operations and subject to monetary fines
and penalties.
The regulatory scope of the Investment Company Act of 1940 ("Investment
Company Act"), which was enacted principally for the purpose of regulating
vehicles for pooled investments in securities, extends generally to companies
engaged primarily in the business of investing, reinvesting, owning, holding or
trading in securities. The Company believes that its anticipated principal
activities will not subject the Company to regulation under the Investment
Company Act. However, the Investment Company Act may also be deemed to be
applicable to a company which does not intend to be characterized as an
investment company but which, nevertheless, engages in activities which may be
deemed to be within the definitional scope of certain provisions of the
Investment Company Act. For example, should the Company obtain or retain a
minority interest in another enterprise, or should more than forty percent of
the Company's assets consist at any time of investments in the initial or
subsequent investment limited partnerships to be formed and managed by the
Company, the Company could become or be deemed an investment company within the
meaning of the Investment Company Act. In such event, the Company may become
subject to certain restrictions relating to the Company's activities, including
restrictions on the nature of its investments and the issuance of securities.
In addition, the Investment Company Act imposes certain requirements on
companies deemed to be within its regulatory scope, including registration as an
investment company, adoption of a specific form of corporate structure, and
compliance with certain burdensome reporting, recordkeeping, voting, proxy,
disclosure, and other rules and regulations. In the event of characterization
of the Company as an investment company, the Company could be expected to incur
significant registration and compliance costs if required to register under the
Investment Company Act, and the failure by the Company to satisfy regulatory
requirements, whether on a timely basis or at all, would, under certain
circumstances, have a material adverse effect on the Company. Accordingly,
management will continue to review the Company's activities from time to time
with a view toward reducing the likelihood that the Company could be classified
as an "investment company."
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Employees
The Company has a total of five full-time employees. The
Company believes that its future success will depend in large part on its
ability to retain its key personnel, and on its ability to attract, retain,
train, and motivate additional highly skilled and dedicated employees. The
Company is not a party to any collective bargaining agreement. The Company has
never experienced a work stoppage and believes that its relations with its
employees are excellent. From time to time the Company may retain independent
third parties to provide services on a contract, "as needed" basis.
ITEM 2. DESCRIPTION OF PROPERTY.
The Company leases a 1,485 square foot office in Pasadena, California
that Management believes is sufficient for the Company's current needs. If
needed, a large amount of additional space is available for rental on a
comparable basis within a few blocks of the Company's present location.
ITEM 3. LEGAL PROCEEDINGS.
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
None.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
RECENT MARKET PRICES
On June 15, 1995, the Company's Registration Statement on Form SB-2
became effective under the Securities Act of 1933, as amended (the "Securities
Act"). See Item 6. Management's Discussion and Analysis or Plan of Operation
- - "Liquidity and Capital Resources." In connection with the effectiveness of
the Registration Statement under the Securities Act, the Company also
voluntarily registered the entire class of its Common Stock under Section 12(g)
of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), in
order to make the Company a "fully reporting company" which files all of the
reports, proxy statements, and information required to be filed with the
Securities and Exchange Commission (the "Commission") under the Exchange Act.
Prior to the registration of the Company's Common Stock under the
Securities Act and the Exchange Act, there had been no public market for the
Common Stock and there can be no assurance that an active public market for the
Company's Common Stock will be sustained in the future. The markets for
securities such as the Company's Common Stock historically have experienced
extreme price and volume fluctuations during certain periods. These broad
market fluctuations and other factors, such as new product developments and
trends in the Company's industry and the investment markets generally, as well
as economic conditions and quarterly variations in the Company's results of
operations, may adversely affect the market price of the Company's Common
Stock. Moreover, unless and until it is approved for quotation on Nasdaq, the
Company's Common Stock could become subject to rules adopted by the Commission
regulating broker-dealer practices in connection with transactions in subject
to rules adopted by the Commission regulating broker-dealer practices in
connection with transactions in "penny stocks." Penny stock generally are
equity securities with a price of less than $5.00 (other than securities
registered on certain national securities exchanges or quoted on Nasdaq,
provided that current price and volume information with respect to transactions
in such securities is provided by the exchange or the Nasdaq system). Unless
an exemption from the definition of a "penny stock" were available, any broker
engaging in a transaction in the Company's Common Stock would be required to
provide any customer with a risk disclosure document, disclosure of market
conditions, if any, disclosure of the
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compensation of the broker-dealer and its salesperson in the transaction, and
monthly accounts showing the market values of the Company's Common Stock held in
the customer's account. The bid and offer quotation and compensation
information must be provided prior to effecting the transaction and must be
contained on the customer's confirmation. It may be anticipated that a number
of brokers may be unwilling to engage in transactions in the Company's Common
Stock because of the need to comply with the "penny stock" rules, thereby making
it more difficult for holders of Common Stock to dispose of their shares.
Since June 1995, the Company's Common Stock has been traded in the
over-the-counter market, and bid and asked quotations for the Common Stock have
been published by one or more broker-dealers on the NASD Bulletin Board since
July 1995. The following table sets forth the high and low bid prices for a
share of the Company's Common Stock during the periods presented, as reported
by the National Quotation Bureau, Inc. Bid quotations represent high and low
prices quoted between dealers, do not include commissions, mark-ups, or mark-
downs, and may not represent actual transactions.
<TABLE>
<CAPTION>
High Low
---- ---
<S> <C> <C> <C>
1995
----
June 15 - September 30 $10 $5-1/2
October 1 - December 31 $ 8 $5-1/4
1996
----
January 1 - March 29 $8-1/4 $5-1/4
</TABLE>
On March 29, 1996, the closing bid and asked quotations for the Common
Stock, as reported by the National Quotation Bureau, Inc., were $8-1/4 and
$8-3/4, respectively, per share. The Company's Common Stock trades under the
symbol ACRI.
DESCRIPTION OF SECURITIES
The Company is authorized to issue up to 10,000,000 shares of Common
Stock, without par value, of which 1,869,372 shares of Common Stock have been
issued and are outstanding and held of record by a total of approximately 400
shareholders as of March 29, 1996. Holders of the Common Stock are entitled to
one vote per share on all matters to be voted on by the shareholders, and to
cumulate votes in the election of directors. Holders of Common Stock are
entitled to receive ratably such dividends, if any, as may be declared by the
Board of Directors out of funds legally available therefor. Upon the
liquidations, dissolution, or winding up of the Company, the holders of Common
Stock are entitled to share ratably in all assets of the Company which are
legally available for distribution, after payment of all debts and other
liabilities. Holders of Common Stock have no preemptive, subscription,
redemption or conversion rights. The outstanding shares of the Common Stock
are, when issued and delivered, validly issued, fully paid and nonassessable.
TRANSFER AGENT AND REGISTRAR
U.S. Stock Transfer Corporation, 1745 Gardena Avenue, Glendale,
California 91204-2991, is the Transfer Agent and Registrar for the Company's
Common Stock.
SHARES ELIGIBLE FOR FUTURE SALE; RIGHTS TO ACQUIRE SHARES
Although 1,602,825 shares of the Company's Common Stock currently
outstanding were issued without registration under the Securities Act, all of
these shares, including an aggregate of 410,000 shares owned by executive
officers and directors of the Company, were registered under the Securities Act
at the time of the Company's initial public offering in June 1995. Sales of
substantial amounts of the total number of outstanding shares of Company's
Common Stock, or even the potential for such sales, could have an adverse
effect on any market price for shares of the Company's Common Stock that could
develop, and could impair the Company's
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ability to raise capital through the sale of its equity securities. In
addition, a total of 1,000,000 shares of Common Stock have been reserved for
issuance upon exercise of options granted and to be granted under the Company's
Stock Option Plan, all of which have also been registered under the Securities
Act. During the terms of such options, the holders thereof will have the
opportunity to profit from an increase in the market price of the Company's
Common Stock with resulting dilution in the interest of holders of Common Stock.
The existence of such stock options may adversely affect the terms on which the
Company can obtain additional financing, and the holders of such options can be
expected to exercise or convert such options at a time when the Company, in all
likelihood, would be able to obtain additional capital by offering shares of its
Common Stock on terms more favorable to the Company than those provided by the
exercise or conversion of such options.
DIVIDEND POLICY
The Company has never paid any cash dividends on its Common Stock and
does not anticipate that it will pay dividends in the foreseeable future.
Instead, the Company intends to apply any earnings to the development and
expansion of its business.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
GENERAL
Although Management of the Company has had extensive experience in the
investment industry, the Company itself is a recently formed business entity
and has no significant history of operations or revenues. As such, it can be
expected that future operating results will continue to be subject to many of
the problems, expenses, delays and risks inherent in the establishment of a new
business enterprise, over many of which the Company has no control. There can
be no assurance, therefore, that the Company will be able to achieve or sustain
profitability in future periods. Even if the Company's operations prove to be
marginally profitable, the value of the Company's Common Stock, and the
potential return to investors, could be substantially diminished.
In March 1995, the Company formed the first of two private
investment partnerships through which the Company intends to invest a portion
of the Company's own funds, as well as additional funds committed to the
Company's investment advisory services by additional limited partners, in
stocks selected for purchase and sale by the Company's portfolio manager with
the aid of the Company's proprietary stock-screening models. Although these
assumptions are based on the best estimates of Management, there can be no
assurance that these assessments will prove to be correct. The level of
management fee revenue received by the Company will depend upon the amount of
money invested in the private investment partnerships and the offshore
investment fund managed by the Company, which will in turn depend to a large
extent upon the performance of the Company's stock-screening models and the
Company's portfolio manager in selecting stocks that can be purchased and sold
to generate trading profits.
In July 1993, the Company made its first investment in a developmental
stage business through the incorporation of Whitewing Labs. Although Whitewing
Labs was successful in establishing and growing its business with the Company's
assistance to a level that enabled Whitewing Labs to conduct an initial public
offering in February 1996, there can be no assurance that any or all of the
additional investments which the Company has made to date, or may make in the
future, will generate a return to the Company on its investment that is
comparable to that realized in the case of Whitewing Labs.
The Company's operating results may vary significantly from quarter to
quarter due to a variety of factors including the amount of money in the funds
and partnerships under management by the Company, the actual performance of the
Company's proprietary stock-screening models in selecting stocks that can be
bought and sold by the funds and partnerships to generate trading profits, the
introduction of new investment products by the Company or its competitors,
pricing pressures, general economic conditions, and other factors. Although
the Company's stock-screening models have achieved a performance record to
date that Management believes will enable the funds and partnerships managed by
the Company to attract additional investment capital, there can be no assurance
that selections made by the stock-screening models can continue to be used to
achieve comparable results. The withdrawal of one or more limited partners or
other investors of a substantial amount of capital invested in the funds or
partnerships, or a short fall in the fund's or
9
<PAGE> 10
partnerships' trading profits, could significantly effect the Company's
quarterly results.
Any future success that the Company might enjoy will depend on several
factors, including factors which may be beyond the control of the Company or
which cannot be predicted at this time. These factors may include
technological advances or product obsolescence, increased levels of
competition, including the entry of additional competitors and increased
success by existing competitors, changes in general economic conditions,
increases in operating costs including costs of supplies, personnel, and
equipment, reduced margins caused by competitive pressures and other factors,
and changes in governmental regulation imposed under federal, state, or local
laws.
10
<PAGE> 11
SELECTED FINANCIAL DATA
The selected financial data set forth below as of December 31, 1993,
1994, and 1995, and for the period January 25, 1993 (inception) through December
31, 1993, and the years ended December 31, 1994 and 1995, has been derived from
the Company's audited consolidated financial statements included elsewhere
herein, and should be read in conjunction with those financial statements
(including the notes thereto).
Financial statements have been restated to reflect a change in
accounting for the Company's investment in Whitewing Labs to the equity method
due to the Company's reduced ownership interest in Whitewing Labs. The Company
also accounts for its investments in Acacia Capital Partners L.P. on the equity
method. However, financial statements for the year ended December 31, 1995
reflect consolidation with MerkWerks Corporation. Financial statements for
periods prior to the period ending December 31, 1995 were originally
consolidated to include the accounts of the Company and Whitewing Labs. These
prior statements included operating revenue earned by the Company from the sale
of health care products by Whitewing Labs. Prior to this restatement, sales for
the Company were reported as $455,359 in 1994 and $110,368 in 1993, as compared
to no revenues from this source reported in 1994 and 1993 in the restated
financial statements.
STATEMENT OF OPERATIONS DATA: For the years ended December 31, 1995 and 1994,
and the period ending 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------------------------------------------------------
<S> <C> <C> <C>
Revenues $ 3,194,241 $ -- $ --
Marketing, general and administrative 1,399,042 722,861 596,343
------------- ------------- ------------
Income from operations 1,795,199 (722,861) (596,343)
Other income (expenses)
Management fees 2,880 -- --
Interest income 49,567 37,502 8,215
Miscellaneous income(loss) -- (1,295) (1,505)
Equity in earnings of investments 271,023 (137,782) (276,465)
------------- ------------- ------------
Income before provision for taxes 2,118,669 (824,436) (866,098)
Provision for income taxes 55,756 3,541 1,486
------------- ------------- ------------
Income before minority consolidated
interest 2,062,913 (827,977) (867,584)
Minority interest in net loss of
consolidated subsidiary (459) -- --
------------- ------------- ------------
Net Income (Loss) $ 2,063,372 $ (827,977) $ (867,584)
============= ============= ============
Earnings(loss) per common share
Fully diluted $0.81 ($0.35) ($0.44)
Weighted average shares outstanding
Fully diluted 2,558,647 2,357,050 1,991,000
</TABLE>
BALANCE SHEET DATA: December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
--------------------------------------
<S> <C> <C>
Total Assets $ 4,463,212 $ 779,180
Total Liabilities 357,979 352,230
Minority interest 10,796 --
Stockholders' equity 4,094,437 426,950
</TABLE>
11
<PAGE> 12
RESULTS OF OPERATIONS
The Company provides management and investment advisory services to
investment funds and a limited number of other institutions and accredited
investors in addition to providing managerial and financing assistance to, and
direct investments in, emerging growth companies. As a result, revenue can be
derived from three primary sources: investment management and advisory fees,
revenues generated by subsidiaries whose results of operations are consolidated
with those of the Company, and proceeds from the sale of all or any portion of
the Company's equity interests in the emerging growth companies in which the
Company has invested. In addition, the Company derives income or loss from
investments in investment funds such as Acacia Capital Partners, L.P. and in
subsidiaries such as Whitewing Labs whose results of operations previously were
consolidated with those of the Company. As described below, this income or
loss is reported on the equity method in the Company's financial statements as
a separate line item, entitled "Equity in earnings on investments."
In 1995, the Company began its first private investment partnership,
Acacia Capital Partners, L.P. The Company is a general partner of this fund
and, to date, has invested a total of $750,000 in this partnership. The Company
is also a general partner of a second private investment partnership, Acacia
Growth Fund, L.P., in which the Company invested $100,000 in March 1996. In
January 1996, the Company became the investment advisor to an offshore
investment company, Acacia USA Fund.
As a general partner of the two private investment partnerships, the
Company earns management fees which are accrued quarterly based on the amount of
capital under management. In the capacity of investment advisor to each of
these partners, and as the investment advisor to Acacia USA Fund, the Company
also earns performance fees based on net profits which are collected on the
anniversary of each partner in the case of the domestic private investment
partnerships, and at the end of each calendar year in the case of the offshore
fund.
During 1995, the Company generated approximately $2.7 million in
revenues from the sale of 51% of its holding in Whitewing Labs common stock
and, as a result of those transactions, the Company's overall ownership
interest of Whitewing Labs was reduced to 38% of common equity. Through
proxies given to the Company from other common shareholders of Whitewing Labs,
the Company did maintain a 65% voting interest as of December 31, 1995. This
control was temporary, however, as Whitewing Labs successfully completed a
public offering of more than 1,000,000 shares of newly issued common shares
which further reduced the Company's voting control to 36% of the common shares
outstanding for Whitewing Labs. Revenue for 1995 also includes $478,025 from
the sale of approximately 25% of the Company's interest in its subsidiary,
MerkWerks Corporation, an investment made by the Company in late 1995. An
additional $101,550 in revenue was generated in early January 1996 from the
completion of a private placement for MerkWerks Corporation and the Company now
maintains a 69% stake in MerkWerks Corporation's stock.
Since the Company continued to own a majority interest in MerkWerks
Corporation as of December 31, 1995, the Company's restated financial
statements do reflect the consolidation of the accounts of MerkWerks
Corporation with those of the company. However, no revenue had been generated
by MerkWerks Corporation as of December 31, 1995. Since MerkWerks is the
Company's only consolidated subsidiary in the restated financial statements,
and the Company itself earned no revenue in 1993 and 1994 during its
development stage, no amounts are reflected as revenue in the restated
financial statements for the periods ended December 31, 1993 and 1994.
Prior to December 31, 1995, financial statements reflected the accounts
of Whitewing Labs as a consolidated subsidiary in which the Company reported
revenues from the sale of health care products of $455,359 in 1994 and $110,768
in 1993. Since the Company no longer holds a majority interest in Whitewing
Labs, the financial statements for 1994 and 1993 have been restated in
accordance with generally accepted accounting principles to reflect the change
in accounting for the investment in Whitewing Labs to the equity method. In
applying the equity method, the current financial statements of the Company
report only its proportionate share of losses of Whitewing Labs attributable to
the Company's ownership interest, and no longer includes the gross assets,
sales, and expenses of Whitewing Labs in its financial statements.
The amounts set forth as equity in earnings on investments for the
periods ended December 31, 1993 and 1994 represent the Company's proportionate
share of Whitewing's losses during the periods, offset to a small degree by
interest accrued on Whitewing Labs' debt to the Company. However, in accordance
with the equity method of accounting, the amounts which the Company reports as
equity in the losses of Whitewing Labs are limited to the amount of capital
invested by the Company in Whitewing Labs. As of December 31, 1995, the
Company's proportionate interest in the losses of Whitewing Labs exceeded the
Company's investment therein by $57,618. In 1995, the Company received $200,000
from Whitewing Labs in repayment of a portion of the then outstanding balance of
the loans made by the Company to Whitewing Labs through December 31, 1994.
Since the Company's carrying value had been reduced by its proportionate share
of Whitewing Lab's losses, this $200,000 payment was accounted for as a return
on the Company's investment in Whitewing Labs which resulted in an increase in
the carrying value of the Company's investment therein for financial reporting
purposes. Accordingly, the balance of the Company's investment in Whitewing
Labs, taking into account the $100,000 used to purchase shares of Whitewing
Labs' common stock and amounts loaned to Whitewing Labs through December 1,
1994, the Company's proportionate share of Whitewing Labs' losses (partially
offset by the interest on the loans), and the $200,000 loan repayment, the
outstanding balance of the Company's investment in Whitewing Labs at December
31, 1995 was $214,247.
In addition to the $200,000 received from Whitewing Labs, the amount
reported as equity in earnings on investments for the year ended December 31,
1995 includes $71,023 attributable to an increase in the net asset value of the
Company's $750,000 investment in Acacia Capital Partners, L.P. to $821,023.
Since the net asset value of the Company's investment in the private investment
partnerships can be expected to fluctuate, these fluctuations will affect the
amounts reported as equity in earnings on investments in future periods.
The increases in interest income occurring in 1995 and 1994 were
partially attributable to the additional cash raised by the Company through
sales of equity which were invested in short-term interest bearing securities
and deposits pending use by the Company to fund the development of Whitewing and
other investments and to defray marketing, general and administrative expenses
during the Company's development stage. The increase in 1995 also includes
interest accrued on notes given to the Company by the purchasers of portions of
the Company's interests in Whitewing Labs and MerkWerks Corporation.
The Company's marketing, general and administrative expenses increased
by $676,181 from 1994 to 1995. The significant components of this increase
consisted primarily of consulting, legal, accounting, and marketing costs, which
exceeded 1994 amounts by approximately $529,000. The increase in these costs
was a direct result of the Company's heightened activity in the establishment of
its investment advisory services and formation of emerging corporations as well
as the development of its existing entities. In 1994, marketing, general and
administrative expenses were 21% higher in comparison with 1993 which was
primarily due to salaries and consulting expenses. These totalled $519,312 for
the year ended December 31, 1994, and were $342,355 for the period ended
December 31, 1993. The difference is a result of the eleven-month reporting
period for 1993, and the increased number of employees of the Company in 1994.
12
<PAGE> 13
LIQUIDITY AND CAPITAL RESOURCES
To date, the Company has relied upon the sale of equity securities to
generate the capital needed to finance the implementation of its plan of
operations. However, Management believes management and performance fees
payable to Company through its investment advisory services will become a
primary source of revenue in the foreseeable future. Moreover, the Company also
expects to generate revenues from the sale of a portion of its investments to
further support ongoing operations.
The Company funded its operations during its start-up period with the
net proceeds generated through the sale of an aggregate of 1,502,825 shares of
the Company's Common Stock in three private placements. In the first private
placement, which was completed in August 1993, 887,000 shares of Common Stock
were sold to a total of 15 investors at $1.00 per share, generating proceeds to
the Company, after deduction of expenses, of approximately $741,000. The
second private placement, which was completed in December 1993, resulted in the
sale of an additional 479,000 shares of Common Stock to 23 new investors at
$2.00 per share, resulting in net proceeds to the Company of approximately
$806,000. In the third private placement, which was completed in September
1994, an additional 136,825 shares of the Company's Common Stock were sold at
$4.00 per share to a total of 23 investors, resulting in net proceeds to the
Company of approximately $450,000.
On June 15, 1995, the Company's Registration Statement on Form SB-2
became effective under the Securities Act. Pursuant to the Registration
Statement, the Company registered 200,000 shares of its authorized but unissued
Common Stock which could be offered and sold to the public by the Company,
through its executive officers and directors, for a period of 90 days
thereafter. During this 90-day period, which ended September 15, 1996, a total
of 160,847 of these shares were sold by the Company at $6.00 per share, raising
net proceeds of approximately $663,808. In addition, all of the 1,502,825
shares of the Company's Common Stock that had been previously issued in private
transactions without registration and 100,000 shares of Company's Common Stock
issued in connection with the organization of the Company were registered under
the Securities Act for resale by the existing shareholders of the Company
identified in the Prospectus included in the Registration Statement. The
Registration Statement also registered for issuance the 1,000,000 shares of the
Company's Common Stock issuable upon exercise of options granted and available
for grant under the Company's Stock Option Plan.
For a description of amounts invested in Acacia Capital Partners,
L.P., see Item 1. Description of Business - "Capital Management/Advisory
Services." For a description of amounts invested by the Company in and/or
loaned to Whitewing Labs and MerkWerks Corporation, see Item 1. Description of
Business - "Emerging Businesses/Affiliates."
Cash flows from operations increased to $1,940,900 in 1995 primarily due to
the partial sale of the Company's interest in Whitewing Labs, as compared to a
deficit in cash flows from operations in 1994, or $695,590. This increase in
operating cash flows was offset by $2,498,168 of cash used to support investing
activities. In 1995, the Company sold some of its interests in Whitewing Labs
and MerkWerks Corporation in exchange for notes receivable. Since December 31,
1995, the Company has collected $336,250 in principal amount of these notes, and
anticipates that these notes will provide cash flow for the Company's planned
operations in 1996. These notes mature in early to mid-1996.
Management believes that the Company will generate sufficient cash
flow, supplemented by its existing cash resources, to finance the Company's
operations at currently anticipated levels for at least the
13
<PAGE> 14
next twelve months. However, there can be no assurance that the Company will not
encounter unforeseen difficulties that may deplete its capital resources more
rapidly than anticipated. On the other hand, if circumstances indicate that the
Company should endeavor to expand its business at a faster rate than that
currently planned for, it is likely that the Company would attempt to raise
additional capital to accelerate its growth. In all events, the Company's
ability to continue operations beyond twelve months will depend on its ability
to generate significant cash flow from its operations. If sufficient cash
flow is not being generated at the end of this period, the Company may be
required to seek additional funds through equity, debt, or other external
financing. Moreover, the development and expansion of the Company's business
could place significant demands on the Company's infrastructure, and may likely
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.
ITEM 7. FINANCIAL STATEMENTS.
The financial statements and supplemental data required by this Item
are filed as exhibits hereto, as listed in the Index to Financial Statements
included under Item 13(c) of Part IV below, and are incorporated herein by this
reference.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable.
14
<PAGE> 15
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The information required by this Item will be set forth in the
Company's definitive proxy statement to be filed within 120 days after the end
of the fiscal year covered hereby, and is incorporated herein by this reference.
ITEM 10. EXECUTIVE COMPENSATION.
The information required by this Item will be set forth in the
Company's definitive proxy statement to be filed within 120 days after the end
of the fiscal year covered hereby, and is incorporated herein by this reference.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.
The information required by this Item will be set forth in the
Company's definitive proxy statement to be filed within 120 days after the end
of the fiscal year covered hereby, and is incorporated herein by this reference.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item will be set forth in the
Company's definitive proxy statement to be filed within 120 days after the end
of the fiscal year covered hereby, and is incorporated herein by this reference.
15
<PAGE> 16
PART IV
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.
(a) Exhibits. The following exhibits are either filed herewith or
incorporated herein by reference:
3.1 Articles of Incorporation, as amended*
3.2 Bylaws, as amended*
10.1 Lease of Company's Executive Offices at 12 South Raymond
Avenue, Pasadena, California 91105*
10.2 The Company's Stock Option Plan*
10.3 Form of Stock Option Agreement*
22.1 Subsidiaries*
* Incorporated by reference from the Company's Registration
Statement on Form SB-2 (33-87368-L.A.) which became
effective under the Securities Act of 1933, as amended,
on June 15, 1995
(b) Reports on Form 8-K. None.
(c) Index to Financial Statements.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Balance Sheets as of December 31, 1995 and 1994 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Statements of Operations for the Years Ended December 31, 1995 and 1994, and the Period Ended 1933 . . . . . . . . . F-3
Statements of Stockholders' Equity for the Years ended December 31, 1995 and 1994, and the Period Ended 1993 . . . . F-4
Statements of Cash Flows, for the Years ended December 31, 1995 and 1994, and the Period Ended 1993 . . . . . . . . . F-5
Notes to Consolidated Financial Statements. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
</TABLE>
16
<PAGE> 17
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has caused this report to be signed on its behalf
by the undersigned, thereunto duly authorized.
Acacia Research Corporation
By: R. BRUCE STEWART
--------------------------------------
R. Bruce Stewart
President, Treasurer and Director
Dated: March 29, 1996
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
<TABLE>
<S> <C> <C>
R. BRUCE STEWART Chairman of the Board March 29, 1996
- -------------------------------------- of Directors and Treasurer
R. Bruce Stewart
BROOKE P. ANDERSON
- -------------------------------------- Director March 29, 1996
Brooke P. Anderson
FRED A. DE BOOM
- -------------------------------------- Director March 29, 1996
Fred A. de Boom
FRED R. RYAN
- -------------------------------------- Director March 29, 1996
Paul R. Ryan
</TABLE>
<PAGE> 18
Finocchiaro & Co.
Certified Public Accountant
150 East Colorado Boulevard - Suite 201
Pasadena, California 91105
Telephone (818) 449-6300 - Telecopier (818) 449-6299
INDEPENDENT AUDITOR'S REPORT
To the Stockholder and the Board of Directors
Acacia Research Corporation
We have audited the accompanying consolidated balance sheet and balance sheet
of Acacia Research Corporation as of December 31, 1995 and 1994, and the
related consolidated statements of operations, stockholders' equity, and cash
flows for the year ended December 31, 1995, as well as the statements of
operations, stockholders' equity, and cash flows for the periods ended December
31, 1994 and 1993. These financial statements are the responsibility of Acacia
Research Corporation's management. Our responsibility is to express and
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable basis
for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Acacia Research Corporation as
of December 31, 1995 and 1994, and the results of operations and cash flows for
each of the three years in the period ended December 31, 1995, in conformity
with generally accepted accounting principles.
As discussed in Note 2 to the financial statements, and as required by
generally accepted accounting principles, Acacia Research Corporation has
restated its financial statements for the periods ended December 31, 1994 and
1993, to reflect its change in accounting for its investment in Whitewing Labs
to the equity method.
Pasadena, California
March 14, 1996
F-1
<PAGE> 19
ACACIA RESEARCH CORPORATION
BALANCE SHEETS
December 31, 1995 and 1994
<TABLE>
<CAPTION>
1995 1994
----------- ---------
<S> <C> <C>
ASSETS
Current Assets
Cash and cash equivalents $ 788,611 $ 361,021
Notes receivable 1,846,000 -
Receivables from affiliates 176,885 314,247
Other receivables 74,994 39,980
Prepaid expenses 12,948 33,181
Deferred tax benefit 15,820 -
---------- ---------
Total current assets 2,915,258 748,429
Equipment, furniture, and fixtures 63,569 28,738
Other assets
Investments, at equity 821,023 -
Deferred tax benefit 659,721 -
Organization costs, net of accumulated amortization
of $1,251 and $2,045 3,641 2,013
---------- ---------
Total Assets $4,463,212 $ 779,180
========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 129,066 $ 34,556
Equity in deficit of investment, at equity 114,247 314,247
Income taxes payable 110,471 800
---------- ---------
Total current liabilities 353,784 349,603
Deferred tax liability 4,195 2,627
---------- ---------
Total other liabilities 357,979 352,230
Commitments and contingencies
Minority interest 10,796 -
Stockholders' equity
Common stock, no par value, 10,000,000 shares authorized,
1,837,672 shares in 1995 and 1,577,825 shares in 1994
issued and outstanding, 25,000 shares unissued in 1995 and 1994 3,934,877 2,172,509
Retained earnings (deficit) 367,812 (1,695,559)
Less stock subscription receivable (208,252) (50,000)
---------- ---------
Total stockholders' equity 4,094,437 426,950
---------- ---------
Total Liabilities and Stockholders' Equity $4,463,212 $ 779,180
========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-2
<PAGE> 20
ACACIA RESEARCH CORPORATION
STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1995 and 1994 and the Period Ended 1993
<TABLE>
<CAPTION>
1995 1994 1993
------------ --------- ----------
<S> <C> <C> <C>
Revenues $ 3,194,241 $ - $ -
Marketing, general, and administrative 1,399,042 722,861 596,343
------------ --------- ----------
Income from operations 1,795,199 (722,861) (596,343)
Other income (expenses)
Management fees 2,880 - -
Interest income 49,567 37,502 8,215
Miscellaneous income (loss) - (1,295) (1,505)
Equity in earnings of investments 271,023 (137,782) (276,465)
------------ --------- ----------
Income before provision for taxes 2,118,669 (824,436) (866,098)
Provision for income taxes 55,756 3,541 1,486
------------ --------- ----------
Income before minority interest 2,062,913 (827,977) (867,584)
Minority interest in net loss of consolidated
subsidiary (459) - -
------------ --------- ----------
Net Income (Loss) $ 2,063,372 $(827,977) $ (867,584)
============ ========= ==========
Earnings (loss) per common share
Primary $0.81 ($0.35) ($0.44)
Fully diluted $0.81 ($0.35) ($0.44)
Weighted average shares outstanding
Primary 2,558,647 2,357,050 1,991,000
Fully diluted 2,558,647 2,357,050 1,991,000
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-3
<PAGE> 21
ACACIA RESEARCH CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1995 and 1994, and the Period Ended 1993
<TABLE>
<CAPTION>
Common Common Retained Stock
Shares Stock Earnings (deficit) Subscriptions Total
----------- --------- ------------------ ------------- ----------
<S> <C> <C> <C> <C> <C>
1993
Stockholders' equity, January 25, 1993 (inception) - $ - $ - $ - $ -
Net loss (867,584) (867,584)
Common stock issued 1,441,000 1,895,000 1,895,000
Issuance costs (247,392) (247,392)
--------- ----------- ----------- ---------- ----------
Stockholders' equity, December 31, 1993 1,441,000 1,647,608 (867,584) - 780,024
1994
Net loss (827,977) (827,977)
Common stock issued 136,825 547,300 547,300
Issuance costs (97,399) (97,399)
Common stock unissued for stock subscriptions 50,000 (50,000) -
Compensation expense relating to stock options 25,000 25,000
--------- ----------- ----------- ---------- ----------
Stockholders' equity, December 31, 1994 1,577,825 2,172,509 (1,695,561) (50,000) 426,948
1995
Net income 2,063,373 2,063,373
Common stock issued 136,180 817,082 817,082
Issuance costs (167,974) (167,974)
Stock options exercised 74,500 183,375 183,375
Common stock issued for stock subscriptions 16,167 97,002 (97,002) -
Stock options exercised for stock subscriptions 33,000 61,250 (61,250) -
Tax benefit from nonstatutory stock options 619,258 619,258
Compensation expense relating to stock options 142,375 142,375
Stock warrants issued 10,000 10,000
--------- ----------- ----------- ---------- ----------
Stockholders' Equity, December 31, 1995 1,837,672 $ 3,934,877 $ 367,812 $ (208,252) $4,094,437
========= =========== ========== ==========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-4
<PAGE> 22
ACACIA RESEARCH CORPORATION
STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1995 and 1994 and the Period Ended 1993
<TABLE>
<CAPTION>
1995 1994 1993
----------- --------- ---------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 2,063,372 $(827,977) $(867,584)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 9,681 6,517 2,270
Deferred taxes (54,715) 1,941 686
Research and development for stock - - 100,000
Undistributed (earnings) loss of affiliate (271,023) 137,782 276,465
Unrealized gain on trading securities (1,505) 1,505
Minority interest in net loss (459) - -
Sale of minority interest in subsidiary 11,255 - -
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable,
inventories, prepaid expenses, and other
assets (14,782) (33,397) (39,764)
Increase (decrease) in accounts payable,
accrued expenses, payroll taxes payable,
and other liabilities 197,571 21,049 12,258
--------- --------- ---------
Net cash provided (used) by operating activities 1,940,900 (695,590) (514,164)
Cash flows from investing activities:
Purchase of equity investment (750,000) - (100,000)
Payment received on advances to affiliate 200,000 - -
Advances to affiliate (62,638) (40,000) (274,247)
Advances to officers - 73,447 (73,447)
Notes receivable (1,846,000) - -
Capitalized expenditures (39,530) (13,970) (23,517)
--------- --------- ---------
Net cash provided (used) by investing activities (2,498,168) 19,477 (471,211)
Cash flows from financing activities:
Compensation from stock options 142,375 25,000 -
Issuance costs (167,974) (97,399) (247,392)
Proceeds from sale of common stock 1,010,457 672,300 1,670,000
--------- --------- ---------
Net cash provided (used) by financing activities 984,858 599,901 1,422,608
--------- --------- ---------
Increase (decrease) in cash and cash equivalents 427,590 (76,212) 437,233
Cash and cash equivalents, beginning 361,021 437,233 -
--------- --------- ---------
Cash And Cash Equivalents, Ending $ 788,611 $ 361,021 $ 437,233
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.
F-5
<PAGE> 23
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DEVELOPMENT STAGE COMPANY
Acacia Research Corporation (the "Company") was incorporated on January
25, 1993 under the state laws of California. The Company offers a
range of investment opportunities to its clients and shareholders. The
Company provides traditional capital management services and also
provides management services to and makes direct investments in new
emerging companies. The Company no longer is considered a development
stage company for financial reporting purposes since significant
revenues have been earned from the sale of an initial business
development interest.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of consolidation - The accompanying consolidated financial
statements for year ended December 31, 1995 include the accounts of the
Company and its 75% 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.
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. The cost and related accumulated depreciation of
property and equipment retired or sold is removed from the account and
any differences between the undepreciated amount and the proceeds from
the sale is charged or credited to income. 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.
Net income (loss) per share - Earnings (loss) per 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, and included in the registration statement, as
amended, that was filed with the SEC on June 5, 1995, which became
effective June 15, 1995. 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 periods
prior to December 31, 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 approximately
1,000,000 shares 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 reduced the loss per common
share for the year ended December 31, 1994 from $0.39 per share to
$0.35 per share.
F-6
<PAGE> 24
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. EQUIPMENT, FURNITURE, AND FIXTURES
Equipment, furniture, and fixtures consist of the following at
December 31, 1995 and December 31, 1994:
<TABLE>
<CAPTION>
1995 1994
------------ -------------
<S> <C> <C>
Computer equipment $ 45,730 $ 24,891
Furniture and fixtures 34,260 11,383
------------ ------------
79,990 36,274
Accumulated depreciation (16,421) (7,536)
------------ ------------
Total Equipment, Furniture, and Fixtures $ 63,569 $ 28,738
============ ============
</TABLE>
Depreciation expense for the years ended December 31, 1995 and 1994
was $8,887 and $5,864, respectively.
4. COMMITMENTS AND CONTINGENCIES
Lease obligations - As of December 31, 1995, the furniture and
fixtures account included assets in the amount of $8,661 financed by
capital lease agreements which will expire in 1996 and 1999.
Accumulated depreciation includes $1,219 of amortization related to
assets financed by capital lease agreements. The amortization of
assets under capital lease has been included in depreciation expense.
The Company leases office facilities under operating leases through
December 1998, with options to renew the leases at a rate determined
by the Consumer Price Index at the time of renewal. The Company's
current minimum monthly lease payment is $2,168. Rent expense for the
years ended December 31, 1995 and 1994 were approximately $29,000 and
$34,000 respectively.
At December 31, 1995, the future minimum lease payments for capital
and operating leases equalled the following:
<TABLE>
<CAPTION>
CAPITAL OPERATING
---------- ---------
<S> <C> <C>
1996 $ 2,994 $ 26,016
1997 2,184 26,016
1998 2,184 26,016
1999 1,638 -
---------- ---------
Totals 9,000 78,048
Less interest portion (2,078) -
---------- ---------
Minimum lease payments $ 6,922 $ 78,048
========== =========
</TABLE>
5. STOCK OPTIONS AND WARRANTS
During 1993, the Company adopted a stock option plan ("the 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 Plan,
which covers an aggregate of 1,000,000 shares, 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 Plan.
F-7
<PAGE> 25
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. STOCK OPTIONS AND WARRANTS (continued)
Under the terms of the 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.
The following is a summary of common stock options:
<TABLE>
<CAPTION>
WEIGHTED
SHARES PRICES AVERAGE
----------------------------------
<S> <C> <C> <C>
1993
Balance at January 25, 1993 - - -
Options granted 550,000 $1.50-$2.00 $1.59
------- ---------- ----
1994
Balance at December 31, 1993 550,000 $1.50-$2.00 $1.59
Options granted 259,225 $1.50-$4.40 $2.05
------- ---------- ----
1995
Balance at December 31, 1994 809,225 $1.50-$4.40 $1.74
Options granted 294,000 $1.50-$5.25 $4.80
Options exercised (107,500) $1.50-$5.25 $2.28
Options cancelled (105,000) $2.00 $2.00
------- ------------ ----
Balance at December 31, 1995 890,725 $1.50-$5.25 $2.66
======= ========== ====
Exercisable at December 31, 1995 775,225 $1.50-$5.25 $2.36
======= ========== ====
</TABLE>
As of the December 31, 1995 and 1994, there were 1,775 and 190,775
shares reserved for grants of common stock options.
As of December 31, 1995 the Company has 100,000 warrants outstanding.
The warrants are exercisable at $2.00 per share, and expire on January
1, 2000.
6. NOTES RECEIVABLE
As of December 31, 1995, the Company holds promissory notes from
individuals related to the sale of common stock owned by the Company
in Whitewing Labs, and MerkWerks Corporation, in the amount of
$1,775,000, and unsecured notes in the amount of $71,000. These notes
generally bear interest at 5% per annum and are generally secured by
the common stock sold and personally guaranteed by the holder. The
value of the collateral meets or exceeds the face amount of the
secured notes as of the date of this report. These notes mature in
March and May of 1996. Accrued interest receivable on notes
receivable amounts to approximately $13,200 as of December 31, 1995.
Subsequent to the balance sheet date the Company has collected
$356,250 on the notes receivable outstanding as of December 31, 1995.
F-8
<PAGE> 26
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. NOTES RECEIVABLE (continued)
The following is a summary of notes receivable at December 31, 1995:
<TABLE>
<S> <C>
Notes receivable due from stockholders, secured $ 530,000
Notes receivable, secured 1,245,000
Notes receivable, unsecured 71,000
-----------
Total Notes Receivable $ 1,846,000
===========
</TABLE>
7. INVESTMENTS, AT EQUITY
Investments carried at equity, and the Company's ownership in each
consist of the following at December 31, 1995 and 1994:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C>
Whitewing Labs 38% 100%
Acacia Capital Partners, L.P. 60% 0%
</TABLE>
The net losses attributable to the Company as equity owner of
Whitewing Labs, exceed the carrying value of the investment on the
Company's financial statement, by approximately $57,000 in 1995 and
$173,000 in 1994. Accordingly, the Company has suspended the use of
equity method until such time as the future earnings attributable to
the Company exceed the prior losses suspended from the investment in
Whitewing Labs. Whitewing Labs is engaged in the development and
distribution of healthcare products. The carrying value of these
shares in these financial statements is $0, and the market value of
shares owned by the Company at December 31, 1995 was approximately
$2,700,000, based upon the initial public offering price of $5 per
share. A summary of the financial information for Whitewing Labs is
as follows:
<TABLE>
<CAPTION>
1995 1994
---- ----
<S> <C> <C> <C>
Current assets $ 1,031,840 $ 787,987
Noncurrent assets 751,579 27,392
----------- -----------
Total Assets $ 1,783,419 $ 815,379
=========== ===========
Current liabilities $ 561,651 $ 600,795
Shareholders' Equity 1,221,768 214,584
----------- -----------
Total Liabilities and Equity $ 1,783,419 $ 815,379
=========== ===========
1995 1994 1993
---- ---- ----
Net Sales $ 3,174,206 $ 455,359 $ 110,368
Cost of goods sold 459,661 38,836 19,228
----------- ----------- -----------
Gross profit $ 3,014,545 $ 416,523 $ 91,140
Operating income (loss) $ 41,566 $ (254,527) $ (274,834)
Net Income (loss) $ 20,695 $ (284,000) $ (279,390)
</TABLE>
The Company records its investment in Acacia Capital Partners, L.P. at
equity as its control is temporary, and in accordance with
authoritative pronouncements regarding investments in partnerships.
The Company's capital account with respect to Acacia Capital Partners,
L.P. is $821,023, and the total net assets of the partnership are
$1,365,742 as of December 31, 1995. Acacia Capital Partners, L.P. is
a California limited partnership that invests primarily in large-cap
U.S. equity securities.
F-9
<PAGE> 27
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. PROVISION FOR INCOME TAXES
Provision for income taxes consists of the following:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
--------------------------------------------
<S> <C> <C> <C>
1995
Current $ 63,141 $ 47,330 $ 110,471
Deferred (46,360) (8,355) (54,715)
1994
Current - 1,600 1,600
Deferred 1,524 417 1,941
1993
Current - 800 800
Deferred 539 147 686
</TABLE>
A reconciliation of the Federal statutory tax rate and the effective
tax rate is as follows:
<TABLE>
<CAPTION>
1995 1994 1993
------------------------------------------
<S> <C> <C> <C>
Statutory Federal tax rate 34.0% 0.0% 0.0%
State income taxes-net of federal benefit 0.6 0.2 0.1
Equity earnings of affiliates (4.6) 0.0 0.0
Net operating loss carryforwards (21.1) 0.0 0.0
Tax benefit from nonstatutory options (6.7) 0.0 0.0
Other, net 0.4 0.2 0.1
------------------------------------------
Effective income tax rates 2.6% 0.4% 0.2%
==========================================
</TABLE>
The Company utilized net operating loss carryforwards of $1,249,223
and $954,547 to offset taxable income for the year ended December 31,
1995 for Federal and California purposes, respectively.
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>
1995 1994
-----------------------------
<S> <C> <C>
DEFERRED TAX ASSETS:
Tax basis of investments at equity $ 40,463 $ 43,300
Nonstatutory stock options 619,258 54,125
Net operating loss carryforwards - 513,509
State income tax deductions 15,820 272
-----------------------------
Gross deferred tax assets 675,541 611,206
Valuation allowance - (611,206)
-----------------------------
Deferred tax assets $ 675,541 $ -
=============================
DEFERRED TAX LIABILITIES:
Equipment, furniture & fixtures $ 4,195 $ 2,627
=============================
</TABLE>
The Company believes that all deferred tax assets as of December 31,
1995 are more likely than not to be realizable as a result of the
public offering of common stock made by its investment, Whitewing
Labs, in February of 1996.
F-10
<PAGE> 28
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. COMMON STOCK SUBSCRIPTIONS
As of December 31, 1995, the Company has a $50,000 unsecured
promissory note receivable from an individual. The note was issued in
connection with the purchase of 25,000 shares of common stock which
have not been issued to the individual. The note bears interest at 4%
per annum and is due in May of 1996. Other receivables include
approximately $3,900 of interest due on this note. The Company
expects to receive full payment from the individual, and no adjustment
has been made to the carrying value of this note.
The Company also has promissory notes in the amount of $158,252 in
connection with the purchase of 16,167 shares of common stock, and the
exercise of 30,000 common stock options. These notes bear interest at
5% per annum and are due in May of 1996. Interest receivable in the
amount of $1,400 has been accrued on these notes.
10. RECEIVABLES FROM AFFILIATES
Receivables from affiliates consist of a promissory note with a
balance of $114,247 and $314,247 at December 31, 1995 and 1994,
respectively, bearing interest at 8% per annum. At December 31, 1995
and 1994 other receivables included approximately $43,000 and $29,000,
respectively, of interest receivable on this note. All outstanding
amounts due on this note have been received subsequent to the balance
sheet date. Also included in receivables from affiliates at December
31, 1995 are advances for the benefit of an organization that the
Company became a shareholder of in March of 1996 in the amount of
$62,638.
11. SUPPLEMENTAL CASH FLOW INFORMATION
As disclosed in Note 4, the Company incurred a capital lease
obligation in 1993 of $2,052 and $6,609 in 1995. Cash paid for the
years ended December 31, 1995 and 1994 for interest was $23,492 and
$306. The Company paid cash for income taxes in the amount of $814
in 1994.
12. CONCENTRATION OF CREDIT RISK
Notes receivable at December 31, 1995 subject the Company to
concentration of credit risk due to notes in the amount of $1,595,000
being due from two individuals. The risk is limited as these notes
are collateralized by common stock with a value of $1,510,000 and
personally guaranteed by the holders as of December 31, 1995.
The Company maintains its cash balances with financial and brokerage
institutions located in Southern California. As of December 31, 1995
the Company maintained balances of $699,405 in excess of insured
amounts with these institutions. No balances exceeded insured amounts
at December 31, 1994.
13. SEGMENT INFORMATION
The results for the year ended December 31, 1995 include the
consolidated balances of MerkWerks Corporation. MerkWerks Corporation
is engaged in the business of software development. As of December
31, 1995 there have been no sales related to those operations. These
financial statements do include $64,013 of administrative expenses
that were incurred by MerkWerks Corporation. The total assets of
MerkWerks Corporation at December 31, 1995 are $106,623, of which
there are no capital assets. Assets of the subsidiary consist of cash
and organization costs, net of amortization.
The revenues reported for the year ended December 31, 1995 consisted
of transactions between several investors and the Company. Included
in those revenues were sales to Wilfred Desrosier in the amount of
$1,125,000, sales to Dr. Robert Ching in the amount of $580,000, and
sales to Mark Rosen in the amount of $510,000.
F-11
<PAGE> 29
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE I. MARKETABLE SECURITIES, OTHER INVESTMENTS
<TABLE>
<CAPTION>
Name Principal Cost Market Value Book Value
of Issuer Amount/Shares of Issue of Issue of Issue
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Whitewing Labs, common stock 548,960 (1) $ 48,796 $ 2,744,800 $ -(2)
Acacia Capital Partners, L.P. $821,023 $ 821,023 $ 821,023 $ 821,023
---------- ---------- ----------
Totals $ 869,819 $ 3,565,823 $ 821,023
========== ========== ==========
</TABLE>
(1) Total shares adjusted for 3 for 2 stock split, effective February 9, 1996.
(2) Book value at December 31, 1995 is comprised of a note receivable from
Whitewing Labs in the amount of $114,247 and a deficit in the common equity of
the affiliate of $114,247.
F-12
<PAGE> 30
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE II. AMOUNTS RECEIVABLE FROM RELATED PARTIES
<TABLE>
<CAPTION>
Balance at
beginning of Balance at
Name of debtor period Additions Deductions end of period
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1995
Whitewing Labs(a) $314,247 $ - $200,000 $114,247
Mark Rosen(b) - 520,000 - 520,000
William R. Tipton(c) - 100,000 50,000 50,000
-------- -------- -------- --------
$314,247 $620,000 $250,000 $684,247
======== ======== ======== ========
1994
Whitewing Labs $274,247 $ 40,000 $ - $314,247
======== ======== ======== ========
1993
Whitewing Labs $ - $274,247 $ - $274,247
======== ======== ======== ========
</TABLE>
(a) Unsecured note receivable bearing 8% interest per annum, and due in
December 31, 1996. The balance on this note was paid in full in February
1996.
(b) Two notes receivable, secured by common stock in Whitewing Labs and
MerkWerks Corporation, bearing interest at 5% per annum in the face amount
of $410,000, and two unsecured notes bearing interest at 5% per annum. All
notes are due in May of 1996.
(c) Secured note receivable bearing interest at 5% per annum. The note is
secured by common stock in Whitewing Labs. The balance on this note was
paid in full in February 1996.
F-13
<TABLE> <S> <C>
<ARTICLE> 5
<CURRENCY> U.S. DOLLARS
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1995
<PERIOD-START> JAN-01-1995
<PERIOD-END> DEC-31-1995
<EXCHANGE-RATE> 1
<CASH> 788,611
<SECURITIES> 0
<RECEIVABLES> 1,846,000
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,915,258
<PP&E> 79,990
<DEPRECIATION> 16,421
<TOTAL-ASSETS> 4,463,212
<CURRENT-LIABILITIES> 353,784
<BONDS> 0
<COMMON> 3,726,625
0
0
<OTHER-SE> 367,812
<TOTAL-LIABILITY-AND-EQUITY> 4,463,212
<SALES> 0
<TOTAL-REVENUES> 3,194,241
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 1,399,042
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 2,118,669
<INCOME-TAX> 55,756
<INCOME-CONTINUING> 2,063,372
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 2,063,372
<EPS-PRIMARY> 0.81
<EPS-DILUTED> 0.81
</TABLE>
