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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 [FEE REQUIRED]
For the fiscal year ended December 31, 1996.
0R
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 [NO FEE REQUIRED]
For the transition period from N/A to N/A
COMMISSION FILE NUMBER 0-26068
ACACIA RESEARCH CORPORATION
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(Exact name of registrant as specified in its charter)
California 95-4405754
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(State or other jurisdiction of (I.R.S. Employer
incorporation organization) Identification No.)
12 South Raymond Avenue, Pasadena CA 91105
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(Address of principal (Zip Code)
executive offices)
Registrant's telephone number, including area code: (818) 449-6431
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act: COMMON STOCK, NO
PAR VALUE
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
filing requirements for the past 90 days. YES X NO
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Indicate by check mark that disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not 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-K or any
amendment to this Form 10-K. /X/
The aggregate market value of the voting stock held by non-affiliates of
the registrant, computed by reference to the average bid and asked prices of
such stock, as of March 27, 1997 was approximately $12,140,563. (All officers
and directors of the registrant are considered affiliates.)
At March 27, 1997 the registrant had 2,078,172 shares of Common Stock, and
no shares of Preferred Stock, all no par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant's definitive proxy statement for its Annual Meeting
of Shareholders to be filed with the Commission within 120 days after the close
of the registrant's fiscal year are incorporated by reference into Part III.
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ITEM 1. BUSINESS
GENERAL
Acacia Research Corporation, a California corporation (the "Company"), is a
capital management company that provides investment advisory services, and also
provides management services to and makes direct investments in emerging
corporations. The Company's operations are comprised of two lines of business:
(i) investment advisor to domestic and offshore private investment funds; and
(ii) investing in and developing start-up business ventures. The Company is
diversified and each business segment is operated independently.
The Company intends to continue expanding through the acquisition of
additional business ventures or increased ownership positions in its existing
holdings as well as the internal development of its present operations. Present
operations currently consist of significant ownership positions in five emerging
growth companies and investment advisor to two domestic private investment
partnerships and two offshore private investment corporations.
INVESTMENT ADVISORY SERVICES
The Company is a registered investment advisor and a general partner of two
domestic private investment partnerships whose limited partners are required to
be "accredited investors," under Regulation D promulgated under the Securities
Act of 1933. The Company is also the investment advisor to two offshore private
investment corporations. Client funds are invested primarily in large-cap U.S.
equities.
The Company began managing its first private investment partnership, or
hedge fund, in 1995. The Company formed an additional private investment
partnership in April of 1996 and became the investment advisor to two offshore
funds, one in January and the other in June of that year. The Company may
manage additional private investment partnerships and offshore investment funds
in the future.
Advisory fee revenue is derived from quarterly management fees that are
based on a percentage of the amount of money invested in the funds under
management and annual performance fees that are based on a percentage of any
profits that may be realized by the funds' investment activities. 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 engage
consultants to whom it will pay cash and a portion of the advisory fees paid
by clients referred to the Company by such consultant. The Company entered
into a distribution agreement with an international group during the fiscal
year 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.
Although management of the Company has had extensive experience in the
investment industry, the Company itself is a recently formed business entity and
has a short history of operations with limited revenues. The level of
management and performance fee revenue received by the Company will depend upon
the amount of money invested in the funds managed by the Company, which in turn
will depend to a large extent upon the performance of the funds managed by the
Company. There can be no assurance that the Company will prove successful in
raising any additional capital for the investment funds managed by the Company.
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 President
and Chief Executive Officer of the Company. The general partners will be
allocated on an annual basis a performance fee based on a percentage of the
annual net profits of each partner's investment in the partnership. The
general partners will also be entitled to annual management fees payable by
each limited partner based on a percentage 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.
Subsequent to the distribution of advisory fees that may be payable to
consultants or brokers, 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.
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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.
The value of the Company's partnership interest in its two private
investment funds was approximately $625,405 in the aggregate at December 31,
1996.
The capital invested by the Company in its investment 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 partnerships 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 the
investment partnerships is also subject to a significant lack of liquidity,
since there is no public market for interests in the investment partnerships
and no such market can be expected to develop. The Company may withdraw
portions of its capital account under the same terms and conditions as a
limited partner together with the additional requirements placed on a general
partner of providing verification from the funds' auditors and of the Company
maintaining in its capital account an amount equal to the lesser of 1% of the
total value of the fund or $500,000. Limited partners may, on advance notice
to the general partners, withdraw all or part of its capital account as of
any June 30 or December 31 following the first anniversary of the partner's
admission to the partnership. The general partners may waive these
withdrawal restrictions for any partner.
OFFSHORE INVESTMENT FUNDS
The Company is the investment advisor to two offshore private investment
corporations both of which are Cayman Islands exempted companies. Furman
Selz Financial Services Limited, in Dublin, Ireland, is the administrator,
registrar, and transfer agent for these funds.
The Company will be allocated on an annual basis a performance fee based on
a percentage of the annual net profits attributable to the investment of each
shareholder of the two private investment corporations. The Company will also
be entitled to annual management fees payable by the funds based on a percentage
of the value of each fund's capital account. Subsequent to the distribution of
advisory fees that may be payable to consultants or brokers, 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 funds for any of its expenses incurred in managing these funds'
investments. The assets of these offshore funds are exposed to many of the same
risks inherent in the Company's domestic private investment partnerships.
COMPETITION
The Company, in its performance of its investment advisory services,
encounters competition from all other sources of investment management and
advice, including public mutual funds, other private investment funds, money
managers, commercial banks, insurance companies, and stock brokerages, some of
which have substantially greater capital and other resources, and offer a wider
range of financial services.
EMERGING BUSINESSES/AFFILIATES
The Company participates in the formation of emerging or start-up
companies in various fields of business 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 as well as
possessing a potential to generate significant revenues through strong
technology or patent rights and experienced management.
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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.
The Company's current portfolio of emerging companies includes the following:
(i) MerkWerks Corporation ("MerkWerks"); (ii) CombiMatrix Corporation
("CombiMatrix"); (iii) Soundview Technologies Incorporated ("Soundview
Technologies"); (iv) Greenwich Information Technologies LLC ("Greenwich
Information Technologies"); and (v) Whitewing Labs, Inc. ("Whitewing")
(MerkWerks, CombiMatrix, Soundview Technologies, Greenwich Information
Technologies, and Whitewing are collectively referred to hereinafter as the
"Affiliates").
The Company generally invests in start-up ventures with no operating
histories, unproven technologies and products and, in some cases, the need for
identification and implementation of experienced management. Because of the
uncertainties and risks associated with such start-up ventures, investors in the
Company should expect losses, which could be significant, associated with any
possible failed venture. In addition, markets for venture capital in the United
States are increasingly competitive. As a result, the Company faces potential
losses of business opportunities and possible deterioration of the terms of
available financings and equity investments in start-up ventures. Furthermore,
the Company may lack financial resources to fully fund additional ventures in
which it could participate and may be dependent upon external financing to
provide sufficient capital, depending on the number and scope of the ventures
that could be financed.
The venture capital business is marked by a high degree of risk,
including risks associated with identifying and developing new business
opportunities, difficulties selecting ventures with acceptable likelihoods of
success and future profitability, the high risk of loss associated with
investments in start-ups and the competitive nature of the venture capital
business. Identifying and developing each new business opportunity requires
the Company to dedicate significant amounts of financial resources,
management attention and personnel, with no assurance that these expenditures
will be recouped. Similarly, the selection of companies and the determination
of whether a company offers a viable business plan, and an acceptable
likelihood of success and future profitability involves inherent risk and
uncertainty.
MERKWERKS
MerkWerks was formed in September, 1995 as a software development company,
whose first product will be software for use with CD-recordable disk drives for
Macintosh platforms. The product will be called CD WonderWriter-TM- or
WonderWriter-TM-. MerkWerks is in the developmental stage and, to date, has not
completed the development of any products or generated any revenues. Although
MerkWerks anticipates that development of its first software product will be
completed shortly and that its first product may be marketed, through license or
sale, in 1997, no assurances can be given that MerkWerks will ever be able to
successfully market this product or any future products, or that a market for
such products will develop.
The markets for software products are intensely competitive and are
characterized by rapid changes in technological standards. There are
currently more than 25 CD-recordable disk drive software packages on the
market. Although MerkWerks believes that its software alternative provides
better user features and greater enhancement of the usability of
CD-recordable disk drives, the acceptance of MerkWerks software in the market
is unproven and speculative. MerkWerks faces competition from large companies
with substantial technical, marketing, and financial resources, allowing them
to aggressively develop, enhance, and market competing products. These
advantages may allow competitors to respond more quickly than MerkWerks to
emerging technologies or to changing customer requirements. Numerous actions
by these competitors, including price reductions and product giveaways,
increased promotion, the introduction of enhanced products, and product
bundling could have a material adverse effect on MerkWerks ability to develop
and market its software products and on MerkWerks business, financial
condition, and operating results.
The success of MerkWerks' CD-recordable software largely depends on its
acceptance by original equipment manufacturers (OEMs) that produce
CD-recordable disk drives. MerkWerks' strategy is to convince these OEMs of
the utility of MerkWerks' software so that the OEMs will offer such software
with the CD-recordable disk drives prior to their sale to the end-user, which
will generate license fees for MerkWerks and generate market acceptance of
MerkWerks' software. No assurances can be given that MerkWerks' software
will gain the acceptance of OEMs or ever be incorporated into CD-recordable
disk drives.
MerkWerks believes that its CD-recordable disk drive software is
proprietary and intends to rely a combination of statutory and common law,
copyright, trademark and trade secret law, licensing agreements, nondisclosure
agreements and other means to protect it proprietary rights. MerkWerks intends
to enter into confidentiality agreements with OEMs, customers and potential
customers, vendors and other third parties and to generally limit the
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dissemination of its proprietary information. Despite these precautions,
MerkWerks faces the risk that third parties will be able to gain access to and
use its proprietary information to develop similar competing technologies. If
the unauthorized use of its proprietary rights developed to any substantial
degree, MerkWerks' business and operational results could be materially and
adversely affected.
MerkWerks' initial software release will be designed for use with the
Macintosh platform. In addition, MerkWerks anticipates adapting its software to
the Windows platform. However, it is uncertain whether MerkWerks will be
successful in adapting its software to the Windows platform, and, if successful,
whether a viable market will develop for this product. Upon completion of its
CD-recordable utility software product, MerkWerks may begin development of or
acquire other software products, while continuing to support and enhance the
initial product.
The Company provided $100,000 in cash to MerkWerks in exchange for
2,000,000 shares of its common stock, or 100% of the total outstanding shares of
MerkWerks. The Company has also loaned or advanced on behalf of MerkWerks an
aggregate of $98,099 as of December 31, 1996. In December 1995 and January
1996, the Company sold approximately 30% of its interest in MerkWerks for
approximately $600,000. R. Bruce Stewart, the Company's Chairman and Chief
Financial Officer, is the Chairman and Treasurer of MerkWerks, Brooke P.
Anderson, Ph.D, a director of the Company as well as its Vice President,
Research and Development, is a director of MerkWerks, and Kathryn King-Van Wie,
the Company's Chief Operating Officer, serves as Corporate Secretary of
MerkWerks.
MerkWerks' president and chief programmer has an employment agreement with
the Company entitling him to a royalty of 30% of the net profits of the CD-
recordable software, with certain limited expenses excluded from the calculation
of net profits, as well as other rights pertaining to such software. The
Company anticipates that its arrangement with MerkWerks' president will be
restructured in the near future, resulting in a contractual arrangement between
him and MerkWerks relating to the same subject matters.
COMBIMATRIX
CombiMatrix was formed in 1995 and is involved in developing new
technologies intended to represent significant improvements in the field of
drug discovery. CombiMatrix has demonstrated preliminary feasibility of its
core technologies and is currently developing a working prototype to automate
its proprietary technologies. These new technologies involve combinatorial
chemistry, which CombiMatrix anticipates could represent advancements over
existing technologies in the speed and cost-effectiveness of drug discovery.
The Company's investment in CombiMatrix is subject to the risks associated
with new technologies, including the viability of CombiMatrix's technologies,
unknown acceptance, difficulties in obtaining financing, the strength of its
intellectual property protection, increasing competition and the development
of applicable laws and regulations. In addition, because the technologies
critical to the success of this industry are in their infancy, no assurances
can be given that CombiMatrix will be able to successfully implement its
technologies. Furthermore, in the event its technologies prove to be
successful, CombiMatrix intends to pursue collaborations with pharmaceutical
companies, which may include the licensing of CombiMatrix's screening
libraries and possibly the licensing of internally developed chemical
compounds. No assurances can be given that CombiMatrix, even if successful
in developing its technologies, would be able to successful implement
collaborative efforts with pharmaceutical companies.
CombiMatrix intends to vigorously protect its intellectual property rights.
There can be no assurance, however, that CombiMatrix's pending provisional
patent application will issue or that a third party will not violate, or attempt
to invalidate, CombiMatrix's intellectual property rights, possibly forcing
CombiMatrix to expend substantial legal fees. Successful challenges to certain
of CombiMatrix's patents, if issued, would materially adversely affect
CombiMatrix's business, operating results and financial condition. In addition
to the protection that may be afforded by these patents, CombiMatrix requires
confidentiality agreements with customers and potential customers, vendors and
other third parties and to generally limit access to information relating to its
technologies. Despite these precautions, third parties may be able to gain
access to and use its technology to develop similar competing technologies. Any
substantial unauthorized use of CombiMatrix's patent and other proprietary
rights, could materially and adversely affect CombiMatrix's business and its
operational results.
There can be no assurance that certain aspects of CombiMatrix's technology
will not be reverse-engineered by third parties without violating CombiMatrix's
proprietary rights. CombiMatrix's existing protections also may not preclude
competitors from developing products with features and prices similar to or
better than those of CombiMatrix.
The Company provided $100,000 in cash to CombiMatrix in exchange for
4,750,000 shares of its common stock, or 70% of the total outstanding shares of
CombiMatrix at that time. CombiMatrix conducted a private placement of
approximately 546,000 shares of its common stock and raised net proceeds of
approximately $500,000. In addition, the Company sold 785,000 shares of
CombiMatrix, which brought the Company's ownership position to
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approximately 52% of the total outstanding shares as of December 31, 1996.
As of March 27, 1997, CombiMatrix has raised additional funds through a
subsequent private placement. Such private placement has not closed as of the
date of this report. The Company has also loaned or advanced on behalf of
CombiMatrix an aggregate of $121,699, which was repaid to the Company as of
December 31, 1996.
R. Bruce Stewart, the Company's Chairman and Chief Financial Officer, is
the Chairman and Treasurer of CombiMatrix; Paul R. Ryan, a director of the
Company as well as its President and Chief Executive Officer, is the interim
President and a director of CombiMatrix; and Brooke P. Anderson, Ph.D., a
director of the Company and its Vice President, Research Development, is also
a director of the CombiMatrix. Kathryn King-Van Wie, the Company's Chief
Operating Officer serves as Corporate Secretary of CombiMatrix. Two
additional directors, Mark G. Edwards and Rigdon Currie, were elected to the
Board of CombiMatrix in February and March of 1997, respectively. Mr.
Edwards is the Managing Director of Recombinant Capital, a San
Francisco-based firm specializing in negotiating alliances and acquisition
transactions on behalf of biotechnology and pharmaceutical companies. Mr.
Edwards was formerly the Manager of Business Development of Chiron
Corporation, a leading biotechnology company. Mr. Currie is experienced in
guiding the development of high technology companies and currently serves on
the Board of Directors of QMS, Inc. and Wonderware Corporation, among others.
Mr. Currie is also a special limited partner of MK Global Ventures and a
former general partner of Pacific Ventures Partners.
In April 1996, the Company and CombiMatrix's Vice President, Research
and Development entered into a shareholder agreement pertaining to certain
matters relating to CombiMatrix. This agreement provides for the collective
voting of shares owned by the Company and this individual for the election of
certain directors to the CombiMatrix's Board of Directors as designated by
the individual and the Company and certain restrictions on the sale or
transfer of individual's shares of common stock in the CombiMatrix.
SOUNDVIEW TECHNOLOGIES
Soundview Technologies was formed in March 1996 and invests in the
development and commercialization of intellectual property in the
telecommunications field, including audio and video blanking systems, also
known as V-chip technology. Soundview Technologies owns the exclusive right
and title to U.S. Patent #4,554,584, which describes a cost-effective method
for V-chip implementation that can work with components currently in use in
televisions. This particular patent was issued in November 1985 and expires
in November 2002. Soundview Technologies works with various inventors,
consultants, and industry participants to enhance its existing technology as
well as to develop new technologies that complement the Telecommunications
Act, which mandates that all televisions 13 inches and larger sold
approximately twelve months subsequent to the adoption of a television
program rating system contain V-chip circuitry. Soundview Technologies has
developed a V-chip retrofit device, the V Chip Converter-TM-, to be available
for use with the 200 million television sets in the United States that will
be "deaf" to V-chip signals. The V Chip Converter-TM-, a set-top unit that
can accommodate any rating system ultimately adopted, was demonstrated at a
news conference held for that purpose, by congressional sponsors of the
V-chip legislation. Soundview Technologies intends to pursue potential
business opportunities with television manufacturers, chip manufacturers and
television accessory companies for an efficient and cost-effective method of
commercializing its technology.
The Company currently holds 1,233,000 shares of the common stock of
Soundview Technologies, representing 16.4% of the outstanding shares. This
minority position and limited board representation results in the inability of
the Company to control the decision-making of Soundview Technologies. Paul R.
Ryan, a director of the Company and its President and Chief Executive Officer,
is a member of the Board of Directors of Soundview Technologies and R. Bruce
Stewart, the Company's Chairman and Chief Financial Officer, is the Corporate
Secretary of Soundview Technologies. The chief executive officer of Soundview
Technologies is a significant shareholder of Soundview Technologies as well as
the chief executive officer and has a majority membership interest another
affiliate of the Company, Greenwich Information Technologies.
Although Soundview Technologies believes that it owns an enforceable patent
on its technology, no assurances can be given that other companies will not
challenge Soundview Technologies' patent rights or develop competing
technologies that do not infringe Soundview Technologies' patent. Additionally,
whether or not competing products emerge, it is uncertain whether and to what
extent Soundview Technologies will be able to profitably exploit its technology.
In addition, other companies may develop competing technologies that offer
better or less expensive alternatives to those offered by Soundview
Technologies. The potential for the development of a sizable commercial
V-chip market could generate technology that would represent substantial
competition for Soundview Technologies. Potential competitors could
have significantly greater research capabilities and financial and
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technical resources than Soundview Technologies, and some could have
established brand names in the market for television products.
The exclusivity of these patent rights and other proprietary technology
are critical to the successful implementation of Soundview Technologies'
business plan. Despite the protections of the intellectual property laws and
the precautions taken by Soundview Technologies, third parties may be able to
gain access to and use its technology to develop similar competing
technologies. Any substantial unauthorized use of this patent and other
proprietary rights and any infringement on Soundview Technologies' patented
technology could materially and adversely affect Soundview Technologies'
business and its operational results.
GREENWICH INFORMATION TECHNOLOGIES
Greenwich Information Technologies was formed as a limited liability
corporation under the laws of the state of Delaware in 1996 and is the
exclusive marketing and licensing agent for several patents relating to
video-on-demand, however, Greenwich Information Technologies does not
currently own patents. Video-on-demand allows television viewers to order
movies or other programs from a remote file server and to view them at home
with full VCR functionality, including pause, fast forward, and reverse.
Audio-on-demand offers the potential of ordering music song by song and
recording one's own CDs. Greenwich Information Technologies does not
currently own full rights and the acquired U.S. rights include two issued
patents, one application that has been allowed, and one application pending.
Acquired foreign rights include patents issued in Japan, Mexico, and the
Republic of China as well as applications pending in Austria, Belgium,
Denmark, France, Germany, Italy, Luxembourg, Monaco, The Netherlands, South
Korea, Sweden, and the United Kingdom. Those patents that have already been
issued, were issued in the past five years and will not expire for a number
of years. Information-on-demand is considered one of the most significant
applications in interactive entertainment. Greenwich Information
Technologies has begun to pursue business opportunities with possible
providers of information-on-demand systems and others involved in supplying
related information-on-demand services.
Greenwich Information Technologies does not currently own exclusive
right and title to any patents. However, Greenwich Information Technologies
is the exclusive marketing and licensing agent for a number of worldwide
patents and other property pertaining to information-on-demand systems, which
lists as co-inventor the chief executive officer who, along with the Company,
is also a Senior Member of Greenwich Information Technologies. Such
individual has an Assignment Agreement with the other co-inventor of the
technology that grants this individual the right to assign certain patent
rights to another person or entity. Such rights allowed to be granted under
this Assignment Agreement have been granted to Greenwich Information
Technologies in the form of an Exclusive Marketing and Licensing Agreement.
The chief executive officer has entered into a Pledge Agreement with
Greenwich Information Technologies whereby he pledges his right, title and
interest in the technology and related property as collateral security for
the due and punctual performance of all liabilities and obligations under the
Assignment Agreement between the chief executive officer and the other
co-inventor as a means of protection for Greenwich Information Technologies.
Such Pledge Agreement will terminate upon: (a) Greenwich Information
Technologies distributing an aggregate of at least $4,500,000 to its members;
(b) Greenwich Information Technologies effecting a transaction or a series of
transactions in which the implicit aggregate value of Greenwich Information
Technologies is at least $4,500,000; (c) substantially all U.S. patent rights
are assigned to Greenwich Information Technologies; or (d) a liquidation of
Greenwich Information Technologies. The chief executive officer of Greenwich
Information Technologies holds a majority membership interest in Greenwich
Information Technologies as well as is the chief executive officer and a
significant shareholder of another affiliate of the Company, Soundview
Technologies.
Although Greenwich Information Technologies believes that it has
marketing and licensing rights to enforceable patents, no assurances can be
given that other companies will not challenge the underlying patents to these
rights or develop competing technologies that do not infringe such patents.
Additionally, whether or not competing products emerge, it is uncertain
whether and to what extent Greenwich Information Technologies will be able to
profitably market and license its rights to the information-on-demand
technology. In addition, other companies may, however, develop competing
technologies that offer better or less expensive alternatives to those
offered by Greenwich Information Technologies. In the event a competing
technology emerges, because of the potential for the development of a sizable
commercial information-on-demand market, Greenwich Information Technologies
would expect substantial competition. Potential competitors could have
significantly greater research capabilities and financial and technical
resources than Greenwich Information Technologies, and some could have
established brand names in the market for such products.
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The exclusivity of these patent rights are critical to the successful
implementation of Greenwich Information Technologies' business plan. Despite
the protections of the intellectual property laws and the precautions taken
by Greenwich Information Technologies, third parties may be able to gain
access to and use its technology to develop similar competing technologies.
Any substantial unauthorized use of these patents and other proprietary
rights and any infringement on Greenwich Information Technologies' patented
technology could materially and adversely affect Greenwich Information
Technologies' business and its operational results.
The Company signed a letter agreement whereby the Company agreed to
invest $1,000,000 in exchange for a 33.33% membership interest in Greenwich
Information Technologies. As of February 1, 1997, the Company had paid
Greenwich Information Technologies $475,000. On February 10, 1997, the
Company issued a Promissory Note in the principal amount of $525,000 whereby
the Company will make payments to Greenwich Information Technologies of a
minimum of $25,000 each month from February 1, 1997 through July 1, 1997,
$50,000 each month from August 1, 1997 to December 1, 1997, and pay the
outstanding principal plus any accrued and unpaid interest by December 31,
1997. The Promissory Note bears a simple interest rate of 6.5% per annum.
The Company also executed a Pledge Agreement in connection with the
Promissory Note whereby the Company pledged a portion of its membership
interest, while retaining voting and distribution rights to such membership
interest, in order to secure the Company's obligations under the Promissory
Note. Should the Company default on the Promissory Note, the Company could
lose a substantial portion of its membership interest. As of March 28, 1997,
the Company has paid $75,000 towards the note and has a principal balance
owing of $450,000.
The Company sold a portion, 3.31%, of its membership interest to third
parties and currently maintains a membership interest of 30.02% in Greenwich
Information Technologies. Although the Company is one of the two Senior Members
of Greenwich Information Technologies, the Company does not hold a majority of
the board of three Senior Members. Similarly, the Company has no control over
the day to day operations of Greenwich Information Technologies, which are
directed by the chief executive officer, an individual with no affiliation to
the Company. This minority position results in the inability of the Company to
control or direct the decision-making of Greenwich Information Technologies in
any meaningful way.
WHITEWING
On July 29, 1993, the Company incorporated Whitewing under the laws of
the state of California. The Company acquired 100% of the outstanding stock
of Whitewing for a total of $100,000 in cash. Whitewing 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 currently
markets 19 different products that are intended to offer alternatives to
conventional treatments for symptoms associated with the aging process.
Whitewing 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's 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 under certain circumstances. Whitewing stock and
warrants trade on the Nasdaq Small Cap Market under the symbols "WWLI" and
"WWLI-W," respectively. The closing price per share of Whitewing stock was
$7/8 as of March 27, 1997.
The Company currently owns 532,459 shares of the common stock of
Whitewing, representing 18.4% of the outstanding shares and has voting
control over 789,709 shares of common stock or 27.3% of the outstanding
shares as of December 31, 1996. R. Bruce Stewart, the Company's Chairman and
Chief Financial Officer, is Chairman of the Board of Directors of Whitewing
and Paul R. Ryan, the Company's President and Chief Executive Officer, is
also a member of the Board of Directors of Whitewing. At December 31, 1996,
the Company had made loans to Whitewing totalling $36,979, of which $26,587
was paid to the Company by Whitewing during 1997.
Since Whitewing is a publicly traded company, information about
Whitewing is publicly available. Any person seeking such information should
review its reports under the Securities Exchange Act of 1934.
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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 that portion of 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.
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 or forty-five 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, all of which could incur
significant registration and compliance costs. 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 and two part-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.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Reference is made in particular to the description of the Company's plans
and objectives for future operations, assumptions underlying such plans and
objectives and other forward-looking statements included in this section "Item
1. Business," "Item 7. Management's Discussion and Analysis of Financial
Condition and Results of Operations," and in other places in this report. Such
statements may be identified by the use of forward-looking terminology such as
"may," "will," "expect," "believe," "estimate," "anticipate," "intend,"
"continue," or similar terms, variations of such terms or the negative of such
terms. Such statements are based on management's current expectations and are
subject to a number of factors and uncertainties, which could cause actual
results to differ materially from those described in the forward-looking
statements. Such statements address future events and conditions concerning
capital expenditures, earnings, litigation, regulatory matters, markets for
products and services, liquidity and capital resources, and accounting matters.
Actual results in each case could differ materially from those anticipated in
such statements by reason of factors such as future economic conditions, changes
in consumer demand, legislative, regulatory and competitive developments in
markets in which the Company and the Affiliates operate, and other circumstances
affecting anticipated revenues and costs. The Company expressly disclaims any
obligation or undertaking to release publicly any updates or revisions to any
forward-looking statements contained herein to reflect any change in the
Company's expectations with regard thereto or any change in events, conditions
or circumstances on which any such statement is based. Additional factors that
could cause such results to differ materially from those described in the
forward-looking statements are set forth in connection with the forward-looking
statement.
ITEM 2. PROPERTY
The Company leases a 1,980 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
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. 96-5551R (EX). The suit alleges that the Company and Whitewing breached
contracts with Ann Hodges by improperly refusing to permit her to exercise an
option to purchase shares of common stock of the Company and Whitewing. The
Hodges seek $950,000 in damages from the Company and $106,000 in damages from
Whitewing. The Company's management cannot predict with certainty the outcome
of this litigation, however, the impact of an adverse outcome on the Company's
financial position or results of operations may be material.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended December 31, 1996 there were no matters submitted
to a vote of the Company's security holders.
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PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
RECENT MARKET PRICES
The Company's Common Stock began trading under the symbol ACRI on the
Nasdaq National Market System on July 8, 1996. Prior to the Company's
listing on the Nasdaq National Market System and subsequent to June 15, 1995
when the Company's Registration Statement on Form SB-2 became effective under
the Securities Act of 1933, as amended (the "Securities Act"), the Company's
Common Stock traded under the same symbol in the over-the-counter market.
Preceding June 15, 1995, there had been no public market for the Company's
Common Stock.
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.
The high and low bid prices for the Common Stock as reported by the
National Quotation Bureau, Inc. for the period of June 15, 1995 through July 5,
1996 and the Nasdaq Stock Market for the period July 8, 1996 through December
31, 1996 are as follows. Such prices are interdealer prices without retail
markups, markdowns or commissions, and may not necessarily represent actual
transactions.
Fiscal Year 1996 High Low Fiscal Year 1995 High Low
---------------- ---- --- ---------------- ---- ---
First Quarter $8-3/4 $5-1/4 First Quarter N/A N/A
Second Quarter $13-3/4 $7 Second Quarter N/A N/A
Third Quarter $12-3/4 $6-5/8 Third Quarter $10 $5-1/2
Fourth Quarter $11 $7-1/8 Fourth Quarter $8 $5-1/4
On March 27, 1997, the closing bid and asked quotations for the Common
Stock were $7-1/4 and $8, respectively, per share.
On March 27, 1997, there were approximately 425 owners of record of the
Company's Common Stock. The majority of the outstanding shares of the Common
Stock are held by a nominee holder on behalf of an indeterminable number of
ultimate beneficial owners.
SALE OF UNREGISTERED SECURITIES
In December 1996, the Company issued 8,500 warrants convertible into an equal
number of warrants convertible into an equal number of shares of the
Company's Common Stock in connection with financial consulting services,
which transaction was exempt from registration under Section 42 of the
Securities Act of 1933.
DESCRIPTION OF SECURITIES
The Company is authorized to issue up to 10,000,000 shares of Common Stock,
without par value, of which 2,078,172 shares of Common Stock have been issued
and are outstanding as of March 27, 1997. 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.
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DIVIDEND POLICY
To date, the Company has not declared or paid any cash dividends with
respect to its capital stock, and the current policy of the Board of Directors
is to retain earnings, if any, to provide for the growth of the Company.
Consequently, no cash dividends are expected to be paid in the foreseeable
future. Further, there can be no assurance that the proposed operations of the
Company will generate revenues and cash flow needed to declare a cash dividend
or that the Company will have legally available funds to pay dividends.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below as of December 31, 1995 and
1996, and for the period January 25, 1993 (inception) through December 31,
1993 and the years ended December 31, 1994, 1995 and 1996, 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).
Marketing, general and administrative expense incurred in 1996 includes
a write-down of $559,250 relating to two promissory notes held by the
Company, which are secured by Whitewing stock. The notes, which are
currently past due, have been written down to the market value price of the
collateral held by the Company as of December 31, 1996. The Company intends
to collect on these notes and will take such action deemed by the Company to
be necessary and appropriate to ensure that these notes do not remain
outstanding for an extended period of time.
Financial statements for 1995 and 1996 were restated to reflect the
Company's auditors determination that the appropriate accounting for the
Company's nonstatutory stock options and the reporting of deferred tax benefits
for the difference between market value and option price require the
establishment of deferred tax assets related to nonstatutory stock options only
for those options for which the Company has recorded compensation expense for
financial statement purposes. Prior to this determination, the Company reported
the deferred tax benefit for all nonstatutory options.
On the advice of its auditors, the Company has historically taken the
position that all nonstatutory options created a deferred tax benefit. However,
in accordance with current interpretations of generally accepted accounting
principles, the Company's auditors have now determined that deferred tax
benefits should only be recorded for those nonstatutory stock options that the
Company has or will record book expense. Generally accepted accounting
principles allow deferred tax assets to be recorded only on temporary
differences. For most of the Company's nonstatutory stock options, a book
expense will not be recorded. Therefore, these differences are permanent
differences rather than temporary and do not give rise to deferred tax benefits.
Based on this interpretation, the Company has restated its financial
position to reflect the tax savings in the year that the options are exercised,
and the entry will be reported as in increase to common stock and a reduction of
income taxes payable. This amount of this entry may vary depending on the
details of the option and when it is exercised.
Financial statements for 1994 and 1995 were restated to reflect a change in
accounting for the Company's investment in Whitewing to the equity method due to
the Company's reduced ownership interest in Whitewing. The Company also
accounts for its investments in CombiMatrix, Soundview Technologies, and
Greenwich Information
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Technologies as well as the two private investment partnerships of which the
Company is a general partner on the equity method. However, financial
statements for the years ended December 31, 1995 and December 31, 1996 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. These prior statements
included operating revenue earned by the Company from the sale of health care
products by Whitewing. Prior to this restatement, sales for the Company were
reported as $455,359 in 1994, as compared to no revenues from this source
reported in 1994 in the restated financial statements.
STATEMENT OF OPERATIONS DATA: For the years ended December 31, 1996, 1995,
1994, and the period ended 1993
<TABLE>
<CAPTION>
1996 1995 1994 1993
----------------------------------------------------
<S> <C> <C> <C> <C>
Revenues
Gains on sales of securities, net $ 876,499 $3,194,241 $ 0 $ 0
Unrealized gain attributable to issuance of
common stock 1,066,408 0 0 0
Equity in earnings of investments 262,737 271,023 (137,782) (276,465)
Management fees 1,458,078 2,880 0 0
Interest income 102,334 49,567 37,502 8,215
---------- ---------- ---------- ----------
Total revenue $3,240,582 $3,517,711 $ (100,280) $ (268,250)
Marketing, general and administrative 2,219,617 1,399,042 724,156 597,848
---------- ---------- ---------- ----------
Income(loss) before minority interest and taxes 1,020,965 2,118,669 (824,436) (866,098)
Minority interest in net loss of consolidated subsidiary (10,796) (459) 0 0
---------- ---------- ---------- ----------
Income (loss) before provision for taxes 1,031,761 2,119,128 (824,436) (866,098)
Provision for Income Taxes 605,341 287,817 3,541 1,486
---------- ---------- ---------- ----------
Net Income (Loss) $ 426,420 $1,831,311 $ (827,977) $ (867,584)
---------- ---------- ---------- ----------
---------- ---------- ---------- ----------
Earnings(loss) per common share
Fully diluted $0.16 $0.72 ($0.35) ($0.44)
Weighted average shares outstanding
Fully diluted 2,680,433 2,558,647 2,357,050 1,991,000
</TABLE>
BALANCE SHEET DATA: December 31, 1996 and 1995
1996 1995
-----------------------------
Total Assets $ 5,377,770 $ 3,843,954
Total Liabilities 822,358 357,979
Minority interest 0 10,796
Stockholders' equity 4,555,412 3,475,179
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATION
GENERAL
The Company's financial condition and results of operations can only be
understood with reference to the Company's business and ongoing activities. The
Company engages in two main lines of business: investment advisory services,
which includes the Company acting as an investment advisor to domestic and
offshore private investment funds, and investing in and developing start-up
business ventures. Although the Company has relied upon the sale of equity
securities to generate the capital needed to finance the implementation of its
plan of operations, the Company's strategy is to retain the majority of its
interests in its current holdings, and possibly acquire additional interests in
such holdings. The Company is currently focussed on the development of its
various business enterprises to establish operations and promote growth and cash
flow in each enterprise.
In the following discussion and analysis, the period to period comparisons
must be viewed in light of the impact that the Company's acquisition and
disposition of securities of its various business interests has had on the
Company's financial condition and results of operations. In fiscal 1995, the
Company's financial condition and results of operations were dominated by the
Company's activities relating primarily to the sale of a portion of its holdings
in Whitewing, and to a lesser extent the formation of and sale of shares in
MerkWerks. In fiscal 1996, the Company's financial condition and results of
operations were dominated primarily by the Company's activities relating to the
acquisition of CombiMatrix, Soundview Technologies, and Greenwich Information
Technologies as well as the impact of the initial public offering of Whitewing
and to a lesser extent the sale of a portion of the Company's interests in
these acquisitions. In addition, in fiscal 1996, the Company expended
significant resources developing and expanding its investment advisory
services.
As a result of the impact of each of these activities that the Company
has undertaken and will continue to undertake, the Company's results of
operations are volatile and do not fall into repeatable patterns.
Consequently, past performance is not necessarily indicative of future
performance.
RESULTS OF OPERATIONS
During fiscal year 1996, the Company expanded its assets by securing
significant positions in CombiMatrix, Soundview Technologies, and Greenwich
Information Technologies LLC as well as becoming the investment advisor to an
additional private investment partnership and two offshore private investment
corporations. The Company is currently concentrating on establishing operations
in each of these new enterprises as well as the further development of its
existing holdings, which include MerkWerks, Whitewing, its other private
investment partnership,and its investment advisory services in general.
REVENUES
1996 COMPARED TO 1995
The Company reported revenues of $3,240,582 for the year ended December 31,
1996, a decrease of $277,129, over revenues of $3,517,711 for the year ended
December 31, 1995. During 1995, the Company generated significant operating
revenue by selling part of its stake in two of its holdings, Whitewing and
MerkWerks. During 1996, the Company sold a smaller portion of its assets,
focusing instead on the development of its various business interests.
During 1995, the Company sold a larger portion of its holdings primarily to
raise the capital necessary to acquire interests in new companies, thereby
increasing and diversifying its holdings, 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. The Company intends to continue to
concentrate on development of its existing holdings in the foreseeable future
while preserving, and possibly increasing, its positions in such holdings.
GAINS ON SALES OF SECURITIES, NET. During the year ended December 31,
1996, the Company increased its asset base by acquiring interests in
three new companies, CombiMatrix, Soundview Technologies, and
Greenwich Information Technologies. 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 $3,194,241 for the year ended
December 31, 1995 to $876,499 for the year ended December
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31, 1996, which represents a decrease of $2,317,742 or 72.6%. Such
gain for the year ended December 31, 1996 is comprised primarily of
gains on sales of shares of CombiMatrix of $618,758, and, to a
lesser extent, of gains on sales of shares of MerkWerks of
$119,551, losses on sales of shares of Soundview Technologies of
$10,000, and gains in sales of membership interests in Greenwich
Information Technologies of $148,190. The year earlier gain of
$3,194,241 represented a gain of $2,716,216 from sales of
approximately 51% of the Company's holding in Whitewing and a
gain of $478,025 from the sale of approximately 25% of the
Company's holding in MerkWerks. Following Whitewing's initial
public offering, the Company was prohibited from selling shares of
Whitewing without the consent of the managing underwriter, Cohig &
Associates, Inc. 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 were sold in an initial public
offering. This initial public offering of shares reduced the
Company's ownership interest in Whitewing from 38.3% to 18.4%. As a
result of this offering, under generally accepted accounting
principles, the Company reported an unrealized gain of $1,066,408,
representing an increase in the book value of the shares of Whitewing
that the Company retained following the initial public offering.
Consequently, the Company currently accounts for its investment in
Whitewing under the equity method of accounting. Management does not
anticipate recognizing any similar gain in relation to shares of
Whitewing, however, the Company does anticipate future gains of this
nature with respect to other subsidiaries should they become publicly
offered entities.
EQUITY IN EARNINGS OF INVESTMENTS. The Company reported losses
attributable to equity in earnings of investments of $262,737 for the
year ended December 31, 1996, compared to revenues of $271,023 for the
year-earlier period. Such losses for the year ended December 31, 1996
are comprised of a gain of $182,980 on the Company's capital
investments as a general partner in two private investment
partnerships offset by a loss from the Company's share of net losses
of CombiMatrix of $87,357, a loss of the Company's share of net
losses in Greenwich Information Technologies of $46,120, and a loss
of $312,240 from the Company's investment in Whitewing, as determined
by the equity method of accounting.
MANAGEMENT FEES. For the year ended December 31, 1996, management fee
income increased to $1,458,078 over management fee income of $2,880
generated during the year ended in 1995. Of the total of $1,458,078
in management fees earned for fiscal year 1996, $1,400,000 was paid to
the Company by Soundview Technologies through the issuance of
1,400,000 shares of Soundview Technologies' common stock to the
Company for providing management and consulting services, including
assisting Soundview Technologies in raising $1,000,000 through the
sale of Soundview Technologies' common stock at $1.00 per share. At
December 31, 1996, the Company retained 1,233,000 of these shares.
The balance of approximately $58,000 of management and performance fee
income recorded during the year ended December 31, 1996 was derived
from four investment funds managed by the Company. While the Company
is entitled to receive quarterly management fees based on the amount
of assets under management in each of these funds, the Company does
not receive performance fees until a particular fund has been in
operation for a twelve month period. In the case of the private
investment partnerships, performance fees are not earned until the
first anniversary of each limited partner's initial investment date.
After such anniversary date, performance fees are earned at the end of
each fiscal year. Two of the funds to which the Company is the
investment advisor have been managed by the Company during the full
twelve 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 and no performance fees during the
year ended December 31, 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. The Company entered into a distribution agreement
with an international group during the fiscal year 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.
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1995 COMPARED TO 1994
The Company reported revenues of $3,517,711 in the year ended December
31, 1995 as compared to reported negative total revenues of $100,280 in the
year ended December 31, 1994. The Company's sole asset in fiscal year 1994
was its holdings in Whitewing. During 1995, the Company became a general
partner in its first private investment partnership as well as formed and
capitalized MerkWerks.
GAINS ON SALES OF SECURITIES, NET. Net gains on sales of securities
increased from no revenue for the year ended December 31, 1994 to
$3,194,241 for the year ended December 31, 1995. Such gain for the
year ended December 31, 1995 is comprised primarily of gains on sales
of shares of Whitewing, and, to a lesser extent, of gains on sales of
shares of MerkWerks.
EQUITY IN EARNINGS OF INVESTMENTS. The Company reported gains
attributable to equity in earnings of investments of $271,023 for the
year ended December 31, 1995, compared to a loss of $137,782 for the
year-earlier period. Such gains for the period ended December 31, 1995
are comprised of a gain of $71,023 on the Company's capital investment
as a general partner in its private investment partnership as well as
a gain of $200,000 for the Company's investment in Whitewing Labs, as
determined by the equity method of accounting. Such losses for the
period ended December 31, 1994 are comprised of a loss of the
Company's share of net losses in Whitewing, as determined by the
equity method of accounting.
MANAGEMENT FEES. For the year ended December 31, 1996, management
fee income increased to $2,880 over no such revenue reported for the
year ended December 31, 1994. The Company derived management fees in
the year ended December 31, 1995 from the single investment fund
managed by the Company at that time. As this fund was established in
early 1995 and had not operated for the required twelve months for the
Company to earn performance fees, no such fees were earned in 1995.
EXPENSES
1996 COMPARED TO 1995
Marketing, general and administrative expenses increased from $1,399,042
for the year ended December 31, 1995 to $2,219,617 for the year ended
December 31, 1996. Expenses incurred in 1996 includes a write-down of
$559,250 relating to two promissory notes held by the Company, which are
secured by Whitewing stock. The notes, which are currently past due, have
been written down to the market value price of the collateral held by the
Company as of December 31, 1996. The Company intends to collect on these
notes and will take such action deemed by the Company to be necessary and
appropriate to ensure that these notes do not remain outstanding for an
extended period of time.
Actual marketing, general and administrative expenses incurred in 1996,
less the write down, were $1,660,367, which represents and increase over 1995
expenses of 18.7%. This increase is primarily due to increased costs of
operating a public company as well as those costs incurred in the acquisition of
additional business ventures and the further development of the Company's
investment advisory services, including additional accounting legal, printing,
and other professional costs, which were not incurred in 1995. Salary expenses
increased approximately $95,000 in 1996 primarily due to increases in two
officers' salaries and an increase in personnel. Although, in general, the
Company has experienced increased costs since becoming a public company, the
Company did not incur certain expenses associated with the raising of capital,
which has occurred in previous years.
1995 COMPARED TO 1994
Marketing, general and administrative expenses increased from $724,156 for
the year ended December 31, 1994 to $1,399,042 for the year ended December 31,
1995. 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 1994.
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PROVISION FOR INCOME TAXES AND NET INCOME
In reviewing the appropriate accounting for the Company's nonstatutory
stock options and the reporting of deferred tax benefits for the difference
between market value and option price, the Company's auditors have determined
that generally accepted accounting principles require the establishment of
deferred tax assets related to nonstatutory stock options only for those options
for which the Company has recorded compensation expense for financial statement
purposes. Prior to this determination, the Company reported the deferred tax
benefit for all nonstatutory options.
On the advice of its auditors, the Company has historically taken the
position that all nonstatutory options created a deferred tax benefit. However,
in accordance with current interpretations of generally accepted accounting
principles, the Company's auditors have now determined that deferred tax
benefits should only be recorded for those nonstatutory stock options that the
Company has or will record book expense. Generally accepted accounting
principles allow deferred tax assets to be recorded only on temporary
differences. For most of the Company's nonstatutory stock options, a book
expense will not be recorded. Therefore, these differences are permanent
differences rather than temporary and do not give rise to deferred tax benefits.
Based on this interpretation, the Company has restated its financial
position to reflect the tax savings in the year that the options are exercised,
and the entry will be reported as in increase to common stock and a reduction of
income taxes payable. This amount of this entry may vary depending on the
details of the option and when it is exercised.
1996 COMPARED TO 1995
For the year ended December 31, 1996, the Company recorded an income tax
provision of $605,341, as compared to an income tax provision of $287,817 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
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. Prior to the restatement, the Company reported an income tax
provision of $55,756 for the 1995 fiscal year.
Net income for 1996 was $426,420, compared to $1,831,311 in 1995. This
decrease is primarily attributable to the Company's decision to limit the sale
of securities held in its emerging companies. Net income for fiscal year 1995
was reported as $2,063,372 prior to the restatement.
1995 COMPARED TO 1994
For the year ended December 31, 1994, the Company recorded an income tax
provision of $3,541 as compared to an income tax provision of $287,817 for the
same period in fiscal 1995. The difference is attributable to the lack of
revenue during the year ended December 31, 1994 versus revenue generated during
the year ended December 31, 1995.
Net income in 1995 was $1,831,311, compared to a net loss of $827,977 in
1994. This difference is again attributable to the lack of revenue during 1994.
The reported provision for income tax and net income reported in 1994 were
unaffected by the restatement.
INFLATION
Inflation has not had a significant impact on the Company.
LIQUIDITY AND CAPITAL RESOURCES
Net cash used by operating activities in 1996 was $1,528,152, compared
with $1,496,657 in 1995, and $695,590 in 1994. Growth in working capital
requirements in all three years reflected the Company's increased business
activities. During 1996, the Company's emphasis was on the acquisition and
development of new business enterprises. The Company invested a total of
$3,000,000 in 1996 in three additional start-up ventures as well as purchased
an interest in a new private investment partnership of which the Company is a
general partner. During 1995, the Company invested a total of $750,000 in
the acquisition of one start-up venture and became the general partner of its
first private investment partnership in which it purchased an interest.
Activities related to the disposition
17
<PAGE>
of securities decreased from proceeds of $3,205,496 from such sales
in 1995 to proceeds of $2,049,051 in 1996. Overall net cash used
by investing activities was $290,521 in 1996, compared to net cash provided
by investing activities of $707,328 in 1995 and $19,477 in 1994.
As of December 31, 1996, the Company had cash and cash equivalents of
$176,251, working capital of $1,276,678, and a ratio of current assets to
current liabilities of 3.0 to 1. As of December 31, 1996, the Company had
issued a short-term non-interest bearing note with a balance of $552,500 in
connection with the investment by the Company in Greenwich Information
Technologies LLC. Subsequent to a payment in the amount of $27,500 by the
Company to Greenwich, the Company issued a Promissory Note in the principal
amount of $525,000, whereby the Company will make payments to Greenwich
Information Technologies of a minimum of $25,000 each month from February 1,
1997 through July 1, 1997, $50,000 each month from August 1, 1997 to December 1,
1997, and pay the outstanding principal plus any accrued and unpaid interest by
December 31, 1997. The Note bears a simple interest rate of 6.5% per annum.
The Company also executed a Pledge Agreement in connection with the Promissory
Note whereby the Company pledged a portion of its membership interest in
Greenwich Information Technologies, while retaining voting and distribution
rights to such membership interest, in order to secure the Company's obligations
under the Promissory Note. Should the Company default on the Promissory Note,
the Company could lose a substantial portion of its membership interest. As of
March 28, 1997, the Company has paid $75,000 towards the note and has a
principal balance owing of $450,000.
The Company invested a total of $950,000 in the two private investment
partnerships of which it is a general partner during 1995 and 1996. The Company
withdrew a total of $600,000 from these partnerships in 1996. As of December
31, 1996, subsequent to these withdrawals, the value of the Company's
partnership interests is approximately $625,000.
The Company anticipates that although revenues from operations, together
with working capital reserves may provide necessary funds for its operating
expenses in the foreseeable future, the Company may also seek additional
financing to fund these expenses as well as new business opportunities. In
addition, there can be no assurance that the Company will not encounter
unforeseen difficulties that may deplete its capital resources more rapidly
than anticipated. Any efforts to seek additional funds could be made through
equity, debt, or other external financing and there can be no assurance that
additional funding, if necessary, will be available on favorable terms, if at
all. Moreover, the development and expansion of the Company's business could
place significant demands on the Company's infrastructure, and may require
the Company to hire additional personnel, to implement additional operating
and financial controls, install additional reporting and management
information systems, and otherwise improve and expand the Company's business.
The Company's future operating results will depend on management's ability
to manage future growth, and there can be no assurance that efforts to manage
future growth will be successful.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
The financial statements and related financial information required to be
filed hereunder are indexed on page F-1 of this report and are incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference from the
registrant's definitive proxy statement to be filed with the Commission not
later than April 22, 1997.
ITEM 11. EXECUTIVE COMPENSATION
18
<PAGE>
The information required by this Item is incorporated by reference from the
registrant's definitive proxy statement to be filed with the Commission not
later than April 22, 1997.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference from the
registrant's definitive proxy statement to be filed with the Commission not
later than April 22, 1997.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference from the
registrant's definitive proxy statement to be filed with the Commission not
later than April 22, 1997.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
(a) 1,2. FINANCIAL STATEMENTS AND FINANCIAL STATEMENT SCHEDULE
Page
----
Independent Auditor's Report............................... F-1
Consolidated Balance Sheets as of December 31,
1996 and 1995............................................. F-2
Consolidated Statements of Operations for the Years
Ended December 31, 1996, 1995, and 1994................... F-3
Consolidated Statements of Stockholders' Equity for
the Years Ended December 31, 1996, 1995 and 1994.......... F-4
Consolidated Statements of Cash Flows, for the Years
Ended December 31, 1996, 1995 and 1994.................... F-5
Notes to Consolidated Financial Statements................. F-6
3. EXHIBITS. The following exhibits are either filed herewith or
incorporated herein by reference.
3.1 Articles of Incorporation, as amended*
3.2 Amended and Restated Bylaws**
10.1 Lease of Company's Executive Offices at 12 South Raymond
Avenue, Pasadena, California 91105*
10.2 Company's 1993 Stock Option Plan*
10.3 Form of Stock Option Agreement*
10.4 Company's 1996 Stock Option Plan***
10.5 Letter Agreement between Acacia Research Corporation and
Greenwich Information Technologies regarding attached
Promissory Note and Pledge Agreement
21. 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
** Incorporated by reference from the Company's Quarterly
Report on Form 10-Q filed on August 14, 1996
*** Incorporated by reference from the Company's Registration
Statement on Form S-8 filed on February 21, 1997
(b) REPORTS ON FORM 8-K. None.
19
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DATED: March 29, 1997
-------------------------
/s/ Paul R. Ryan
-------------------------
Paul R. Ryan
Chief Executive Officer and President
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>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ R. Bruce Stewart Chairman of the Board of Directors, March 29, 1997
- --------------------------------- Chief Financial Officer
R. Bruce Stewart (Principal Financial and Accounting Officer)
/s/ Paul R. Ryan Chief Executive Officer and President March 29, 1997
- --------------------------------- (Principal Executive Officer)
Paul R. Ryan
/s/ Kathryn King-Van Wie Chief Operating Officer and Secretary March 29, 1997
- ----------------------------------
Kathryn King Van-Wie
/s/ Brooke P. Anderson Director March 29, 1997
- ----------------------------------
Brooke P. Anderson, Ph.D.
/s/ Fred A. de Boom Director March 29, 1997
- ----------------------------------
Fred A. de Boom
/s/ Edward W. Frykman Director March 29, 1997
- ----------------------------------
Edward W. Frykman
</TABLE>
20
<PAGE>
Finocchiaro & Co.
Certified Public Accountant
150 East Colorado Boulevard, Suite 201
Pasadena, CA 91105
Telephone (818)449-6300 Telecopier (818)449-6299
INDEPENDENT AUDITOR'S REPORT
To the Stockholders and the Board of Directors
Acacia Research Corporation
We have audited the accompanying consolidated balance sheets of Acacia
Research Corporation as of December 31, 1996 and 1995, and the related
consolidated statements of operations, stockholders' equity, and cash flows
for each of the three years ended December 31, 1996. 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 opnion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the consolidated financial position of Acacia Research
Corporation as of December 31, 1996 and 1995, and the consolidated results of
operations and cash flows for each of the three years in the period ended
December 31, 1996, 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 years ended December 31, 1995 and
1994, to reflect a change in its accounting for deferred tax benefits and its
investment in Whitewing Labs, Inc. to the equity method.
/s/ Finocchiarro & Co.
Pasadena, California
March 28, 1997
F-1
<PAGE>
ACACIA RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1996 and 1995
December 31, 1996 December 31, 1995
----------------- -----------------
ASSETS
Current Assets
Cash and cash equivalents $ 176,251 $ 788,611
Distributions receivable 400,000 0
Notes receivable 820,500 1,846,000
Receivables from affiliates 52,592 176,885
Other receivables 295,278 74,994
Prepaid expenses 160,640 12,948
Deferred tax benefit 272 15,820
----------------- -----------------
Total current assets 1,905,533 2,915,258
Equipment, furniture, and fixtures 116,658 63,569
Other assets
Equity in unconsolidated subsidiaries,
at equity 1,494,671 0
Investment in unconsolidated subsidary,
at cost 1,233,000 0
Partnership interests, at equity 625,405 821,023
Deferred tax benefit 0 40,463
Organization costs, net of accumulated
amortization of $3,183 and $2,045 2,503 3,641
----------------- -----------------
Total Assets $5,377,770 $3,843,954
----------------- -----------------
----------------- -----------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 76,355 $ 129,066
Deficit interest in unconsolidated
subsidiary, at equity 0 114,247
Income taxes payable 0 110,471
Note payable 552,500 0
----------------- -----------------
Total current liabilities 628,855 353,784
Deferred tax liability 193,503 4,195
----------------- -----------------
Total liabilities 822,358 357,979
Commitments and contingencies
Minority interest 0 10,796
Stockholders' equity
Common stock, no par value, 10,000,000
shares authorized, 1,970,672 shares
in 1996 and 1,862,672 shares in 1995
issued and outstanding 4,081,993 3,547,680
Retained earnings 562,171 135,751
Less stock subscription receivable (88,752) (208,252)
----------------- -----------------
Total stockholders' equity 4,555,412 3,475,179
----------------- -----------------
Total Liabilities and Stockholders'
Equity $5,377,770 $3,843,954
----------------- -----------------
----------------- -----------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-2
<PAGE>
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
---------- ---------- ----------
<S> <C> <C> <C>
Revenues
Gains on sales of securities, net $ 876,499 $3,194,241 $ 0
Gain on issuance of stock by equity investee 1,066,408 0 0
Equity in earnings of investments (262,737) 271,023 (137,782)
Management fees 1,458,078 2,880 0
Interest income 102,334 49,567 37,502
---------- ---------- ----------
Total revenues 3,240,582 3,517,711 (100,280)
Marketing, general, and administrative 2,219,617 1,399,042 724,156
---------- ---------- ----------
Income (loss) before minority interest and taxes 1,020,965 2,118,669 (824,436)
Minority interest in net loss of consolidated subsidiary (10,796) (459) 0
---------- ---------- ----------
Income (loss) before provision for income taxes 1,031,761 2,119,128 (824,436)
Provision (benefit) for income taxes 605,341 287,817 3,541
---------- ---------- ----------
Net income (loss) $ 426,420 $1,831,311 ($827,977)
---------- ---------- ----------
---------- ---------- ----------
Earnings per common share
Primary $0.16 $0.72 ($0.35)
Fully diluted $0.16 $0.72 ($0.35)
Weighted average shares outstanding
Primary 2,680,433 2,558,647 2,357,050
Fully diluted 2,680,433 2,558,647 2,357,050
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-3
<PAGE>
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
Common Common Retained Stock
Shares Stock Earnings (Deficit) Subscriptions Total
---------- --------- ----------------- ------------- ----------
<S> <C> <C> <C> <C> <C>
1994
Stockholders' equity at December 31, 1993 1,441,000 $1,647,608 ($867,584) $ $780,024
Net Loss (827,977) (827,977)
Common stock issued 136,825 547,300 547,300
Issuance costs (97,399) (97,399)
Common stock issued for stock subscriptions 25,000 50,000 (50,000) 0
Compensation expense relating to stock options 25,000 25,000
---------- ---------- ----------------- ------------- ----------
Stockholders' equity at December 31, 1994 1,602,825 2,172,509 (1,695,561) (50,000) 426,948
1995
Net income 1,831,312 1,831,312
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) 0
Stock options exercised for stock subscriptions 33,000 61,250 (61,250) 0
Tax benefit from nonstatutory stock options 232,061 232,061
Compensation expense relating to stock options 142,375 142,375
Stock warrants issued 10,000 10,000
---------- ---------- ----------------- ------------- ----------
Stockholders' equity at December 31, 1995 1,862,672 3,547,680 135,751 (208,252) 3,475,179
1996
Net income 426,420 426,420
Stock options exercised 108,000 215,500 215,500
Cash received for stock subscriptions 119,500 119,500
Tax benefit from nonstatutory stock options 318,813 318,813
---------- ---------- ----------------- ------------- ----------
Stockholders' equity at December 31, 1996 1,970,672 $4,081,993 $562,171 $(88,752) $4,555,412
---------- ---------- ----------------- ------------- ----------
---------- ---------- ----------------- ------------- ----------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-4
<PAGE>
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1996, 1995 and 1994
<TABLE>
<CAPTION>
1996 1995 1994
------------- ------------- ------------
<S> <C> <C> <C>
Cash flows from operating activities:
Net income (loss) $ 426,420 $ 1,831,311 $ (827,977)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 22,412 9,681 6,517
Deferred taxes 245,319 (54,715) 1,941
Undistributed (earnings) loss of affiliate 262,737 (271,023) 137,782
Gain on sales of securities (876,499) (3,194,241) 0
Minority interest in net loss (10,796) (459) 0
Gain on issuance of stock by equity investee (1,066,408) 0 0
Unrealized gain on trading securities 0 0 (1,505)
Changes in operating assets and liabilities:
(Increase) decrease in accounts receivable,
prepaid expenses, and other assets (368,154) (14,782) (33,397)
Increase (decrease) in accounts payable,
accrued expenses, income taxes payable,
and other liabilities (163,183) 197,571 21,049
------------- ------------- ------------
Net cash used by operating activities (1,528,152) (1,496,657) (695,590)
Cash flows from investing activities:
Purchase of equity investments (3,000,000) (750,000) 0
Proceeds from sales of securities 2,049,051 3,205,496 0
Payment received on advances to affiliate 536,862 200,000 0
Advances to affiliates (429,665) (62,638) (40,000)
Advance to officers 0 0 73,447
Distributions receivable (400,000) 0 0
Notes receivable 0 (1,846,000) 0
Payments received and write-off on notes
receivable 1,025,500 0 0
Capitalized expenditures (72,269) (39,530) (13,970)
------------- ------------- ------------
Net cash provided (used) by investing
activities (290,521) 707,328 19,477
Cash flows from financing activities:
Proceeds from note payable 800,000 0 0
Payments on note payable (247,500) 0 0
Proceeds from line of credit 0 2,000,000 0
Payments of line of credit 0 (2,000,000) 0
Tax benefit from nonstatutory stock options 318,813 232,061 0
Compensation from stock options 0 142,375 25,000
Issuance costs 0 (167,974) (97,399)
Proceeds from sale of common stock 335,000 1,010,457 672,300
------------- ------------- ------------
Net cash provided by financing activities 1,206,313 1,216,919 599,901
------------- ------------- ------------
Increase (decrease) in cash and cash equivalents (612,362) 427,590 (76,212)
Cash and cash equivalents, beginning 788,611 361,021 437,233
------------- ------------- ------------
Cash and cash equivalents, ending $ 176,251 $ 788,611 $ 361,021
------------- ------------- ------------
------------- ------------- ------------
</TABLE>
F-5
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
<PAGE>
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Acacia Research Corporation (the "Company") was incorporated on January 25,
1993 under the laws of the state of California. The Company provides
investment advisory services, and also provides management services to
and makes direct investments in 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements for the year ended December 31, 1996 and 1995 include the
accounts of the Company and its 70% owned subsidiary, MerkWerks
Corporation, a business developed by the Company. Material 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 which
the Company's controlling interest is considered to be temporary (See Note
6). The cost method is used where the Company maintains ownership
interest 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.
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
using the treasury stock method. Weighted average shares outstanding for
all years presented include those shares and options considered to be
"cheap stock" pursuant to SEC rules.
USE OF ESTIMATES - The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date
of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
these estimates.
PRESENTATION - For financial statement reporting purposes certain
reclassifications of prior years' balances have been made to conform to the
1996 presentation.
F-6
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
RESTATEMENT OF PRIOR PERIODS - Financial statements for the period ended
December 31, 1994 were restated to reflect the change in accounting for the
Company's investment in Whitewing Labs, Inc. to the equity method of
accounting. The Company's ownership interest was reduced, through sales of
the Company's holdings in the investment and additional stock issued by
Whitewing Labs, Inc. during 1995, from 100% of common equity to 38% while
maintaining an overall voting interest of 55% as of December 31, 1995.
Whitewing Labs, Inc. 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 period financial statements to reflect the accounting for its
investment in Whitewing Labs, Inc. on the equity method in accordance
with generally accepted accounting principles. This restatement reduced
the net loss per common share for the year ended December 31, 1994 from
$0.39 per share to $0.35 per share.
The December 31, 1995 financial statements reflect a restatement for the
accounting for the tax benefits of nonstatutory stock options. As a result
of these changes, net income for 1995 decreased by $232,061 and decreased
earnings per share from $0.81 to $0.72.
3. EQUIPMENT, FURNITURE, AND FIXTURES
Equipment, furniture, and fixtures consist of the following at December
31, 1996 and December 31, 1995:
1996 1995
--------- ---------
Computer equipment $ 79,374 $ 45,730
Furniture and fixtures 73,786 34,260
--------- ---------
153,160 79,990
Accumulated depreciation (36,502) (16,421)
--------- ---------
Total Equipment, Furniture, and Fixtures $ 116,658 $ 63,569
--------- ---------
--------- ---------
Depreciation expense for the years ended December 31, 1996 and 1995
was $21,277 and $8,887, respectively.
4. COMMITMENTS AND CONTINGENCIES
LEASE OBLIGATIONS - As of December 31, 1996, the equipment, furniture,
and fixtures account included assets in the amount of $9,531 financed
by capital lease agreements which will expire in 1999 and 2000.
Accumulated depreciation includes approximately $1,900 of amortization
related to assets financed by capital lease agreements. The
amortization of assets under capital lease agreements 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 $3,006. Rent expense for
the years ended December 31, 1996 and 1995 were approximately $38,300
and $29,000, respectively.
F-7
<PAGE>
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
4. COMMITMENTS AND CONTINGENCIES (continued)
At December 31, 1996, the future minimum lease payments for capital and
operating leases equalled the following:
CAPITAL OPERATING
---------- ----------
1997 3,417 36,072
1998 3,417 36,072
1999 3,023 -
2000 793 -
---------- ----------
Totals 10,646 72,144
Less interest portion (2,653) -
---------- ----------
Minimum lease payments $ 7,993 $ 72,144
---------- ----------
---------- ----------
LITIGATION - The Company has been named in a lawsuit filed by a
former director and employee for alleged breach of contract. The
suit asks for damages totalling $950,000. The Company's management
cannot predict with certainty the outcome of this litigation, however,
the impact of an adverse outcome on the Company's financial
position or results of operations may be material.
5. 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 that 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 December 31, 1996, all
shares available for grant under the 1993 Plan had been granted,
and at December 31, 1995, there were 1,775 shares reserved for
future grants of common stock options.
In March of 1996, the Board of Directors adopted the 1996 Executive
Stock Bonus Plan (the "Bonus Plan"), which was approved by a vote
of the shareholders in May of 1996. The Bonus Plan grants one-time
options to purchase an aggregate of 360,000 shares of common stock
of the Company to directors, officers and other key employees
performing services for the Company and its affiliates. Under each
option agreement of the Bonus Plan, 25% of the options become
exercisable on each of the first four anniversaries of the grant
date. The options granted under the Bonus Plan expire in March
2001.
During April of 1996, the Board of Directors adopted the Acacia
1996 Stock Option Plan (the "1996 Plan"), which was approved by the
shareholders in May of 1996. The Company has reserved 250,000
shares of common stock for issuance under the 1996 Plan. The 1996
Plan provides for the grant of Nonqualified Stock Options and
Incentive Stock Options to key employees including officers of the
Company and its subsidiaries and certain other individuals. The
1996 Plan also provides for the automatic grant of Nonqualified
Stock Options to non-employee directors upon initial election to
the Board of Directors and thereafter on an annual basis under the
Non-Employee Director Program. These options are generally
exercisable six months to one year after grant, and expire five
years after grant for directors or up to ten years after grant for
key employees. At December 31, 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.
F-8
<PAGE>
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. STOCK OPTIONS AND WARRANTS (continued)
During 1996 the Company also granted 20,000 options at $5.38 per share
that were granted outside the 1993 and 1996 Plans. These options expire
in March 2001. As of December 31, 1996 and 1995, there were 215,000 and
1,775 shares reserved for grants of common stock options.
The following is a summary of common stock options:
<TABLE>
<CAPTION>
WEIGHTED
SHARES PRICES AVERAGE
---------- ----------- -------
<S> <C> <C> <C>
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 canceled (105,000) $2.00 $2.00
---------- ----------- ------
1996
Balance at December 31, 1995 890,725 $1.50-$5.25 $2.66
Options granted 421,775 $4.38-$10.50 $6.28
Options exercised (108,000) $1.50-$5.25 $2.00
Options canceled (10,000) $5.00 $5.00
---------- ----------- ------
Balance at December 31, 1996 1,194,500 $1.50-$10.50 $3.98
---------- ----------- ------
---------- ----------- ------
Exercisable at December 31, 1996 $ 712,500 $1.50-$5.75 $2.50
---------- ----------- ------
---------- ----------- ------
</TABLE>
In October 1995, the Financial Accounting Standards Board issued SFAS
No. 123, Accounting for Stock-Based Compensation. This pronouncement
establishes the accounting and reporting requirements using a fair value
method of accounting for stock-based compensation plans. Under the new
standard, the Company may either adopt the new fair value-based
measurement method or continue to use the intrinsic value-based
measurement method for stock-based compensation and provide proforma
disclosures of net income and earnings per share as if the measurement
provisions of the pronouncement had been adopted. The Company has
adopted only the disclosure requirements of SFAS No. 123; therefore, the
adoption will have no effect on the Company's consolidated net earnings
or cash flows.
Had compensation expense related to stock options been reported in
accordance with SFAS No. 123 the Company's net income and earnings per
share would have been reduced to the pro forma amounts below:
1996 1995
-------- ----------
Net Income, as reported $426,240 $1,831,311
Net Income, Pro Forma 402,104 1,656,051
Primary earnings per share, as reported $0.16 $0.72
Primary earnings per share, Pro Forma $0.15 $0.65
Fully diluted earnings per share, as reported $0.16 $0.72
Fully dilured earnings per share, Pro Forma $0.15 $0.65
The fair values of options were determined using the Black-Scholes
model, and assumed option lives of five years, risk free interest of 7%,
and volatility of approximately 80%.
During 1996, the Company issued 8,500 warrants with an exercise price of
$6.75 per share. As of December 31, 1996, the Company had 108,500
warrants outstanding. The warrants are exercisable at $2.00-$6.75 per
share, and expire in January 2000 and November 2001.
6. NOTES RECEIVABLE
As of December 31, 1996 and 1995, the Company held promissory notes from
individuals related to the sale of common stock owned by the Company in
Whitewing Labs, Inc. and MerkWerks Corporation. These notes generally
bear interest at 5% per annum and are generally secured by the common
stock sold. As of December 31, 1996, two promissory notes which are
secured by Whitewing Labs, Inc. common stock have been written down to
the market value price of the collateral held by the Company as of the
balance sheet date. The amount of the write down was $559,250, and has
been reported in the statement of operations as part of marketing,
selling and administrative expenses.
F-9
<PAGE>
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. NOTES RECEIVABLE (continued)
The following is a summary of notes receivable at December 31, 1996 and
1995:
1996 1995
-------------- ----------------
Notes receivable due from
shareholder, secured $ 480,000 $ 530,000
Notes receivable, secured 319,500 1,245,000
Notes receivable, unsecured 21,000 71,000
----------- ------------
Total Notes Receivable $ 820,500 $ 1,846,000
----------- ------------
----------- ------------
Subsequent to the balance sheet date, the Company has collected
$49,508 on the notes receivable outstanding as of December 31, 1996.
Interest receivable on these notes amounted to approximately $85,500 and
$13,200, as of December 31, 1996 and 1995, respectively.
7. INVESTMENTS, AT EQUITY
Investments carried at equity, and the Company's ownership in each
consist of the following at December 31, 1996 and 1995:
1996 1995
------ ------
Whitewing Labs, Inc. 18% 38%
Acacia Capital Partners, L.P. 36% 60%
Acacia Growth Fund, L.P. 29% 0%
CombiMatrix Corporation 52% 0%
Greenwich Information Technologies LLC 30% 0%
The investment in Whitewing Labs, Inc. is reported using the equity
method. The Company maintains an ownership percentage of 18.4% as of
December 31, 1996, and officers of the Company hold significant
positions on the Board of Directors of Whitewing Labs, Inc. The
investment in Whitewing Labs, Inc. is carried on the financial
statements at a value of $640,101 at December 31, 1996 and at $0 as of
December 31, 1995. The market value of the Company's investment in
Whitewing Labs, Inc. is approximately $1,064,918 based upon the
closing market price of $2.00 per share as of December 31, 1996. The
net losses attributable to the Company as equity owner of Whitewing
Labs, Inc., exceeded the carrying value of the investment on the
Company's financial statement by approximately $57,000 in 1995.
Whitewing Labs, Inc. had total assets of $3,720,256 in 1996 and
$5,901,956 in 1995, and net losses of $2,428,062, $69,554, and
$336,544 in 1996, 1995, and 1994, respectively.
In March of 1996, the Company acquired a majority interest in
CombiMatrix Corporation, a California 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 $0 as of
December 31, 1996. Total losses attributable to the Company exceed the
Company's investment by $129,738 as of the latest balance sheet date.
In September of 1996, the Company acquired an equity interest in
Greenwich Information Technologies LLC, a Delaware Limited Liability
Company. As of December 31, 1996, the Company maintained a 30%
ownership interest in this entity. The investment is carried on the
balance sheet of the Company as of December 31, 1996 at a cost of
$854,570.
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 carrying value with respect
to Acacia Capital Partners, L.P. is $361,427 and $821,023 as of December
31, 1996 and 1995, respectively. Acacia Capital Partners, L.P. is a
California limited partnership that invests primarily in large-cap U.S.
equity securities.
F-10
<PAGE>
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. INVESTMENTS, AT EQUITY (continued)
On April 1, 1996, the Company acquired an equity interest in Acacia
Growth Fund, L.P. The Company's investment at December 31, 1996 is
carried on these financial statements at $263,978. Acacia Growth Fund,
L.P. is a California limited partnership that invests primarily in
large-cap U.S. equity securities.
8. INVESTMENTS, AT COST
In 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. The Company
received a management fee of $1,400,000 in the form of common stock
for these services. At December 31, 1996, the Company carries its
investment in Soundview Technologies at $1,233,000, which represents a
16.4% ownership interest in Soundview Technologies.
9. NOTE PAYABLE
As of December 31, 1996, the Company has a note payable to Greenwich
Information Technologies LLC, which is in connection with the purchase
of an equity interest in that entity. This note has a balance of
$552,500 as of December 31, 1996. In February 1997, the Company
signed a new note payable to Greenwich Information Technologies, which
replaced the original note. The new note bears interest at 6.5% and
calls for monthly principal payments of $25,000 to $50,000 per month,
with the final payment due in December 1997. The Company has pledged
a portion of its membership interest in Greenwich Information
Technologies as security for this note.
10. PROVISION FOR INCOME TAXES
Provision for income taxes consists of the following:
FEDERAL STATE TOTAL
----------- ---------- ----------
1996
Current $ 277,565 $ 82,457 $ 360,022
Deferred 195,968 49,351 245,319
1995
Current $ 245,360 $ 97,172 $ 342,532
Deferred (46,360) (8,355) (54,715)
1994
Current - 1,600 1,600
Deferred $ 1,524 $ 417 $ 1,941
A reconciliation of the Federal statutory tax rate and the effective tax
rate is as follows:
1996 1995 1994
------ ------ ------
Statutory Federal tax rate 34.0% 34.0% 0.0%
State income taxes-net of federal benefit 8.4 2.8 0.2
Net operating loss carryforwards 0.0 (20.0) 0.0
Tax benefit from nonstatutory options 24.1 3.7 0.0
Other, net (7.9) (7.0) 0.2
------ ------ ------
Effective income tax rates 58.6% 13.5% 0.4%
------ ------ ------
------ ------ ------
F-11
<PAGE>
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. PROVISION FOR INCOME TAXES (continued)
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:
1996 1995
---------- -----------
DEFERRED TAX ASSETS:
Tax basis of investments at equity $ 0 $ 40,463
State income tax deductions 272 15,820
--------- -----------
Deferred tax assets $ 272 $ 56,283
--------- -----------
--------- -----------
DEFERRED TAX LIABILITIES:
Tax basis of investments at equity 184,762 0
Equipment, furniture & fixtures $ 8,741 $ 4,195
--------- -----------
--------- -----------
Deferred tax liabilities $ 193,503 $ 4,195
--------- -----------
--------- -----------
Deferred tax assets for 1995 have been restated to reflect the change in
accounting of the tax benefits related to nonstatutory stock options. The
restatement reduced deferred tax assets for 1995 by $619,353. The
Company's income taxes currently payable for federal and state purposes
have been reduced by the benefit derived from nonstatutory stock options by
$232,061 in 1995 and $318,813 in 1996.
The Company believes that all deferred tax assets as of December 31,
1996 are more likely than not to be realizable, therefore a valuation
allowance has not been recorded.
11. COMMON STOCK SUBSCRIPTIONS
Common stock subscriptions as of December 31, 1996 and 1995 consist of
promissory notes due from individuals on the purchase of common stock
and the exercise of stock options. These notes generally bear interest
at 4% to 5% per annum. The notes are due in full in 1997. As of
December 31, 1996 and 1995 the outstanding balances due on these notes
was $88,752 and $208,252, respectively. Other receivables includes
interest receivable of $5,700 for 1996, and $1,400 for 1995 on these
notes. Subsequent to December 31, 1996 the Company has collected
$28,752 on these notes.
12. RECEIVABLES FROM AFFILIATES
Receivables from affiliates generally represent advances to the
Company's investments carried at equity and carried at cost. As of
December 31, 1996, receivables from affiliates include advances for the
benefit of Whitewing Labs, Inc. of approximately $37,000, Soundview
Technologies of approximately $15,000. Subsequent to December 31, 1996,
the Company has collected $26,587 from these balances.
Receivables from affiliates includes advances for the benefit of
CombiMatrix Corporation of approximately $62,000 and a promissory note
with a balance of $114,247 at December 31, 1995 bearing interest at 8%
per annum from Whitewing Labs, Inc. At December 31, 1995 other
receivables included approximately $43,000 of interest receivable on the
note from Whitewing Labs, Inc. These balances were paid in full in 1996.
F-12
<PAGE>
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. GAIN ON ISSUANCE OF STOCK BY EQUITY INVESTEE
In February 1996, Whitewing Labs, Inc. issued approximately 1.1 million
shares of common stock as part of a public offering of its common stock.
The issuance of stock reduced the Company's ownership interest
from approximately 38% to approximately 18%. This transaction resulted
in a noncash pretax gain of approximately $1.1 million for the Company.
The Company will continue to account for this investment under the
equity method as described in Note 7.
14. SUPPLEMENTAL CASH FLOW INFORMATION
As discussed in Note 4, the Company incurred a capital lease
obligation of $2,922 in 1996, $6,609 in 1995 and $2,052 in 1993. Cash
paid for the years ended December 31, 1996, 1995 and 1994 for interest
was $1,511, $23,492 and $306, respectively. The Company paid cash for
income taxes in the amount of $814 in 1994 and $251,885 in 1996.
15. CONCENTRATION OF CREDIT RISK
Notes receivable at December 31, 1996 and 1995 subject the Company to
concentration of credit risk due to notes being due from two
individuals. These notes are collateralized by common stock. The
Company has determined that due to the fact that the notes are past due,
they should be reported on the balance sheet at the value of their
collateral. As described in Note 6, the Company has charged income for
$559,250 relative to these notes.
The Company maintains its cash balances with financial and brokerage
institutions located in Southern California. On December 31, 1996, the
Company had no accounts which exceeded the insured amounts. As of
December 31, 1995 the Company maintained balances of $699,405 in excess
of insured amounts with these institutions.
16. SEGMENT INFORMATION
The results for the year ended December 31, 1996 and 1995 include the
consolidated balances of MerkWerks Corporation. MerkWerks Corporation
is engaged in the business of software development. As of December 31,
1996, there have been no sales related to those operations. These
financial statements do include $86,285 in 1996 and $64,013 in 1995 of
administrative expenses that were incurred by MerkWerks Corporation.
The total assets of MerkWerks Corporation at December 31, 1996 and 1995
are $51,876 and $106,623. Assets of the subsidiary consist of cash,
equipment, and organization costs, net of amortization and depreciation.
The revenues reported for the year ended December 31, 1996 consisted of
transactions between several investors and the Company. Included in
those revenues were sales to Dr. Robert Ching in the amount of $600,000.
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 Wildred Desrosiers 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-13
<PAGE>
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SCHEDULE I. MARKETABLE SECURITIES, OTHER INVESTMENTS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------
Name Principal Cost Basis Market Value Book Value
of Issuer Amount/Shares of Issue of Issue of Issue
- ---------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Whitewing Labs, Inc. common (1) 532,459 $ 48,796 $ 1,064,918 $ 640,101
Acacia Capital Partners, L.P. 361,427 361,427 361,427 361,427
CombiMatrix Corporation, common 3,965,000 83,269 3,965,000 0
Acacia Growth Fund,L.P 263,978 263,978 263,978 263,978
Greenwich Information Technologies, LLC 854,570 854,570 903,090 854,570
Soundview Technologies Incorporated 1,233,000 1,233,000 1,233,000 1,233,000
----------- ------------ -----------
Totals $ 2,845,040 $ 7,791,613 $ 3,353,076
----------- ------------ -----------
----------- ------------ -----------
</TABLE>
(1) Total shares adjusted for 3 for 2 stock split, effective February 9, 1996.
F-14
<PAGE>
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>
1996
Whitewing Labs $ 114,247 $ - $ 147,247 $ -
Mark Rosen (a) 520,000 - 10,000 510,000
William R. Tipton 50,000 - 50,000 -
Dr. Robert Ching (b) - 100,000 - 100,000
---------- ---------- ------------ ------------
$ 684,247 $ 100,000 $ 207,247 $ 610,000
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
1995
Whitewing Labs $ 314,247 $ - $ 200,000 $ 114,247
Mark Rosen - 520,000 - 520,000
William R. Tipton - 100,000 50,000 $ 50,000
$ 314,247 $ 40,000 $ 250,000 $ 684,247
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
1994
Whitewing Labs $ 274,247 $ 40,000 $ - $ 314,247
---------- ---------- ------------ ------------
---------- ---------- ------------ ------------
</TABLE>
(a) Notes receivable, secured by common stock in Whitewing Labs and Acacia
Research Corporation, bearing interest at 5% per annum in the face amount
$520,000. The note is due on demand. Subsequent to December 31, 1996, the
Company received $28,508 in connection with this note.
(b) This receivable was paid in full subsequent to December 31, 1996.
F-15
<PAGE>
EXHIBIT 10.5
ACACIA RESEARCH CORPORATION
February 10, 1997
VIA FAX AND FEDERAL EXPRESS
- ---------------------------
Fax No.: (203)869-8594
Mr. H. Lee Browne
Greenwich Information Technologies LLC
Two Soundview Drive
Greenwich, Connecticut 06830
Dear Lee:
The undersigned, Acacia Research Corporation, a California corporation (the
"Company"), and Greenwich Information Technologies LLC, a Delaware limited
liability company ("Greenwich"), entered into a letter of agreement, as
amended (the "Letter Agreement"), whereby the Company agreed to invest
$1,000,000 on or before January 31, 1997 in exchange for a 33.33% membership
interest in Greenwich (the "Investment"). As of the date of this letter, the
Company has already paid Greenwich $475,000. This letter reflects the
parties' agreement as to the manner in which the Company will perform its
payment obligations with respect to the remaining $525,000, as described
below.
1. ISSUANCE OF PROMISSORY NOTE. The Company shall issue to Greenwich a
non-recourse promissory note in the principal amount of $525,000 bearing
simple interest at 6.5% per annum (the "Note"). Such interest shall not
compound. The Company shall make payments to Greenwich, in repayment of the
Note, pursuant to the following schedule:
(a) commencing February 10, 1997 and continuing through July 1, 1997,
the Company shall pay Greenwich the principal amount of $25,000
on February 10, 1997 and, thereafter, on the first business day
of each month;
(b) commencing August 1, 1997 and continuing through December 1, 1997,
the Company shall pay Greenwich the principal amount of $50,000
on the first business day of each month; and
(c) on December 31, 1997, the Company shall pay Greenwich the
outstanding principal amount of the Note, together with all
accrued and unpaid interest.
All payments made in accordance with the foregoing payment schedule shall
be credited to the principal on the Note, unless otherwise provided herein.
The Company shall have the option, but not the obligation, on each date on
which an installment of principal is due and payable hereunder to pay any
interest which has accrued as of such installment date. Repayment of the
Note is also subject to acceleration as described in a Pledge Agreement
relating to the Note.
2. EXECUTION OF PLEDGE AGREEMENT. The Company and Greenwich shall
enter into a Pledge Agreement, whereby the Company will pledge a portion of
its membership interest in Greenwich in order to secure the Company's
obligations under the Note.
<PAGE>
Page Two of Two
Greenwich Information Technologies LLC/Letter Agreement
February 10, 1997
3. AMENDMENTS AND MODIFICATIONS TO PRIOR AGREEMENTS. The Letter
Agreement, and all other related agreements and obligations, whether oral or
written, relating to the Investment are hereby modified and amended to
conform in all respects to the agreements of the parties as described in this
letter.
Sincerely,
ACACIA RESEARCH CORPORATION
a California corporation
By: /s/ Paul R. Ryan
-------------------------------------
Paul R. Ryan
President and Chief Executive Officer
Agreed To And Accepted By:
GREENWICH INFORMATION TECHNOLOGIES LLC
a Delaware limited liability company
By: /s/ H. Lee Browne
- ---------------------------------------
H. Lee Browne
Chief Executive Officer
<PAGE>
NON-RECOURSE
PROMISSORY NOTE
DUE DECEMBER 31, 1997
$525,000.00 Pasadena, California
February 10, 1997
FOR VALUE RECEIVED, ACACIA RESEARCH CORPORATION, a California
corporation ("MAKER"), unconditionally promises to pay to the order of GREENWICH
INFORMATION TECHNOLOGIES LLC, a Delaware limited liability company ("PAYEE"), in
the manner and at the place hereinafter provided, the principal amount of FIVE
HUNDRED TWENTY FIVE THOUSAND DOLLARS ($525,000.00).
Maker also promises to pay interest on the unpaid principal amount
hereof from the date hereof until paid in full at a simple interest rate equal
to 6.5% per annum. Such interest shall not compound. Interest on this Note
shall be payable on the maturity date and as set forth in Section 3 hereof. All
computations of interest shall be made by Payee on the basis of a 365 day year,
for the actual number of days elapsed in the relevant period (including the
first day but excluding the last day).
1. PAYMENTS. All payments of principal and interest in respect of
this Note shall be made in lawful money of the United States of America. Each
payment made hereunder shall be credited to principal, unless otherwise provided
herein, and interest shall thereupon cease to accrue upon the principal so
credited.
2. PAYMENT SCHEDULE. Maker shall pay Payee, in repayment of the
Note, pursuant to the following schedule:
(a) commencing February 10, 1997 and continuing through July 1, 1997,
Maker shall pay Payee the principal amount of $25,000.00 on
February 10, 1997 and, thereafter, on the first business day of
each month;
(b) commencing August 1, 1997 and continuing through December 1,
1997, Maker shall pay Payee the principal amount of $50,000.00 on
the first business day of each month; and
(c) on December 31, 1997, Maker shall pay Payee the outstanding
principal amount of this Note, together with any accrued and
unpaid interest.
3. PREPAYMENTS. Maker shall have the right at any time and from
time to time to prepay the principal of this Note in whole or in part, without
premium or penalty, such prepayment, if in full, to be accompanied by accrued
and unpaid interest to the date of prepayment. Maker shall also have the
option, but not the obligation, on each date on which an installment of
principal is due and payable hereunder to pay any interest which has accrued as
of such installment date. If, prior to the complete repayment of this Note,
Maker receives a Distribution (as such term is defined in that certain Pledge
Agreement between
<PAGE>
Maker and Payee as of even date herewith that secures the obligations of this
Note (the "Pledge Agreement")), Maker shall use the Distribution to prepay
this Note in an amount equal to the Distribution. Such prepayment shall be
without premium or penalty.
4. ACCELERATION. The outstanding principal amount of this Note,
together with any accrued and unpaid interest thereon, shall become due and
payable by Maker, prior to the complete repayment of the Note, within 10
business days after the closing of one or more transactions (including,
without limitation, offerings of equity, the incurrence of debt or the sale
of the Company's investment securities) in which Maker raises capital
generating net proceeds in excess of $2,000,000.00 in the aggregate to be
used for Company purposes (and not to be used for affiliates or subsidiaries).
5. EVENTS OF DEFAULT. The occurrence of any of the following
events shall constitute an "EVENT OF DEFAULT":
(a) failure of Maker to pay any principal under this Note when due,
whether at stated maturity, required prepayment, acceleration, or
otherwise, or failure of Maker to pay any interest or other amount due
under this Note within five business days after the date due; and
(b) if Maker shall challenge, or institute any proceedings to
challenge, the validity, binding effect or enforceability of this Note or
any endorsement of this Note or any other obligation to Payee.
6. REMEDIES. Upon the occurrence and during the continuance of any
Event of Default, Payee may, by written notice to Maker, declare the principal
amount of this Note, together with accrued interest thereon, to be due and
payable, and the principal amount of this Note, together with such interest,
shall thereupon immediately become due and payable without presentment, further
notice, protest or other requirements of any kind (all of which are hereby
expressly waived by Maker).
7. MISCELLANEOUS.
(a) Any notice or other communication herein required or permitted to
be given shall be in writing and may be personally served, telexed or sent by
telefacsimile or United States mail or courier service and shall be deemed to
have been given when delivered in person or by courier service, upon receipt of
telefacsimile or telex, or three business days after depositing it in the United
States mail with postage prepaid and properly addressed. For the purposes
hereof, the address of Maker shall be as specified under its signature below;
the address of Payee shall be Greenwich Information Technologies LLC, c/o Mr. H.
Lee Browne, Two Soundview Drive, Greenwich, Connecticut 06830; or in each case
at such other address as shall be designated by Payee or Maker.
(b) No failure or delay on the part of Payee or any other holder of
this Note to exercise any right, power or privilege under this Note and no
course of dealing between Maker and Payee shall impair such right, power or
privilege or operate as a waiver of any default or an acquiescence therein, nor
shall any single
<PAGE>
or partial exercise of any such right, power or privilege preclude any other
or further exercise thereof or the exercise of any other right, power or
privilege. The rights and remedies expressly provided in this Note are
cumulative to, and not exclusive of, any rights or remedies that Payee would
otherwise have. No notice to or demand on Maker in any case shall entitle
Maker to any other or further notice or demand in similar or other
circumstances or constitute a waiver of the right of Payee to any other or
further action in any circumstances without notice or demand.
(c) Maker and any endorser of this Note hereby consent to renewals
and extensions of time at or after the maturity hereof, without notice, and
hereby waive diligence, presentment, protest, demand and notice of every kind
and, to the full extent permitted by law, the right to plead any statute of
limitations as a defense to any demand hereunder.
(d) If any provision in or obligation under this Note shall be
invalid, illegal or unenforceable in any jurisdiction, the validity, legality
and enforceability of the remaining provisions or obligations, or of such
provision or obligation in any other jurisdiction, shall not in any way be
affected or impaired thereby.
(e) This Note is non-recourse to the Maker and its assets, and Maker
shall have no personal liability under this Note. Payee's only recourse shall
be against the collateral pledged to Payee under the Pledge Agreement.
(f) This Note and the rights and obligations of Maker and Payee
hereunder shall be governed by, and shall be construed and enforced in
accordance with, the internal laws of the State of California without regard to
conflicts of laws principles.
[REMAINDER OF PAGE LEFT INTENTIONALLY BLANK]
<PAGE>
IN WITNESS WHEREOF, Maker has caused this Note to be executed and
delivered by its authorized officer as of the day and year and at the place
first above written.
ACACIA RESEARCH CORPORATION
/s/ Paul R. Ryan
----------------------------------------
By: Paul R. Ryan
Its: President and Chief Executive Officer
Notice Address:
Acacia Research Corporation
12 South Raymond Avenue
Pasadena, California 91105
<PAGE>
PLEDGE AGREEMENT
This PLEDGE AGREEMENT (this "Agreement") is dated as of February
10, 1997 and entered into by and between ACACIA RESEARCH CORPORATION, a
California corporation ("Pledgor"), and GREENWICH INFORMATION TECHNOLOGIES
LLC, a Delaware limited liability company ("Secured Party" or the "Company").
PRELIMINARY STATEMENTS
A. Pledgor is a party to that certain Operating Agreement of the
Company dated as of September 11, 1996 (the "Operating Agreement"), pursuant
to which Pledgor received a 33.33% membership interest in the Company in
exchange for Pledgor's agreement to contribute $1,000,000 to the Company.
B. Pledgor has sold 3.31% of its membership interest in the
Company. As a result, Pledgor owns a 30.02% membership interest in the
Company.
C. As of the date hereof, Pledgor has paid $475,000 of the
$1,000,000 it agreed to contribute to the Company in exchange for its
original 33.33% membership interest. Pledgor must contribute an additional
$525,000, representing 17.5% of its 30.02% membership interest in the Company
in order to satisfy all of its payment obligations for the 33.33% membership
interest originally purchased.
D. Secured Party has entered into a letter agreement dated as of
the date hereof (the "Letter Agreement") with Pledgor pursuant to which
Pledgor and Secured Party have agreed as to the manner in which Pledgor will
meet its remaining payment obligations with respect to 17.5% of the
membership interest in the Company owned by Pledgor.
E. Pursuant to the Letter Agreement, Pledgor has issued to
Secured Party a promissory note dated as of the date hereof (such promissory
note, as it may hereafter be amended, supplemented or otherwise modified from
time to time, being the "Note", the terms defined therein and not otherwise
defined herein being used herein as therein defined).
F. Pursuant to the Letter Agreement, Secured Party and Pledgor
have agreed that the Note shall be secured by the pledge and security
interests contemplated by this Agreement.
NOW, THEREFORE, in consideration of the premises and in order to
induce Secured Party to accept the Note and for other good and valuable
consideration, the receipt and adequacy of which are hereby acknowledged,
Pledgor hereby agrees with Secured Party as follows:
<PAGE>
SECTION 1. PLEDGE OF SECURITY. Pledgor hereby pledges and assigns
to Secured Party, and hereby grants to Secured Party a security interest in,
all of Pledgor's right, title and interest in and to:
(a) That portion of Pledgor's membership interest in the Company,
calculated as of the date hereof as follows:
Date of
Determination Pledged Interest
------------- ----------------
(i) on or prior to the 20.79%
date on which
Pledgor shall have
made aggregate
payments in respect
of the Note of
$200,000
(ii) following the date set 17.5%
forth in Section 1(a)(i)
above
(on any such date of determination, the "Pledged Interest"); and
(b) Subject to the provisions of Section 5(a) and Section 5(b), all
cash, securities, distributions and other property at any time and from time
to time received, receivable or otherwise distributed in respect of or in
exchange for any or all of the Pledged Interest (the Pledged Interest and the
pledged property identified in this subsection (b) are collectively referred
to hereinafter as the "Pledged Collateral").
SECTION 2. SECURITY FOR OBLIGATIONS. This Agreement secures, and
the Pledged Collateral is collateral security for, the prompt payment or
performance in full when due, whether at stated maturity, required
prepayment, acceleration or otherwise, of all obligations and liabilities of
Pledgor arising out of or in connection with the Note and all extensions or
renewals thereof, whether for principal or interest, and all obligations of
Pledgor now or hereafter existing under this Agreement, including without
limitation obligations under Section 12 hereof (all such obligations of
Pledgor being the "Secured Obligations").
SECTION 3. COVENANTS AS TO THE PLEDGED COLLATERAL. So long as any
of the Secured Obligations shall remain outstanding, Pledgor shall not,
unless Secured Party shall otherwise consent in writing, sell, assign,
exchange or otherwise dispose of any of the Pledged Collateral or any
interest therein or create or suffer to exist any lien, security interest or
other charge or encumbrance upon or with respect to any of the Pledged
Collateral, except for the pledge hereunder and the security interest created
hereby; PROVIDED, HOWEVER, that Pledgor shall be entitled to transfer the
Pledged Interest so long as (a) such transfer is permitted by the terms of
the Operating Agreement, (b) such transfer is subject to the lien of and the
other terms and conditions of this Pledge Agreement, (c) any such assignee
becomes a party to this Pledge Agreement and agrees to be bound by the
<PAGE>
terms hereof and thereof, (d) Secured Party is given possession of any new
certificate representing such membership interest and executed transfer power
evidencing the transfer of such Pledged Interest to such assignee, and (e)
any such assignee shall take such further actions and execute such further
documents as shall be necessary to perfect or evidence a security interest of
Secured Party in the Pledged Collateral.
SECTION 4. FURTHER ASSURANCES. 0Pledgor agrees that from time to
time, Pledgor will execute and deliver all further instruments and documents,
and take all further action that Secured Party may reasonably request, in
order to perfect and protect any security interest granted or purported to be
granted hereby or to enable Secured Party to exercise and enforce its rights
and remedies hereunder with respect to any Pledged Collateral.
SECTION 5. VOTING RIGHTS; DISTRIBUTIONS; ETC.
(a) So long as no Event of Default shall have occurred and be
continuing
(i) Pledgor shall be entitled to exercise any and all voting and
other consensual rights and powers relating or pertaining to the
Pledged Collateral or any part thereof for any purpose not
inconsistent with the terms of this Agreement; and
(ii) Pledgor shall be entitled to recognize on its accounts all
accrued but unpaid profits of the Company in respect of the Pledged
Interest; and
(iii) any and all interim or annual distributions in respect of
the Pledged Interest, other than the tax distributions referred to
in paragraph 5(b) below, which are actually paid to Pledgor after
the date hereof and prior to the satisfaction of the Secured
Obligations hereunder, shall be used by Pledgor to prepay, in an
amount equal to such distribution (the "Distribution") amounts
outstanding under the Note; and
(iv) any and all liquidating distributions made on or in respect
of the Pledged Collateral, whether resulting from a subdivision,
combination or reclassification of the outstanding interests of any
issuer thereof or received in exchange for such Pledged Collateral
or any part thereof or as a result of any merger, consolidation,
acquisition or other exchange of assets to which any such issuer may
be a party or otherwise, and any and all cash and other property
received in payment of the principal of or in redemption of or in
exchange for any Pledged Collateral (either at maturity, upon call
for redemption or otherwise), shall be and become part of the
Pledged Collateral and, if received by the Pledgor, shall be held in
trust for the benefit of the Secured Party and shall forthwith be
delivered to the Secured Party or its designated agent (accompanied
by property instruments of assignment and/or stock and/or bond
powers executed by such in accordance with the Secured Party's
instructions) to be held subject to the terms of this Pledge
Agreement.
<PAGE>
(b) Upon the occurrence and during the continuance of an Event of
Default, upon written notice from Secured Party to Pledgor, all rights of
Pledgor to exercise the voting and other consensual rights which it would
otherwise be entitled to exercise pursuant to Section 5(a)(i) shall cease,
and all such rights (so long as an Event of Default is continuing) shall
thereupon become vested in Secured Party who shall thereupon have the sole
right to exercise such voting and other consensual rights. For the avoidance
of doubt, the parties acknowledge that if, as a result of an Event of
Default, Secured Party is entitled to exercise its remedies as provided
hereunder with respect to the Pledged Interest, such remedies shall include
the right to receive all profits with respect to the Pledged Interest that
have accrued from the date of this Agreement through the date of any such
Event of Default that remain undistributed as of such date. Anything
contained herein to the contrary notwithstanding, Secured Party shall pay tax
distributions to its members, including the Pledgor, pursuant to Section 7.5
of the Operating Agreement even in periods during which Events of Default are
continuing, and the Pledgor shall be entitled to retain such tax
distributions to the extent necessary to allow Pledgor to satisfy its tax
liabilities in respect of its interest in the Company.
SECTION 6. SECURED PARTY APPOINTED ATTORNEY-IN-FACT. Pledgor
hereby irrevocably appoints Secured Party as Pledgor's attorney-in-fact, with
full authority in the place and stead of Pledgor and in the name of Pledgor
or otherwise, from time to time in Secured Party's discretion during any
period in which an Event of Default is continuing, to take any action and to
execute any instrument which Secured Party deems reasonably necessary or
advisable to accomplish the purpose of this Agreement which appointment is,
irrevocable and coupled with an interest.
SECTION 7. SECURED PARTY MAY PERFORM. If Pledgor fails to perform
any agreement contained herein, Secured Party may itself perform, or cause
performance of, such agreement or obligation, and the reasonable expenses of
Secured Party incurred in connection therewith shall be payable by Pledgor.
SECTION 8. STANDARD OF CARE. Secured Party shall exercise
reasonable care in the custody of any of the Pledged Collateral in its
possession or control and shall be deemed to have exercised such reasonable
care if such Pledged Collateral is accorded treatment substantially equal to
that which Secured Party accords its own property or if Secured Party takes
such action with respect to the Pledged Collateral as Pledgor shall
reasonably request in writing (which action Secured Party shall endeavor to
take if it determines, in its sole discretion, that such action will not
adversely affect the value as collateral of the Pledged Collateral and such
request is received by Secured Party in time), but no failure to comply with
any such request, nor any omission to do any such act requested by the
undersigned, shall be deemed a failure to exercise reasonable care, nor shall
any failure of Secured Party to take necessary steps to preserve rights
against any parties with respect to any of the Pledged Collateral in its
possession or control be deemed a failure to exercise reasonable care.
SECTION 9. EVENTS OF DEFAULT. The occurrence of any of the
following events shall constitute an "Event of Default":
<PAGE>
(a) Failure of Pledgor to pay any principal or interest under the
Note when due, whether at stated maturity, required prepayment, acceleration
or otherwise; or
(b) Failure of Pledgor to perform or observe any material term,
covenant or agreement contained in this Pledge Agreement or the Note and such
failure is not cured within 60 days after written notice thereof from Secured
Party.
SECTION 10. REMEDIES. If any Event of Default shall have occurred
and be continuing, following the expiration of any applicable cure period,
the Pledgor shall forfeit its Pledged Collateral in consideration of the
extinguishment of the Pledgor's debt to the Company and the Pledged Interest
shall be allocated to each Member of the Company pro rata according to such
Member's Percentage Interest in the Company (as each such capitalized term is
defined in the Operating Agreement). Upon such forfeiture, the Note shall be
fully discharged, and Pledgor shall have no further obligation or liability
to Secured Party or otherwise in respect of the Note or this Pledge Agreement.
SECTION 11. APPLICATION OF PROCEEDS. Except as expressly provided
elsewhere in this Agreement, all proceeds received by Secured Party in
respect of any sale of, collection from, or other realization upon all or any
part of the Pledged Collateral pursuant to Section 10(b) or (d) hereof may,
in the discretion of Secured Party, be held by Secured Party as Pledged
Collateral for, and/or then, or at any time thereafter, applied in full or in
part by Secured Party against, the Secured Obligations in the following order
of priority:
FIRST: To the payment of all reasonable costs and expenses of such
sale, collection or other realization and all amounts for which Secured
Party is entitled to indemnification hereunder, and to the payment of all
reasonable costs and expenses paid or incurred by Secured Party in
connection with the exercise of any right or remedy hereunder, all in
accordance with Section 12;
SECOND: To the payment of all of the Secured Obligations; and
THIRD: To the payment to or upon the order of Pledgor, or to
whosoever may be lawfully entitled to receive the same or as a court of
competent jurisdiction may direct, of any surplus then remaining from such
proceeds.
SECTION 12. INDEMNITY AND EXPENSES. Pledgor agrees to reimburse
the Secured Party, on demand, for all costs and expenses incurred by the
Secured Party in enforcing this Pledge Agreement (including the reasonable
fees and expenses of its agents and counsel), to the extent such costs and
expenses result from the breach of any warranty or covenant hereunder by the
Pledgor. Pledgor agrees to indemnify and hold harmless the Secured Party from
and against any and all liability incurred by the Secured Party in good faith
hereunder (as a result of such breach or misrepresentation) other than any
liability arising as a result of the Secured Party's negligence, recklessness
or willful misconduct.
<PAGE>
SECTION 13. CONTINUING SECURITY INTEREST. This Agreement shall
create a continuing security interest in the Pledged Collateral and shall (a)
remain in full force and effect until the payment in full of all Secured
Obligations, (b) be binding upon Pledgor, its successors and assigns, and (c)
inure, together with the rights and remedies of Secured Party hereunder, to
the benefit of Secured Party and its successors, transferees and assigns.
Upon the payment in full of all Secured Obligations, the security interest
granted hereby shall terminate and all rights to the Pledged Collateral shall
revert to Pledgor. Upon any such termination Secured Party will, at
Pledgor's expense, execute and deliver to Pledgor such documents as Pledgor
shall reasonably request to evidence such termination and Pledgor shall be
entitled to the return, upon its request and at its expense, against receipt
and without recourse to Secured Party, of such of the Pledged Collateral as
shall not have been sold or otherwise applied pursuant to the terms hereof.
SECTION 14. NO RECOURSE. Notwithstanding anything to the contrary
in this Agreement, no recourse shall be had, whether by levy or execution, or
under any law, or by the enforcement of any assessment or penalty or
otherwise, for the payment of any of the Secured Obligations, against Pledgor
individually or personally, or any successor, assign or affiliate of Pledgor,
or any of the assets of the aforesaid persons, it being expressly understood
that the sole remedies available to Secured Party pursuant to this Agreement
with respect to the Secured Obligations shall be against the Pledged
Collateral. In an Event of Default, the Secured Party shall look for payment
solely to the Pledged Collateral and will not make any claim or institute any
action or proceeding against the Pledgor (or its successors or assigns of
affiliates) for payment of the Secured Obligations (or for any deficiency
remaining after application of the Pledged Collateral). Nothing contained
herein, however, shall be construed to release or impair the lien upon the
Pledged Collateral, or preclude the application of the Pledged Collateral to
the payment of the Secured Obligations in accordance with the terms of this
Pledge Agreement.
SECTION 15. AMENDMENTS; ETC. No amendment, modification,
termination or waiver of any provision of this Agreement, and no consent to
any departure by Pledgor therefrom, shall in any event be effective unless
the same shall be in writing and signed by Secured Party and, in the case of
any such amendment or modification, by Pledgor. Any such waiver or consent
shall be effective only in the specific instance and for the specific purpose
for which it was given.
SECTION 16. NOTICES. Any notice or other communication herein
required or permitted to be given shall be in writing and may be personally
served, telexed or sent by telecopy or United States mail or courier service
and shall be deemed to have been given when delivered in person or by courier
service, upon receipt of telecopy or telex, or three Business Days after
depositing it in the United States mail with postage prepaid and properly
addressed. For the purposes hereof, the address of each party hereto shall
be as set forth below or, as to either party, such other address as shall be
designated by such party in a written notice delivered to the other party
hereto:
<PAGE>
If to Pledgor:
Acacia Research Corporation
c/o Mr. Paul R. Ryan
12 South Raymond Avenue
Pasadena, California 91105
If to Secured Party:
Greenwich Information Technologies LLC
c/o Mr. H. Lee Browne
Two Soundview Drive
Greenwich, Connecticut 06830
SECTION 17. FAILURE OR INDULGENCE NOT WAIVER; REMEDIES CUMULATIVE.
No failure or delay on the part of Secured Party in the exercise of any
power, right or privilege hereunder shall impair such power, right or
privilege or be construed to be a waiver of any default or acquiescence
therein, nor shall any single or partial exercise of any such power, right or
privilege preclude any other or further exercise thereof or of any other
power, right or privilege. All rights and remedies existing under this
Agreement are cumulative to, and not exclusive of, any rights or remedies
otherwise available.
SECTION 18. SEVERABILITY. In case any provision in or obligation
under this Agreement shall be invalid, illegal or unenforceable in any
jurisdiction, the validity, legality and enforceability of the remaining
provisions or obligations, or of such provision or obligation in any other
jurisdiction, shall not in any way be affected or impaired thereby.
SECTION 19. HEADINGS. Section and subsection headings in this
Agreement are included herein for convenience of reference only and shall not
constitute a part of this Agreement for any other purpose or be given any
substantive effect.
SECTION 20. GOVERNING LAW; TERMS. THIS AGREEMENT AND THE RIGHTS
AND OBLIGATIONS OF THE PARTIES HEREUNDER SHALL BE GOVERNED BY, AND SHALL BE
CONSTRUED AND ENFORCED IN ACCORDANCE WITH, THE INTERNAL LAWS OF THE STATE OF
CALIFORNIA, WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES, EXCEPT TO THE
EXTENT THAT THE UNIFORM COMMERCIAL CODE OF THE STATE OF CALIFORNIA PROVIDES
THAT THE VALIDITY OR PERFECTION OF THE SECURITY INTEREST HEREUNDER, OR
REMEDIES HEREUNDER, IN RESPECT OF ANY PARTICULAR PLEDGED COLLATERAL ARE
GOVERNED BY THE LAWS OF A JURISDICTION OTHER THAN THE STATE OF CALIFORNIA.
Unless otherwise defined herein or in the Note, terms used in Articles 8 and
9 of such Code are used herein as therein defined.
SECTION 21. COUNTERPARTS. This Agreement may be executed in one or
more counterparts and by different parties hereto in separate counterparts,
each of which when so executed and delivered shall be deemed an original, but
all such counterparts together shall constitute but one and the same
instrument; signature pages may be detached from multiple separate
counterparts and
<PAGE>
attached to a single counterpart so that all signature pages are physically
attached to the same document.
[REMAINDER OF PAGE INTENTIONALLY LEFT BLANK]
<PAGE>
IN WITNESS WHEREOF, Pledgor and Secured Party have caused this
Agreement to be duly executed and delivered by their respective officers
thereunto duly authorized as of the date first written above.
ACACIA RESEARCH CORPORATION, as Pledgor
/s/ Paul R. Ryan
------------------------------------------
By: Paul R. Ryan
Its: President and Chief Executive Officer
GREENWICH INFORMATION
TECHNOLOGIES LLC, as Secured Party
/s/ H. Lee Browne
------------------------------------------
By: H. Lee Browne
Its: Chief Executive Officer
Approved and consented to by the
Senior Members of Greenwich
Information Technologies LLC:
H. LEE BROWNE, as Senior Member
/s/ H. Lee Browne
- -----------------------------------------
ACACIA RESEARCH CORPORATION, as
Senior Member
/s/ Paul R. Ryan
- ------------------------------------------
By: Paul R. Ryan
Its: President and Chief Executive Officer
S-1
<PAGE>
EXHIBIT 21
SUBSIDIARIES OF ACACIA RESEARCH CORPORATION
The significant subsidiaries of Acacia Research Corporation are:
NAME STATE OF INCORPORATION
---- ----------------------
MerkWerks Corporation California
CombiMatrix Corporation California
Soundview Technologies Incorporated Delaware
Greenwich Information Technologies LLC Delaware
Whitewing Labs, Inc. Delaware
<TABLE> <S> <C>
<PAGE>
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0
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<COMMON> 4081993
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