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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
__________________________________
FORM 10-K/A
__________________________________
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934]
For the fiscal year ended December 31, 1996.
OR
[ ] TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from N/A to N/A
----- -----
COMMISSION FILE NUMBER 0-26068
ACACIA RESEARCH CORPORATION
________________________________________________________________________________
(Exact name of registrant as specified in its charter)
California 95-4405754
_____________________________________________ ___________________
(State or other jurisdiction of (I.R.S. Employer
incorporation organization) Identification No.)
12 South Raymond Avenue, Pasadena CA 91105
_____________________________________________ ___________________
(Address of principal executive offices) (Zip Code)
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 ___
___
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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The Registrant submits its second amendment to its Form 10-K for the
year ended December 31, 1996 to restate its consolidated financial statements
to include the accounts of CombiMatrix Corporation on a consolidated basis.
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 shares of the Company's Common Stock in connection with
financial consulting services, which transaction was exempt from registration
under Section 4(2) 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 liquidation, 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.
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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.
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 statement for 1996 have been restated to include the accounts
of CombiMatrix in the Company's consolidated financial statements. The
Company previously accounted for its interest in CombiMatrix using the equity
method of accounting.
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 the 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. The amount of this entry may vary
depending on the details of the option and when it is exercised.
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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 Soundview Technologies and Greenwich
Information 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, and financial statements for the
year ended December 31, 1996 reflect consolidation with CombiMatrix.
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,
and 1994 and the period ended 1993
<TABLE>
<CAPTION>
1996 1995 1994 1993
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<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 (175,689) 271,023 (137,782) (276,465)
Management fees 1,458,078 2,880 0 0
Interest income 113,049 49,567 37,502 8,215
---------- ---------- --------- ----------
Total revenue 3,338,345 3,517,711 (100,280) (268,250)
Marketing, general and administrative 2,640,504 1,399,042 724,156 597,848
---------- ---------- --------- ----------
Income (loss) before minority interest and taxes 697,841 2,118,669 (824,436) (866,098)
Minority interest in net loss of consolidated
subsidiary (201,309) (459) 0 0
---------- ---------- --------- ----------
Income (loss) before provision for taxes 899,150 2,119,128 (824,436) (866,098)
Provision for Income Taxes 606,141 287,817 3,541 1,486
---------- ---------- --------- ----------
Net Income (Loss) $ 293,009 $1,831,311 $(827,977) $(867,584)
---------- ---------- --------- ----------
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Earnings (loss) per common share
Fully diluted $0.11 $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 $5,638,932 $3,843,954
Total liabilities $ 836,602 $ 357,979
Minority interest $ 380,329 $ 10,796
Stockholders' equity $4,422,001 $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 $3,338,345 for the year ended December 31,
1996, a decrease of $179,366, 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
providing 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
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$3,194,241 for the year ended December 31, 1995 to $876,499 for the
year ended December 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 $175,689 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
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 and fourth funds 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 $2,640,504 for the year ended
December 31, 1996. Expenses incurred in 1996 include 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. Expenses in 1996 also include the consolidation of
the accounts of CombiMatrix of $420,887, which were not present in 1995 as
CombiMatrix commenced operations in 1996.
Actual marketing, general and administrative expenses incurred in 1996,
less the write down and expenses related to CombiMatrix, were $1,660,367,
which represents an 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 an increase to common stock and
a reduction of income taxes payable. The 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 $606,141, 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 $293,009, 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 $1,913,829, 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 of securities decreased from proceeds
of $3,205,496 from such sales
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in 1995 to proceeds of $2,049,051 in 1996. Overall net cash used by
investing activities was $446,821 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
$292,701, $116,450 of which was cash held by CombiMatrix. In addition, the
Company had working capital of $1,437,271, and a ratio of current assets to
current liabilities of 3.1 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.
9
<PAGE>
ITEM 11. EXECUTIVE COMPENSATION
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 Company and Greenwich Information
Technologies regarding attached Promissory Note and Pledge
Agreement.
21 Subsidiaries
27 Financial Data Schedule
* 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
10
<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: August 13, 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.
SIGNATURE TITLE DATE
/s/ R. BRUCE STEWART
- --------------------- Chairman of the Board of August 13, 1997
R. Bruce Stewart Directors, Chief Financial
Officer (Principal Financial
and Accounting Officer)
/s/ PAUL R. RYAN
- ------------------------ Chief Executive Officer and August 13, 1997
Paul R. Ryan President (Principal Executive
Officer)
/s/ KATHRYN KING-VAN-WIE
- ------------------------ Chief Operating Officer and August 13, 1997
Kathryn King-Van-Wie Secretary
/s/ BROOKE P. ANDERSON
- ----------------------- Director August 13, 1997
Brooke P. Anderson
/s/ FRED A. DE BOOM
- ------------------------ Director August 13, 1997
Fred A. de Boom
/s/ EDWARD W. FRYKMAN
- ------------------------ Director August 13, 1997
Edward W. Frykman
11
<PAGE>
FINOCCHIARO & CO.
150 East Colorado Boulevard, Suite 201
Pasadena, California 91105
Telephone (818)449-6300
Fax (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 an 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 included examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the 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 and its financial
statements for the year ended December 31, 1996 to reflect a change in its
accounting for its investment in CombiMatrix Corporation to the consolidated
method.
/s/ FINOCCHIARO & CO.
Pasadena, California
July 31, 1997
<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 $ 292,701 $ 788,611
Distributions receivable 400,000 0
Notes receivable 820,500 1,846,000
Receivables from affiliates 52,592 176,885
Other receivables 295,546 74,994
Prepaid expenses 219,027 12,948
Deferred tax benefit 272 15,820
---------- ----------
Total current assets 2,080,638 2,915,258
Equipment, furniture, and fixtures 202,049 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 $3,367 and $2,045 3,169 3,641
---------- ----------
Total assets $5,638,932 $3,843,954
---------- ----------
---------- ----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 90,599 $ 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 643,099 353,784
Deferred tax liability 193,503 4,195
---------- ----------
Total liabilities 836,602 357,979
Commitments and contingencies
Minority interest 380,329 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 428,760 135,751
Less stock subscription receivable (88,752) (208,252)
---------- ----------
Total stockholders' equity 4,422,001 3,475,179
---------- ----------
Total liabilities and stockholders' equity $5,638,932 $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 (175,689) 271,023 (137,782)
Management fees 1,458,078 2,880 0
Interest income 113,049 49,567 37,502
---------- ---------- ----------
Total revenues 3,338,345 3,517,711 (100,280)
Marketing, general, and administrative 2,640,504 1,399,042 724,156
---------- ---------- ----------
Income (loss) before minority interest and 697,841 2,118,669 (824,436)
taxes
Minority interest in net loss of
consolidated subsidiary (201,309) (459) 0
---------- ---------- ----------
Income (loss) before provision for
income taxes 899,150 2,119,128 (824,436)
Provision (benefit) for income taxes 606,141 287,817 3,541
---------- ---------- ----------
Net income (loss) $ 293,009 $1,831,311 $ (827,977)
---------- ---------- ----------
---------- ---------- ----------
Earnings per common share
Primary $0.11 $0.72 ($0.35)
Fully diluted $0.11 $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 293,009 293,009
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 $ 428,760 $ (88,752) $4,422,001
--------- ---------- ----------- --------- ----------
--------- ---------- ----------- --------- ----------
</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) $ 293,009 $ 1,831,311 $(827,977)
Adjustments to reconcile net income to net
cash provided by operating activities:
Depreciation and amortization 31,151 9,681 6,517
Deferred taxes 245,319 (54,715) 1,941
Undistributed (earnings) loss of affiliate 175,689 (271,023) 137,782
Gain on sales of securities (876,499) (3,194,241) 0
Minority interest in net loss (201,309) (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 (358,962) (14,782) (33,397)
Increase (decrease) in accounts payable,
accrued expenses, income taxes payable,
and other liabilities (155,819) 197,571 21,049
----------- ----------- ---------
Net cash used by operating activities (1,913,829) (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 414,156 200,000 0
Advances to affiliates (369,597) (62,638) (40,000)
Payment for acquisition of patent (53,637)
Payment for other receivables (51,604)
Collection of other receivables 94,336
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 (155,026) (39,530) (13,970)
----------- ----------- ---------
Net cash provided (used) by investing activities (446,821) 707,328 19,477
Cash flows from financing activities:
Proceeds from note payable 800,000 0 0
Payments on note payable (248,143) 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 (34,650) (167,974) (97,399)
Proceeds from issuance of common stock 693,720
Proceeds from sale of common stock 335,000 1,010,457 672,300
----------- ----------- ---------
Net cash provided by financing activities 1,864,740 1,216,919 599,901
----------- ----------- ---------
Increase (decrease) in cash and cash equivalents (495,910) 427,590 (76,212)
Cash and cash equivalents, beginning 788,611 361,021 437,233
----------- ----------- ---------
Cash and cash equivalents, ending $ 292,701 $ 788,611 $ 361,021
----------- ----------- ---------
----------- ----------- ---------
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
F-5
<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 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, MerkWerks Corporation, a 69% owned subsidiary
developed by the Company and CombiMatrix Corporation, a 52% owned
subsidiary acquired 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 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 investee.
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
assets 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 the 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>
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
SUMMARY OF SIGNIFICANT ACCOUNTING PRINCIPLES (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.
RESTATEMENT OF 1996 - The Company's December 31, 1996 consolidated
financial statements have been restated to include the accounts of
CombiMatrix Corporation on a consolidated basis. The Company's ownership
interest in CombiMatrix Corporation exceeded 50% as of December 31,
1996, but was expected to decline below 50% based on planned offering's
of common stock by CombiMatrix Corporation and, therefore, was
previously reported under the equity method. However, the Securities and
Exchange Commission believes that the exception for temporary control is
applicable only, if control is likely to be lost in the near term as a
result of the probable occurence of events that lie outside the
Company's control. As a result of these changes, net income for 1996
decreased by $133,411 and earnings per share earnings decreased from $0.16
to $0.11. Total assets as of December 31, 1996 increased by $261,162 to
$5,638,932.
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 $106,371 $ 45,730
Furniture and fixtures 89,172 34,260
Laboratory equipment 40,050 -
Leasehold improvements 11,892 -
-------- --------
247,485 79,990
Accumulated depreciation (45,436) (16,421)
-------- --------
Total Equipment, Furniture,
and Fixtures $202,049 $ 63,569
-------- --------
-------- --------
Depreciation expense for the years ended December 31, 1996 and 1995 was
$29,888 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 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 was 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 equaled the following:
Capital Operating
------- ---------
1997 $ 3,415 $36,072
1998 3,415 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 which are not
intended to so qualify ("Nonstatutory Options") to officers, directors,
employees, consultants, and others expected to provide significant services
to the Company or its subsidiaries. The 1993 Plan, which covers an
aggregate of 1,000,000 shares of common stock, was approved by the Board of
Directors in October, 1993. The Company has reserved 1,000,000 shares of
common stock in connection with the 1993 Plan. Under the terms of the 1993
Plan, options may be exercised upon terms approved by the Board of
Directors of the Company, and expire at a maximum of ten years from the
date of grant.Incentive Stock Options are granted at prices equal to or
greater than fair market value at the date of grant. Nonstatutory Stock
Options are generally granted at prices equal to or greater than 85% of the
fair market value at the date of grant. At 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:
Weighted
Shares Prices Average
----------------------------------------------------------------------
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 $5.38-$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
----------------------------------------------------------------------
----------------------------------------------------------------------
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 pro forma 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 diluted 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.
F-9
<PAGE>
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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.
The following is a summary of notes receivable at December 31, 1996 and
1995:
1996 1995
-------- ----------
Notes receivable due from stockholders, 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%
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 $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 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 maintains a 30% ownership interest in the
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 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.
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.
F-10
<PAGE>
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INVESTMENTS, AT COST
In March 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 exchange 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. As of December 31, 1996, the Company carries its investment in
Soundview Technologies at $1,233,000, which represents a 16.4% ownership
interest.
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 $83,257 $360,822
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%
--------------------------
--------------------------
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 state of California purposes, respectively.
F-11
<PAGE>
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. PROVISION FOR INCOME TAXES (continued)
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 were $88,752 and
$208,252, respectively. Other receivables include 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 and Soundview Technologies
Incorporated 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.
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.
F-12
<PAGE>
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. SUPPLEMENTAL CASH FLOW INFORMATION
As disclosed in Note 4, the Company incurred a capital lease obligation of
$2,922 in 1996, $6,609 in 1995, and $2,052 in 1994. 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 on 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 these 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 $669,405 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 Corporations 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 depreciation and amortization.
The results for the year ended December 31, 1996 include the consolidated
balances of CombiMatrix Corporation. CombiMatrix Corporation is engaged in
the business of developing new technologies in the field of drug discovery.
These financial statements include revenues of $10,715 and operating
expenses of $420,887 from CombiMatrix Corporation. The total assets of
CombiMatrix Corporation at December 31, 1996 were $261,162 and consisted of
cash, prepaid expenses, patent, equipment and organization costs, net of
depreciation and amortization.
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 Wilfred 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.
17. 1996 QUARTERLY INFORMATION (UNAUDITED)
The following is selected unaudited quarterly information that reflects
the inclusion of the accounts of CombiMatrix Corporation on a consolidated
basis (See Note 2).
Quarter Ended Quarter Ended Quarter Ended
March 31, 1996 June 30, 1996 September 30, 1996
--------------- ------------- ------------------
Total Revenue $1,827,681 $1,439,708 $ 134,336
Net Income $ 879,790 $ 552,105 (161,033)
Earnings Per Share $ 0.34 $ 0.20 ($0.08)
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 $7,791,413 $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 $ - $114,247 $ -
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 $174,247 $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 $620,000 $250,000 $684,247
-------- -------- -------- --------
-------- -------- -------- --------
1994
Whitewing Labs $274,247 $ 40,000 $ - $314,247
-------- -------- -------- --------
-------- -------- -------- --------
</TABLE>
(a) Note receivable, secured by common stock in Whitewing Labs and Acacia
Research Corporation, bearing interest at 5% per annum in the face amount of
$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
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1996
<PERIOD-START> JAN-01-1996
<PERIOD-END> DEC-31-1996
<CASH> 292,701
<SECURITIES> 0
<RECEIVABLES> 920,500
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 2,080,638
<PP&E> 247,485
<DEPRECIATION> 45,436
<TOTAL-ASSETS> 5,638,932
<CURRENT-LIABILITIES> 643,099
<BONDS> 0
0
0
<COMMON> 3,993,241
<OTHER-SE> 428,760
<TOTAL-LIABILITY-AND-EQUITY> 5,638,932
<SALES> 0
<TOTAL-REVENUES> 3,338,345
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 899,150
<INCOME-TAX> 606,141
<INCOME-CONTINUING> 293,009
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 293,009
<EPS-PRIMARY> 0.11
<EPS-DILUTED> 0.11
</TABLE>
