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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]
For the fiscal year ended December 31, 1997.
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
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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 executive offices) (Zip Code)
Registrant's telephone number, including area code: (626) 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 closing bid and asked
prices of such stock, as of March 26, 1998 was approximately $44,270,355.
(All officers and directors of the registrant are considered affiliates.)
At March 26, 1997 the registrant had 3,616,187 shares of Common 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 businesses. 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 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.
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. As of March 25, 1998, assets under management
in the four funds totalled approximately $20 million.
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 consultants. 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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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
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Each private investment partnership has two general partners, the
Company and Paul R. Ryan. Mr. Ryan is also a director and the President and
Chief Executive Officer of the Company. A performance fee based on a
percentage of the annual net profits of each partner's investment in the
partnership will be allocated on an annual basis to the general partners. 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. On dissolution of a partnership,
any assets remaining after provision for all of the partnership's debts would
be distributed to all partners in proportion to their respective capital
accounts as of the end of the most recent quarter.
A partnership will also pay or reimburse the general partners for
certain costs and expenses incurred by or on behalf of the partnership,
including certain legal and accounting fees. Although a partnership will not
be obligated to reimburse the general partners for any of the general
partners' own operating, general and administrative, and overhead costs and
expenses, some or all of these expenses may be paid by securities brokerage
firms that execute securities trades for a partnership.
The value of the Company's partnership interest in its two private
investment funds was approximately $586,393 in the aggregate at December 31,
1997.
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. A limited partner 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
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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
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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
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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, many
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, and invests in, 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.
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) CombiMatrix Corporation ("CombiMatrix"); (ii) Greenwich Information
Technologies LLC ("Greenwich Information Technologies"); (iii) MerkWerks
Corporation ("MerkWerks"); (iv) Soundview Technologies Incorporated
("Soundview Technologies"); and (v) Whitewing Labs, Inc. ("Whitewing")
(CombiMatrix, MerkWerks, Greenwich Information Technologies, Soundview
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, an
acceptable likelihood of success, and future profitability involves inherent
risk and uncertainty.
CombiMatrix
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CombiMatrix was incorporated in October 1995 under the laws of the State
of California. CombiMatrix is engaged in research and development to
commercialize its proprietary technologies for combinatorial chemistry
synthesis. CombiMatrix has developed a combinatorial chemistry system that
synthesizes and analyzes chemical arrays on a semiconductor chip. The first
generation of chips each contain 1,000 miniature virtual flasks where DNA,
small molecules, or peptides are synthesized. CombiMatrix has demonstrated a
preliminary feasibility of its core technologies and is currently developing
instrumentation to automate its proprietary technologies. If successful,
CombiMatrix's technologies would allow the rapid and systematic synthesis of
large numbers of molecular building blocks to produce large and diverse
libraries of chemical compounds. These compounds can then be screened for
activity against known disease targets and identified as potential drug
leads. CombiMatrix's technologies are intended to result in significant
improvements over current technologies in the speed and cost effectiveness of
drug discovery. CombiMatrix has one pending patent application for its
technologies. To date, no patents have been issued.
The Company's investment in CombiMatrix is subject to
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the risks associated with new technologies, including the viability of
CombiMatrix's technologies, unknown customer acceptance, difficulties in
obtaining financing, the ability to obtain intellectual property protection,
competition, and the impact of applicable laws and regulations. In addition,
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 successfully implement collaborative efforts with pharmaceutical
companies. To date, CombiMatrix has not generated any revenues. The Company
anticipates that, if adequate funding can be obtained, CombiMatrix will
increase its research and development expenditures and will incur continued
losses for the foreseeable future.
CombiMatrix intends to vigorously protect its intellectual property
rights. There can be no assurance, however, that CombiMatrix's pending 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
CombiMatrix's patent application would materially adversely affect
CombiMatrix's business. CombiMatrix requires confidentiality agreements with
customers and potential customers, vendors and other third parties and
generally limits 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. 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. During 1996, CombiMatrix issued in a private
placement approximately 546,000 shares of its common stock and raised net
proceeds of approximately $500,000. In addition, the Company sold 785,000 of
its shares of CombiMatrix during 1996 and 25,000 of its shares of CombiMatrix
during first quarter of 1997, which brought the Company's ownership position
to approximately 51% of the total outstanding shares. In May 1997,
CombiMatrix completed a privately placed equity financing in which it sold
143,500 shares of common stock, raising gross proceeds of $287,000 and in
July 1997, CombiMatrix completed another privately-placed equity financing in
which it sold 200,000 shares of common stock, raising gross proceeds of
$400,000. The Company participated in both of these private placements,
purchasing a total of 139,000 shares of CombiMatrix, and maintaining its
majority ownership position. During January 1998, the Company purchased an
additional 100,000 shares of CombiMatrix common stock from a shareholder in
exchange for 22,085 shares of the Company's common stock. The transaction
increased the Company's ownership from 51.4% to 66.7%. In March 1998,
CombiMatrix completed a private placement of three year notes and warrants to
purchase common stock, which raised gross proceeds of $1.45 million. The
Company also participated in this financing, investing $50,000.
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
Chief Executive Officer and a director of CombiMatrix; and Brooke P.
Anderson, Ph.D., a director of the Company and Director of Engineering of
CombiMatrix, is also a director of CombiMatrix. Kathryn King-Van Wie, the
Company's Chief Operating Officer, serves as Corporate Secretary of
CombiMatrix. Three additional directors, Mark G. Edwards, Rigdon Currie, and
Paul Low, Ph.D. were elected to the Board of CombiMatrix during 1997. 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. Dr. Low was formerly
the President of IBM's General Products Division and General Manager of IBM.
During his tenure at IBM, Dr. Low was also a member of IBM's Corporate
Management Board and had worldwide line responsibility for Technology
Products.
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 CombiMatrix's Board of Directors as designated by the
individual and the Company and certain restrictions on the sale or transfer
of the individual's shares of common stock in CombiMatrix.
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Greenwich Information Technologies
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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. Greenwich Information Technologies does not currently own
any 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 is the licensing
agent with respect to two issued U.S. patents, one application that has been
allowed, and one application pending. 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 one of the primary
applications of 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 any patents.
However, Greenwich Information Technologies is the exclusive marketing and
licensing agent for a number of worldwide patents and other intellectual
property pertaining to information-on-demand systems, which lists as
co-inventor the chief executive officer of Greenwich Information Technologies
who, along with the Company, is also a Senior Member of Greenwich Information
Technologies. The chief executive officer is a party to an Assignment
Agreement with the other co-inventor of the technology and co-owner of the
patents that grants the chief executive officer the right to assign certain
patent rights to another person or entity. Pursuant to this Assignment
Agreement, Greenwich Information Technologies has been appointed exclusive
marketing and licensing agent for the patents under the terms 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 (including the payment of royalties from
licensing the patents) 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) assignment of substantially all U.S. patent rights 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 and is also the chief executive officer and a significant
shareholder of another affiliate of the Company, Soundview Technologies.
Since its formation, Greenwich Information Technologies has not licensed the
patents to any party and has no current revenues.
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 or
develop competing technologies that do not infringe such patents.
Additionally, 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. Other companies may develop
competing technologies that offer better or less expensive alternatives to
those offered by Greenwich Information Technologies without infringing on the
patent rights.
The Company signed a letter agreement in 1996 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 made payments to Greenwich Information Technologies of a minimum
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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; with the outstanding
principal plus any accrued and unpaid interest by December 31, 1997. The
Promissory Note bore a simple interest rate of 6.5% per annum. As of
December 31, 1997, the Company paid this Promissory Note in full.
The Company sold a portion, 3.31%, of its membership interest to third
parties in 1996 and subsequently repurchased this 3.31% membership interest
in January 1998 in exchange for 51,017 shares of the Company's common stock
in a series of related transactions. Although the Company is one of the two
Senior Members of Greenwich Information Technologies, the Company does not
hold a majority of the board, which is comprised 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. The Company accounts for its interest in Greenwich Information
Technologies on the equity method.
MerkWerks
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MerkWerks was incorporated in September 1995 under the laws of the State
of California and is 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. No assurances can be
given that MerkWerks will ever be able to successfully complete the
development of or 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 will
provide 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.
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, if
and when completed, 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 on a combination of statutory and common law,
copyright, trademark and trade secret law, licensing agreements,
nondisclosure agreements, and other means to protect its 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 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 MerkWerks an aggregate of $168,228
as of December 31, 1997. In December 1995 and January 1996, the Company sold
approximately 30% of its interest in MerkWerks for approximately $600,000.
In January 1998, the Company repurchased 401,359 shares of MerkWerks common
stock in exchange for 85,975 shares of the Company's common stock in a series
of transactions. These transactions resulted in an increase in the Company's
ownership from 69.5% to 89.6%. 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, 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.
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Soundview Technologies
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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. On March 12, 1998, the Federal Communications
Commission ("FCC") approved the television guidelines rating system as well
as the V-chip technical standards. Soundview Technologies owns the exclusive
right and title to U.S. Patent #4,554,584, which describes the V-chip
technology and technical implementation as mandated by Congress and approved
by the FCC. This patent was issued in November 1985 and expires in November
2002. Soundview Technologies' V-chip technology is a cost-effective method
for V-chip implementation that can work with components currently in use in
televisions. Soundview Technologies works with various inventors,
consultants, and industry participants to enhance its existing technology as
well as to develop new technologies and has filed three patent applications.
Soundview Technologies has developed a V-chip set-top retrofit device, the V
Chip Converter-TM-, to be available for use with the approximately 250
million television sets in the United States that will be "deaf" to V-chip
signals. Soundview Technologies intends to license its patent, along with
its other intellectual property, to the manufacturers of the approximately 25
million new televisions sold each year in the United States. Soundview
Technologies also intends to license companies who will include the V-chip
technology in cable boxes, VCRs, and converter boxes.
In July 1997, the Company acquired majority ownership of Soundview
Technologies in a transaction valued at $4.2 million, which increased the
Company's ownership from 16.4% to 51.4%. The purchase price for the
additional 35% of Soundview Technologies' outstanding stock from two of the
principals of Soundview Technologies consisted of 400,000 shares of the
Company's common stock, $500,000 in cash, and a $900,000 note, which was paid
in full as of December 31, 1997. In January 1998, the Company purchased an
additional 1,144,000 shares of Soundview Technologies common stock from other
shareholders in exchange for 244,336 shares of the Company's common stock in
a series of transactions. These transactions resulted in an increase in the
Company's ownership from 51.4% to 66.7%. R. Bruce Stewart, the Company's
Chairman and Chief Financial Officer, is a director and Corporate Secretary
of Soundview Technologies; Paul R. Ryan, a director of the Company as well as
its President and Chief Executive Officer, is a director of Soundview
Technologies; and Kathryn King-Van Wie, the Chief Operating Officer of the
Company, is a director and Chief Financial Officer of Soundview Technologies.
The chief executive officer of Soundview Technologies is a significant
shareholder of Soundview Technologies and has a majority membership interest
in another affiliate of the Company, Greenwich Information Technologies.
Although Soundview Technologies believes that it owns an enforceable
patent, no assurances can be given that other companies will not challenge
Soundview Technologies' patent rights or develop products 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.
Other companies may also develop competing technologies or products that
offer better or less expensive alternatives to those offered by Soundview
Technologies. Potential competitors could have significantly greater research
capabilities and financial and technical resources than Soundview
Technologies, and some could have established brand names in the market for
television products.
The exclusivity and validity of these patent rights and other
proprietary technology are critical to the successful implementation of
Soundview Technologies' business plan.
8
<PAGE>
Whitewing
- ---------
Whitewing was incorporated on July 29, 1993, under the laws of the State
of California. 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 21 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 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's common
stock was $1-9/16 as of March 26, 1998.
The Company currently owns 532,459 shares of the common stock of
Whitewing, representing 18.6% of the outstanding shares and has voting
control over 789,709 shares of common stock or 27.6% 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.
Since Whitewing is a publicly traded company, information about
Whitewing is publicly available. Any person seeking such information should
review its reports filed under the Securities Exchange Act of 1934.
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 possess
greater financial, technical, human, and other resources than that of the
Company.
REGULATION
The Company is 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
9
<PAGE>
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. 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."
EMPLOYEES
The Company and its consolidated subsidiaries have a total of twenty-one
employees. The Company and its Affiliates also rely on a number of key
consultants and advisors. 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. Neither the Company nor any of the Affiliates are 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 an "as needed" basis.
RESEARCH AND DEVELOPMENT
Although the Company itself is not involved in research and development
at this time, the Company's consolidated subsidiaries are so involved. In
1997, CombiMatrix, MerkWerks, and Soundview Technologies incurred research
and development related expenses of $621,204, $117,753, and $148,933,
respectively. Soundview Technologies' expense relates only to the six month
period following the Company's acquisition of a majority-ownership position
in Soundview Technologies.
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.
Such lease terminates in November 1998. However, the Company is seeking to
move into larger facilities to accomodate its growing business. The Company
believes that suitable space is readily available and is currently
negotiating a lease. MerkWerks is located at the Company's facilities. The
Company's other consolidated subsidiaries, CombiMatrix and Soundview
Technologies lease facilities in the San Francisco, California and Greenwich
Connecticut areas respectively.
ITEM 3. LEGAL PROCEEDINGS
None.
10
<PAGE>
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
During the quarter ended December 31, 1997 there were no matters submitted to a
vote of the Company's security holders.
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 January 1, 1996 through
July 5, 1996 and the Nasdaq Stock Market for the period July 8, 1996 through
December 31, 1997 are as follows. Such prices are interdealer prices without
retail markups, markdowns or commissions, and may not necessarily represent
actual transactions.
<TABLE>
<CAPTION>
Fiscal Year 1996 High Low
---------------- ---- ---
<S> <C> <C>
First Quarter $8-3/4 $5-1/4
Second Quarter $13-3/4 $7
Third Quarter $12-3/4 $6-5/8
Fourth Quarter $11 $7-1/8
Fiscal Year 1997
----------------
First Quarter $8-7/8 $6-1/2
Second Quarter $7-1/4 $3
Third Quarter $10-1/4 $6-1/2
Fourth Quarter $12-5/8 $7-1/8
</TABLE>
11
<PAGE>
On March 26, 1998, the closing bid and asked quotations for the Common
Stock were $14-3/4 and $15-1/4, respectively, per share.
On March 26, 1998, there were approximately 750 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.
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.
SALES OF UNREGISTERED SECURITIES
On May 7, 1997, the Company entered into a Settlement Agreement
terminating a lawsuit brought by Ann P. Hodges, a former director of the
Company, and her husband Christopher D. Hodges. The suit alleged that the
Company breached a contract with Ann Hodges by improperly refusing to permit
her to exercise an option to purchase 100,000 shares of common stock of the
Company, and sought $950,000 in damages from the Company. Under the terms of
the Settlement Agreement, the Hodges were paid $25,000 in cash and options to
purchase 120,600 shares of the Company's Common Stock at an exercise price
equal to $4.25 per share. The ability to exercise the options vests over a
period of 18 months, and options remain exercisable until the Hodges realize
total profits of up to $475,000 (measured as the aggregate difference between
the market value of the shares on the date of exercise and the exercise
price). As of March 20, 1998, the Hodges have exercised their options to
purchase 80,400 shares of the Company's common stock, with an approximate
value of such exercise of $445,000. The issuance of both the options and the
shares of common stock upon exercise of the options was exempt from
registration pursuant to Section 4(2) of the Securities Act.
In June 1997, the Company sold 290,200 units at a purchase price of
$5.00 per unit, each unit representing one common stock purchase warrant and
one share of the Company's common stock, to 37 accredited investors. Each
common stock purchase warrant entitles its holder to purchase one share of
the Company's common stock at an exercise price of $7.50 per share, subject
to adjustment, and expires on June 8, 2000. Finders involved in this
transaction received finders fees at a rate of $0.50 per unit placed and one
finder warrant per ten units placed for a total of 27,870 finder warrants.
Each finder warrant may be exercised prior to June 8, 2000 for one share of
the Company's common stock at an exercise price of $5.50 per share, subject
to adjustment. The Company's sale of these units was exempt from
registration, as a private placement, under Section 4(2) of the Securities
Act and Regulation D promulgated thereunder.
Additionally, in June 1997, the Company issued warrants representing the
right to purchase 100,000 shares of the Company's common stock (subject to
vesting), at an exercise price of $6.00 per share, to Cruttenden Roth
Incorporated in connection with financial consulting services provided by
that firm, and the Company granted an option to purchase 12,000 shares of the
Company's common stock (subject to vesting), at an exercise price of $5.00
per share, in connection with services provided to the Company by a
consultant. Each of these transactions was exempt from registration, as a
private placement, under Section 4(2) of the Securities Act.
In July 1997, in connection with the Company's purchase of an additional
35% interest in Soundview Technologies, the Company issued 400,000 shares of
the Company's common stock to two individuals who were accredited investors.
The issuance of these shares was exempt from registration, as a private
placement, under Section 4(2) of the Securities Act.
Additionally, in July 1997, the Company granted options to purchase
24,000 shares and 4,000 shares, respectively, of the Company's common stock
(in each case subject to vesting), at exercise prices of $7.00 per share, in
connection with services provided to the Company by two consultants each of
whom are accredited investors. Each of these transactions was exempt from
registration, as a private placement, under Section 4(2) of the Securities
Act.
In December 1997, the Company sold 226,002 units at a purchase price of
$7.50 per unit, each unit representing one common stock purchase warrant and
one share of the Company's common stock, to 51 accredited investors. Each
common stock purchase warrant entitles its holder to purchase one share of
the Company's common stock at an exercise price of $10.00 per share, subject
to adjustment, and expires on November 30, 2000. Finders involved in this
transaction received finders fees at a rate of $0.50 per unit placed and one
finder warrant per ten units placed for a total of 20,550 finder warrants.
Each finder warrant may be exercised prior to November 30, 2000 for one share
of the Company's common stock at an exercise price of $8.25 per share,
subject to adjustment. The Company's sale of these units was exempt from
registration, as a private placement, under Section 4(2) of the Securities
Act and Regulation D promulgated thereunder.
12
<PAGE>
DESCRIPTION OF SECURITIES
The Company is authorized to issue up to 10,000,000 shares of Common
Stock, without par value, of which 3,616,187 shares of Common Stock have been
issued and are outstanding as of March 20, 1998. 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.
On March 17, 1998, the Company announced that its Board of Directors
declared a two-for-one split of the Company's common stock subject to
approval by shareholders of an amendment of the Company's Articles of
Incorporation to increase the number of authorized common shares. The split
will be effected through a dividend of one share of common stock for each
common share outstanding. The proposed amendment will be voted on by
shareholders of record as of April 6, 1998 at the Company's annual
shareholders meeting on May 19, 1998. If approved, the Company will
distribute the stock dividend on or about June 12, 1998, for each share held
of record at the close of business on May 29, 1998.
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.
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below as of December 31, 1997 and
December 31, 1996 and for the years ended December 31, 1997 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). The audited financial data as of
December 31, 1995, 1994 and 1993 and for the periods ending December 31, 1994
and 1993 has been derived from audited consolidated financial statements not
included herein, but which were previously filed with the Securities and
Exchange Commission.
13
<PAGE>
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:
<TABLE>
<CAPTION>
1996
1997(3) Restated(3) 1995 1994 1993
---------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues
Gains on sales of investments $ 49,475 $ 876,499 $ 3,194,241 $ 0 $ 0
Gain on issuance of stock by affiliate 0 1,066,408 0 0 0
Equity in (losses) earnings of affiliates (160,738) (451,676) 271,023 (137,782) (276,465)
Management fees 490,966 1,458,078 2,880 0 0
Interest income 52,075 113,049 49,567 37,502 8,215
------------ -------------------------- ----------- -----------
Total revenue 431,778 3,062,358 3,517,711 (100,280) (268,250)
------------ -------------------------- ----------- -----------
Total expenses (1) 3,952,199 2,640,504 1,399,042 724,156 597,848
------------ -------------------------- ----------- -----------
(Loss) income before income taxes and
minority interests (3,520,421) 421,854 2,118,669 (824,436) (866,098)
(Benefit) provision for income taxes (250,132) 606,141 287,817 3,541 1,486
------------ ----------- -------------------------- -----------
(Loss) income before minority interests (3,270,289) (184,287) 1,830,852 (827,977) (867,584)
Minority interests (410,910) (201,309) (459) 0 0
------------ ------------------------- ----------- -----------
Net (loss) income $(2,859,379) $ 17,022 $1,831,311 $ (827,977) $(867,584)
------------ ----------- ----------- ----------- -----------
------------ ----------- ----------- ----------- -----------
(Loss) earnings per common share
Basic $(1.15) $0.01 $1.08 $(0.55) $(1.65)
Diluted $(1.15) $0.01 $0.77 $(0.55) $(1.65)
Weighted average number of common and potential common
shares for computation of (loss) earnings per
share(2)
Basic 2,481,143 1,913,007 1,700,797 1,503,573 524,808
Diluted 2,481,143 2,488,217 2,366,606 1,503,573 524,808
</TABLE>
CONSOLIDATED BALANCE SHEET DATA:
<TABLE>
<CAPTION> 1996
1997(3) Restated(3) 1995 1994 1993
----------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Total assets $ 8,853,633 $ 5,175,445 $3,843,954 $ 779,180 $ 670,018
Total liabilities $ 446,569 $ 836,602 $ 357,979 $ 352,230 $ 14,993
Minority interest $ 227,364 $ 380,329 $ 10,796 $ 0 $ 0
Stockholders' equity $ 8,179,700 $ 3,958,514 $3,475,179 $ 426,950 $ 855,025
</TABLE>
(1) Includes write-downs in 1997 and 1996 of $272,093 and $559,250,
respectively, relating to three promissory notes held by the Company
which are secured by the stock of Whitewing and the Company (See Note 4
to the Consolidated Financial Statements).
(2) Potential common shares in 1997, 1994, and 1993 have been excluded from
per share calculations because the effect of their inclusion would be
anti-dilutive.
(3) In 1997, the Company acquired a controlling interest in Soundview
Technologies. The 1996 amounts have been restated for the effects of
the Company's increased interest in Soundview Technologies. Prior to
this restatement, the Company reported losses of $160,738 in equity in
earnings of affiliates and net income of $293,009 (See Notes 1 and 2 to
the Consolidated Financial Statements).
14
<PAGE>
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 its own as well as its holdings of the Affiliates' 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 current holdings, and possibly acquire additional interests in the
Affiliates or acquire interests in new companies to increase and diversify
its holdings. 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. 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
highlighted 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 highlighted primarily by
the Company's activities relating to investments in 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 Affiliates. In addition, in
fiscal 1996, the Company expended significant resources developing and
expanding its investment advisory services. In fiscal 1997, the Company's
financial condition and results of operation were highlighted by the
acquisition of a majority ownership interest in Soundview Technologies, the
settlement of a lawsuit and the cost of several filings with the Securities
and Exchange Commission relating the Soundview Technologies acquisition and
the registration of shares of the Company's common stock.
As a result of the impact of each of these activities that the Company
has undertaken and will continue to undertake as well as the start-up nature
of most of the Company's Affiliates, 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.
ACQUISITION
On July 6, 1997, the Company purchased from two individuals, a total
of 2,625,000 shares (the "Soundview Shares") of common stock, $0.001 par
value per share, of Soundview Technologies pursuant to a Common Stock
Purchase Agreement among the Company and the two individuals dated July 6,
1997. The Soundview Shares represented 35% of the outstanding capital stock
of Soundview Technologies. As a result of the transaction, the Company owned
over 50% of the outstanding common stock of Soundview Technologies and
Soundview Technologies became a consolidated subsidiary of the Company.
As a result of the Company's increased ownership position in Soundview
Technologies, the Company has restated its consolidated balance sheet as of
December 31, 1996 and its operating results for year ended December 31, 1996
and for the six months ended June 30, 1997 to report the Company's 16.4%
ownership interest in Soundview Technologies during these periods on the
equity method. Subsequent to the Company attaining a majority position in
Soundview Technologies, beginning with the six month period beginning July 1,
1997, the Company's financial statements include the accounts of
15
<PAGE>
Soundview Technologies on a consolidated basis.
RESULTS OF OPERATIONS
1997 COMPARED TO 1996
REVENUES
The Company reported net revenues of $431,778 for the year ended
December 31, 1997 ("1997") compared to revenues of $3,062,358 for the year
ended December 31, 1996 ("1996").
GAINS ON SALES OF INVESTMENTS. Net gains on sales of investments
decreased from $876,499 for 1996 to $49,475 for 1997. Such gain for
1997 is comprised of gains on sales of interests in CombiMatrix. The
year-earlier gain of $876,499 represents a gain primarily from sales
of shares of CombiMatrix, and to a lesser extent of MerkWerks and
Soundview Technologies. During 1997, the Company sold a smaller
portion of its assets, focusing instead on the development of its
various business interests. During 1996, the Company sold a larger
portion of its holdings primarily to raise the capital necessary to
acquire interests in new companies as well as to 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. Furthermore, the timing and extent of any
sales of securities are subject to substantial fluctuation from
quarter to quarter.
GAIN ON ISSUANCE OF STOCK BY AFFILIATE. In February 1996, shares of
Whitewing Labs were sold in an initial public offering. This initial
public offering of shares reduced the Company's ownership interest in
Whitewing Labs from 38.3% to 18.4%. As a result of this offering, the
Company reported an unrealized gain of $1,066,408, representing an
increase in the book value of the shares of Whitewing Labs that the
Company retained following the initial public offering. There were no
such events during 1997. Management does not anticipate recognizing
any similar gain in relation to shares of Whitewing Labs. However,
the Company may have future gains of this nature with respect to other
subsidiaries if they engage in an initial public offering.
EQUITY IN (LOSSES) EARNINGS OF AFFILIATES. The Company reported
equity in losses of affiliates of $160,738 for 1997, compared to
losses of $451,676 for 1996. Such losses for 1997 are comprised of a
gain of $129,131 on the Company's capital investments as a general
partner in two private investment partnerships offset by a loss of
$173,632 for the Company's investment in Whitewing Labs, and a loss of
$116,237 for the Company's investment in Greenwich Information
Technologies, as determined by the equity method of accounting.
Losses for 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 of $312,549 for the Company's investment
in Whitewing Labs, a loss of $275,987 for the Company's investment in
Soundview Technologies, and a loss of $46,120 for the Company's
investment in Greenwich Information Technologies, as determined by the
equity method of accounting.
MANAGEMENT FEES. During 1997, management fee income, which includes
performance fee income, was $490,966 as compared to management fee
income of $1,458,078 generated during 1996.
Of the total $1,458,078 in management fees earned in 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. The
balance of $58,078 of management fee income recorded during 1996 was
derived from four investment funds managed by the Company. No such
fees were paid for by Soundview Technologies in 1997.
Two of these funds had 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, generated limited
management fees during 1996.
16
<PAGE>
RESULTS OF OPERATIONS (CONT.)
1997 COMPARED TO 1996 (CONT.)
In 1997, all of the management fee income was related to management of
the four investment funds. The increase in management fee income derived
from the four investment funds during 1997 of $490,966 as compared to
1996 was primarily a result of performance fees realized from one of the
investment funds and, to some extent, an increase in assets under
management.
The Company may share management fees or direct a certain amount of
brokerage to a broker in return for the broker's referral of prospective
clients in relation to its investment advisory business. The Company
may also employ consultants to whom it will pay cash or a portion of the
advisory fees paid by clients referred to the Company by such
consultants. 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.
EXPENSES
Total expenses increased from $2,640,504 during 1996 to $3,952,199
during 1997 primarily due to the amortization of patent and goodwill arising
from the purchase of a majority ownership interest in Soundview Technologies,
expenses relating to the expansion of CombiMatrix's research and development
efforts, and expenses related to a settlement of a lawsuit.
MARKETING, GENERAL AND ADMINISTRATIVE. For 1997, marketing, general
and administrative expenses increased to $2,145,162 from $2,134,933
for 1996. Expenses incurred during 1997 include a write-down of
$272,093 relating to three promissory notes held by the Company, two
of which are secured by Whitewing Labs stock and one of which is
secured by the Company's common stock as well as Whitewing Labs stock.
Expenses incurred in 1996 include a write-down of $559,250 relating
to the two promissory notes held by the Company, which are secured by
Whitewing Labs stock. The notes, which are currently past due, have
been written down to the market value price of the collateral held by
the Company. Expenses incurred during 1997 also include consolidation
with Soundview Technologies beginning July 7, 1997. Soundview
Technologies expenses totalled $156,622 for this period.
Marketing, general and administrative expenses incurred by the Company
in 1996, excluding the write-down and expenses related to Soundview
Technologies, were $1,716,447 compared to marketing, general and
administrative expenses incurred by the Company in 1996, excluding the
write-down, were $1,575,683, representing an increase over 1996 expenses
of 8.9%. This increase is primarily due to legal and accounting costs
associated with several filings with the Securities and Exchange
Commission as well as the purchase of a majority ownership interest in
Soundview Technologies, and, to a lesser extent, expenses incurred in the
use of consultants in which a portion of the compensation has been paid
in equity securities (stock options or warrants). The Company is
required to record the fair value of such securities as they vest. Using
option valuation techniques, the Company incurred an expense of
approximately $179,000. (See Note 2 to the Consolidated Financial
Statements.)
RESEARCH AND DEVELOPMENT EXPENSE. The Company incurred research and
development expenses of $887,890 for 1997, compared to expenses of
$505,571 during 1996. Such expenses for the period ended December 31,
1997 are comprised of expenses incurred by CombiMatrix of $621,204,
expenses incurred by MerkWerks of $117,753, and expenses incurred by
Soundview Technologies for the six-month period beginning July 1, 1997
of $148,933. Research and development expenses for 1996 are comprised
of expenses incurred by CombiMatrix of $420,887 and expenses incurred by
MerkWerks of $84,684. No expenses are attributable to Soundview during
the first six-months of 1997 and the year ended December 31, 1996 as the
Company reported its investment on the equity method of accounting.
AMORTIZATION OF PATENTS AND GOODWILL. The Company reported
amortization expenses relating to patents and goodwill of $459,147
during 1997 as compared to no such expense during 1996. This relates
to the Company's purchase of a majority interest in Soundview
Technologies whereby the Company is incurring amortization expenses of
approximately $230,000 each
17
<PAGE>
quarter for a period of approximately five years relating to the
intangible assets acquired.
LEGAL SETTLEMENT EXPENSE. The Company incurred a one-time charge of
$460,000 relating to a legal settlement during the year ended December
31, 1997. Management of the Company believes that settling this
litigation on the agreed upon terms prevented unnecessary litigation
costs as well as the unnecessary diversion of Company resources and was
in the best interests of the Company. (See Part II, Item 5 "Sales of
Unregistered Securities")
PROVISION FOR INCOME TAXES
For 1997, the Company recorded a benefit of $250,132, as compared
to an income tax expense of $606,141 for the same period in fiscal 1996. In
the current year, the Company generated a loss as compared to a pre-tax
income in 1996.
MINORITY INTERESTS
Minority interests in losses of consolidated
subsidiaries increased to $410,910 in 1997, compared to $201,309 in
1996. The increase is primarily attributable to increased losses
generated by the consolidated subsidiaries in 1997 and the
consolidation of Soundview Technologies for the period from July 7,
1997 to December 31, 1997. The Company's investment in Soundview
Technologies in 1996 was accounted for under the equity method.
1996 COMPARED TO 1995
REVENUES
The Company reported net revenues of $3,062,358 in 1996 compared to
revenues of $3,517,711 for the year ended December 31, 1995 ("1995").
GAINS ON SALES OF INVESTMENTS. During 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
investments decreased from $3,194,241 for 1995 to $876,499 for 1996,
which represents a decrease of $2,317,742 or 72.6%. Such gain for
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.
GAIN ON ISSUANCE OF 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, 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. No such event occured in 1995.
EQUITY IN (LOSSES) EARNINGS OF AFFILIATES. The Company reported losses
attributable to equity in earnings of affiliates of $451,676 for 1996,
compared to earnings of $271,023 for 1995. Such losses for 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 Soundview Technologies of
$275,987, net losses in Greenwich Information Technologies of $46,120,
and a loss of $312,549 from the Company's investment in Whitewing, as
determined by the equity method of accounting.
18
<PAGE>
MANAGEMENT FEES. For 1996, management fee income increased to
$1,458,078 over management fee income of $2,880 generated during 1995.
Of the total $1,458,078 in management fees earned during 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 in exchange 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.
The balance of $58,078 of management and performance fee income
recorded during 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 were
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, generated limited management fees and
no performance fees during the year ended December 31, 1996.
EXPENSES
Total expenses increased from $1,399,042 during 1995 to $2,640,504
during 1996 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. Expenses in 1996 also include the consolidation of the accounts of
CombiMatrix, which were immaterial in 1995.
MARKETING, GENERAL AND ADMINISTRATIVE. For 1996, marketing, general and
administrative expenses increased to $2,134,933 as compared to $1,334,559
for 1995. Expenses incurred during 1996, include a write-down of $559,250
relating to the two promissory notes held by the Company, which are
secured by Whitewing Labs stock.
Marketing, general and administrative expenses incurred by the
Company in 1996, excluding the write-down, were $1,575,683,
representing an increase over 1995 expenses of 18.1%. 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.
RESEARCH AND DEVELOPMENT EXPENSE. The Company incurred research and
development expenses of $505,571 during 1996, compared to expenses of
$64,483 during 1995. Such expenses for 1996 are comprised of expenses
incurred by CombiMatrix of $420,887 and expenses incurred by MerkWerks
of $84,684. Research and development expenses for 1995 are comprised
of expenses incurred by CombiMatrix of $380 and expenses incurred by
MerkWerks of $64,103. No such expenses are attributable to Soundview
during the first six-months of 1997 and the year ended December 31,
1996 as the Company reported its investment on the equity method of
accounting.
19
<PAGE>
PROVISION FOR INCOME TAXES
For 1996, the Company recorded an income tax provision of $606,141, as
compared to an income tax provision of $287,817 for 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.
MINORITY INTERESTS.
Minority interest in losses of consolidated subsidiaries increased to
$201,309 in 1996 from $459 in 1995. This increase is primarily attributable
to the Company's majority-ownership of CombiMatrix and a full year's
operations of MerkWerks in 1996. MerkWerks was formed September 1995 and
incurred an insignificant loss in 1995.
INFLATION
Inflation has not had a significant impact on the Company.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1997, the Company had cash and cash equivalents of
$1,366,878, working capital of $1,348,971, and a ratio of current assets to
current liabilities of 4.0 to 1 on a consolidated basis. The Company has no
material commitments for capital expenditures at the present time.
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
Company's investment in Greenwich Information Technologies. The short-term
note, net of payments, was subsequently converted to a Promissory Note
to Greenwich Information Technologies in the principal amount of $525,000,
whereby the Company made 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 bore interest at 6.5% per annum. As of December 31, 1997,
the Company has paid this note in full.
The Company also issued two non-recourse promissory notes to two
individuals in the aggregate principal amount of $900,000 in connection with
the Company's purchase of a majority ownership interest in Soundview
Technologies. These notes bore interest at the rate of 6.07% per annum. As
of December 31, 1997, the Company has paid these notes in full.
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 and $250,000 from these partnerships in
1996 and 1997, respectively. As of December 31, 1997, subsequent to these
withdrawals, the value of the Company's partnership interests is
approximately $586,000.
The Company's principal source of operating capital has been the
issuance of equity securities and, to a lesser extent, the sale of portions
of its investments in Affiliates. The Company's other financial resources are
limited as it has no committed bank lines of credit.
Although the Company anticipates that revenues from operations and
working capital reserves will provide sufficient funds for its operating
expenses in the next twelve months, the Company intends to seek additional
financing to fund new business opportunities and operating expenses. 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, however, there can be no assurance
that additional funding will be available on favorable terms, if at all.
Such financing transactions may be dilutive to existing investors.
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS
In June 1997, the Financial Accounting Standards Board issued
Statement of Financial Accounting Standards No. 130, "Comprehensive Income"
("SFAS 130"), and No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). In February 1998, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 132, "Employers' Disclosures about Pension and other Postretirement
Benefits" ("SFAS 132"). SFAS 130 and SFAS 131 will become effective for the
Company in 1998. The adoption of SFAS 130 and SFAS 131 deals only with
disclosure matters and is not expected to have a material effect on the
Company's consolidated financial statements. SFAS 132 is not applicable to
the Company.
YEAR 2000 ISSUES
The Company has assessed its internal computer systems and believes
these systems are or will easily become Year 2000 compliant. However, the
Company's investment advisory services rely, to some extent, on brokers and
other service providers and, although the Company believes they have or are
taking steps to become Year 2000 compliant, the Company can provide no
assurance that their systems will be compliant.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
The financial statements and related financial information required to
be filed hereunder are indexed on page 22 of this report and are
incorporated herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
20
<PAGE>
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information required by this Item is incorporated by reference
from the information under the captions entitled "Election of Directors --
Nominees," "Executive Officers," and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive proxy statement to be filed
with the Commission not later than April 30 1998.
ITEM 11. EXECUTIVE COMPENSATION
The information required by this Item is incorporated by reference
from the information under the caption entitled "Executive Officer
Compensation" in the Company's definitive proxy statement to be filed with
the Commission not later than April 30, 1998.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by this Item is incorporated by reference
from the information under the caption entitled "Executive Officer
Compensation" in the Company's definitive proxy statement to be filed with
the Commission not later than April 30, 1998.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by this Item is incorporated by reference
from the information under the caption entitled "Transactions with
Management and Others" in the Company's definitive proxy statement to be
filed with the Commission not later than April 30, 1998.
21
<PAGE>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.
<TABLE>
<CAPTION>
(a) 1 Financial Statements:
PAGE
<S> <C>
Report of Independent Accountants . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1
Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2
Consolidated Balance Sheets as of December 31, 1997 and 1996 . . . . . . . . . . . . . . . . F-3
Consolidated Statements of Operations for the Years Ended December 31, 1997,
1996, and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4
Consolidated Statements of Stockholders' Equity for the Years Ended December 31,
1997, 1996, and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-5
Consolidated Statements of Cash Flows for the Years Ended December 31, 1997,
1996, and 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6
Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . F-7
</TABLE>
2. FINANCIAL STATEMENT SCHEDULES. Financial statement schedules are
omitted because they are not applicable or the required
information is shown in the Financial Statements or the Notes
thereto.
3. EXHIBITS. The following exhibits are either filed herewith or
incorporated herein by reference:
<TABLE>
<S> <C>
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.****
10.6 Legal Settlement between the Company and Ann P. Hodges and Christopher D. Hodges**
10.7 Agreement between the Company and Cruttenden Roth Incorporated**
10.8 Agreement between Acacia Research and Paul Ryan
10.9 1996 Executive Stock Bonus Plan*****
10.10 Greenwich Information Technologies Exclusive Marketing and Licensing Agreement.
23.1 Consent of Price Waterhouse LLP
23.2 Consent of Finocchiaro & Co.
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, 1997.
*** Incorporated by reference from the Company's Registration Statement on Form S-8
filed on February 21, 1997.
**** Incorporated by reference from the Company's Annual Report on Form 10-K for the
year ended December 31, 1996.
***** Incorporated by reference from the definitive proxy statement for the 1996
annual shareholder meeting.
</TABLE>
(b) REPORTS ON FORM 8-K.
Current report event date April 29, 1997 (Item 4 and Item 7)
Current report event date July 6, 1997, as Amended by Form 8-K/A on
September 19, 1997 (Item 2 and Item 7)
Current report event date January 27, 1998 (Item 2 and Item 7)
22
<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 27, 1998 ACACIA RESEARCH CORPORATION
/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, Chief Financial
R. Bruce Stewart Officer (Principal Financial and Accounting Officer) March 27, 1998
/s/ Paul R. Ryan
- ------------------------ Chief Executive Officer and President (Principal
Paul R. Ryan Executive Officer) and Director March 27, 1998
/s/ Kathryn King-Van-Wie
- ------------------------ Chief Operating Officer and Secretary March 27, 1998
Kathryn King-Van-Wie
/s/ Brooke P. Anderson
- ------------------------ Director March 27, 1998
Brooke P. Anderson
/s/ Fred A. de Boom
- ------------------------ Director March 27, 1998
Fred A. de Boom
/s/ Edward W. Frykman
- ------------------------ Director March 27, 1998
Edward W. Frykman
</TABLE>
23
<PAGE>
Report of Independent Accountants
---------------------------------
To the Board of Directors and
Stockholders of Acacia Research Corporation
In our opinion, the accompanying consolidated balance sheet at December 31,
1997 and the related consolidated statements of operations, of stockholders'
equity and of cash flows for the year ended December 31, 1997 listed in the
accompanying index present fairly, in all material respects, the financial
position of Acacia Research Corporation and its subsidiaries at December 31,
1997, and the results of their operations and their cash flows for the year
in conformity with generally accepted accounting principles. These financial
statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audit. We conducted our audit of these statements in accordance with
generally accepted auditing standards which require that we plan and perform
the audit 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, assessing the accounting principles used and
significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for the opinion expressed above.
As discussed in Note 2, the consolidated financial statements as of and for
the year ended December 31, 1996 have been restated to account for the
Company's investment in Soundview Technologies Incorporated on the equity
method as a result of the Company's purchase of additional ownership interest
in Soundview Technologies Incorporated in 1997. We have audited the
adjustments described in Note 2 that were applied to restate the 1996
financial statements. In our opinion, such adjustments are appropriate and
have been properly applied to the 1996 financial statements.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Los Angeles, California
March 25, 1998
F-1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To the Board of Directors and
Stockholders of Acacia Research Corporation
We have audited the consolidated balance sheet of Acacia Research Corporation
and subsidiaries as of December 31, 1996, and the consolidated statements of
operations, of stockholders' equity and of cash flows for the years ended
December 31, 1996 and 1995, as listed in the accompanying index, prior to
restatement described in Note 2. These financial statements are
the responsibility of the Company'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 required that we plan and perform the audit to
obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements.
An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements audited by us, prior to
restatement described in Note 2, present fairly, in all material respects,
the financial position of Acacia Research Corporation and its subsidiaries at
December 31, 1996, and results of their operations and their cash flows for
the years ended December 31, 1996 and 1995, in conformity with generally
accepted accounting principles. We have not audited the consolidated
financial statements of Acacia Research Corporation and its subsidiaries for
any period subsequent to December 31, 1996 nor have we examined any
adjustments applied to the 1996 financial statements.
/s/ FINOCCHIARO & CO.
Pasadena, California
July 31, 1997, except as
to the penultimate paragraph
in Note 2, which is as
of March 25, 1998
F-2
<PAGE>
ACACIA RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
December 31, 1997 and 1996
<TABLE>
<CAPTION>
(Restated)
December 31, 1997 December 31, 1996
----------------- -----------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 1,366,878 $ 292,701
Capital withdrawals receivable from partnerships 0 400,000
Receivables from affiliates 0 52,592
Management fees and other receivables 235,059 245,446
Prepaid expenses 83,603 215,490
Income tax receivable 110,000 0
Deferred income taxes 0 272
------------ ------------
Total current assets 1,795,540 1,206,501
Equipment, furniture, and fixtures, net 241,661 202,049
Notes receivable, net 376,008 633,000
Investment in affiliates, at equity 1,204,802 2,451,684
Partnership interests, at equity 586,393 625,405
Patents, net of accumulated amortization 3,877,250 53,637
Goodwill, net of accumulated amortization 757,697 0
Organization costs, net of accumulated amortization 14,282 3,169
------------ ------------
$ 8,853,633 $ 5,175,445
------------ ------------
------------ ------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 169,796 $ 90,599
Accrued compensation 50,684 0
Legal settlement payable 226,089 0
Note payable 0 552,500
------------ ------------
Total current liabilities 446,569 643,099
Deferred income taxes 0 193,503
------------ ------------
Total liabilities 446,569 836,602
------------ ------------
Minority interests 227,364 380,329
------------ ------------
Stockholders' equity
Common stock, no par value; 10,000,000 shares authorized;
3,143,074 shares in 1997 and 1,970,672 shares in 1996
issued and outstanding 10,712,984 4,071,993
Warrants to purchase common stock 370,122 10,000
(Accumulated deficit) retained earnings (2,706,606) 152,773
Stock subscription receivable 0 (88,752)
Note receivable secured by common stock (196,800) (187,500)
------------ ------------
Total stockholders' equity 8,179,700 3,958,514
------------ ------------
$ 8,853,633 $ 5,175,445
------------ ------------
------------ ------------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
(Restated)
1997 1996 1995
---------- ---------- ----------
<S> <C> <C> <C>
Revenues
Gains on sales of investments $ 49,475 $ 876,499 $3,194,241
Gain on issuance of stock by affiliate 0 1,066,408 0
Equity in (losses) earnings of affiliates (160,738) (451,676) 271,023
Management fees 490,966 1,458,078 2,880
Interest income 52,075 113,049 49,567
---------- ---------- ----------
Total revenues 431,778 3,062,358 3,517,711
---------- ---------- ----------
Expenses
Marketing, general, and administrative expenses 2,145,162 2,134,933 1,334,559
Research and development expenses 887,890 505,571 64,483
Amortization of patent and goodwill 459,147 0 0
Legal settlement expense 460,000 0 0
---------- ---------- ----------
Total expenses 3,952,199 2,640,504 1,399,042
---------- ---------- ----------
(Loss) income before income taxes and
minority interests (3,520,421) 421,854 2,118,669
(Benefit) provision for income taxes (250,132) 606,141 287,817
---------- ---------- ----------
(Loss) income before minority interests (3,270,289) (184,287) 1,830,852
Minority interests (410,910) (201,309) (459)
---------- ---------- ----------
Net (loss) income $(2,859,379) $ 17,022 $1,831,311
---------- ---------- ----------
---------- ---------- ----------
(Loss) earnings per share
Basic ($1.15) $0.01 $1.08
Diluted ($1.15) $0.01 $0.77
Weighted average number of common and
potential common shares outstanding
used in computation of (loss) earnings
per share
Basic 2,481,143 1,913,007 1,700,797
Diluted 2,481,143 2,488,217 2,366,606
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
(ACCUMULATED
WARRANTS TO DEFICIT) STOCK NOTE RECEIVABLE
COMMON COMMON PURCHASE RETAINED SUBSCRIPTIONS SECURED BY
SHARES STOCK COMMON STOCK EARNINGS RECEIVABLE COMMON STOCK TOTAL
--------- --------- ------------ --------------- ------------- ---------------- -----------
<S> <C> <C> <C> <C> <C> <C> <C>
1995
Balance at December 31, 1994 1,602,825 $2,172,509 $(1,695,561) $(50,000) $ 426,948
Net income 1,831,312 1,831,312
Common stock issued 136,180 817,082 817,082
Stock 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 nonqualified
stock options 232,061 232,061
Compensation expense relating
to stock options 142,375 142,375
Warrants issued $10,000 10,000
--------- --------- ------------ ---------- ----------- --------- -----------
Balance at December 31, 1995 1,862,672 3,537,680 10,000 135,751 (208,252) 0 3,475,179
1996
Net income, as restated 17,022 17,022
Stock options exercised 108,000 215,500 215,500
Cash received for stock
subscriptions 119,500 119,500
Issuance of note secured
by common stock (187,500) (187,500)
Tax benefit from nonqualified
stock options 318,813 318,813
--------- --------- ------- --------- ---------- ----------- ----------
Balance at December 31, 1996 1,970,672 4,071,993 10,000 152,773 (88,752) (187,500) 3,958,514
1997
Net loss (2,859,379) (2,859,379)
Units issued in private
placement 916,202 5,694,223 25,810 5,720,033
Stock issuance costs (301,211) 188,278 (112,933)
Stock options exercised 256,200 806,000 806,000
Warrants issued 146,034 146,034
Increase in capital due to
issuance of stock by
affiliate 358,779 358,779
Compensation expense
relating to stock options 33,200 33,200
Cash received for stock
subscriptions 88,752 88,752
Adjustment in carrying
value of note secured
by common stock (9,300) (9,300)
Tax benefit from nonqualified
stock options 50,000 50,000
--------- --------- ------- --------- ---------- ----------- ----------
Balance at December 31, 1997 3,143,074 $10,712,984 $370,122 $(2,706,606) $ 0 $(196,800) $8,179,700
--------- --------- ------- --------- ---------- ----------- ----------
--------- --------- ------- --------- ---------- ----------- ----------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<PAGE>
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31, 1997, 1996 and 1995
<TABLE>
<CAPTION>
(Restated)
1997 1996 1995
--------- ----------- ----------
<S> <C> <C> <C>
Cash flows from operating activities:
Net (loss) income $(2,859,379) $ 17,022 $1,831,311
Adjustments to reconcile net (loss) income to net
cash used in operating activities:
Legal settlement expense 435,000 0 0
Depreciation and amortization 529,262 31,151 9,681
Deferred income tax (benefit) provision (193,231) 245,319 (54,715)
Gain on sales of investments 0 (876,499) (3,194,241)
Equity in losses (earnings) of affiliates 160,738 451,676 (271,023)
Minority interest in net loss (410,910) (201,309) (459)
Gain on issuance of stock by affiliate 0 (1,066,408) 0
Provision for write-down of notes and interest receivable 272,093 559,250 0
Issuance of warrants for services 360,122 0 0
Changes in assets and liabilities, net of effects of acquisitions:
Management fees and other receivables, prepaid expenses,
patents and other assets (113,498) (316,230) (14,782)
Accounts payable, accrued expenses, accrued compensation
and other liabilities 110,324 (155,819) 197,571
---------- ---------- ----------
Net cash used by operating activities (1,709,479) (1,311,847) (1,496,657)
Cash flows from investing activities:
Purchase of equity investments, net of cash acquired (131,604) (3,000,000) (750,000)
Payment received on advances to affiliate 52,592 414,156 200,000
Advances to affiliates 0 (369,597) (62,638)
Withdrawals from partnerships 568,143 (400,000) 0
Proceeds from sales of investments 0 2,049,051 3,205,496
Payment for acquisition of patent 0 (53,637) 0
Payments received on notes receivable 68,033 466,250 0
Notes receivable 0 0 (1,846,000)
Capitalized expenditures (92,061) (155,026) (39,530)
---------- ---------- ----------
Net cash provided by (used in) investing activities 465,103 (1,048,803) 707,328
Cash flows from financing activities:
Payments on notes payable (1,452,500) (248,143) 0
Proceeds from notes payable 0 800,000 0
Proceeds from exercise of stock options 806,000 0 0
Tax benefit from nonqualified stock options 50,000 318,813 232,061
Compensation from stock options 0 0 142,375
Proceeds from line of credit 0 0 2,000,000
Payments on line of credit 0 0 (2,000,000)
Collection of stock subscription receivable 88,752 0 0
Capital contributions from minority shareholders of subsidiaries 434,000 693,720 0
Proceeds from sale of common stock, net of issuance costs 2,392,301 300,350 842,483
--------- ----------- ---------
Net cash provided by financing activities 2,318,553 1,864,740 1,216,919
--------- ----------- ---------
Increase (decrease) in cash and cash equivalents 1,074,177 (495,910) 427,590
Cash and cash equivalents, beginning of year 292,701 788,611 361,021
--------- ----------- ---------
Cash and cash equivalents, end of year $1,366,878 $ 292,701 $ 788,611
--------- ----------- ---------
--------- ----------- ---------
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
<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 emerging corporations with
intellectual property rights, most of which are involved in developing
new or unproven technologies. There is no assurance that any or all of
such technologies will be successful, and, even if successful, that the
development of such technologies can be commercialized.
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. ("Whitewing"),
MerkWerks Corporation ("MerkWerks"), CombiMatrix Corporation
("CombiMatrix"), Soundview Technologies Incorporated ("Soundview
Technologies"), and Greenwich Information Technologies LLC ("Greenwich
Information Technologies"). 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.
On July 6, 1997, the Company purchased from two individuals a total of
2,625,000 shares (the "Soundview Shares") of common stock of Soundview
Technologies for a total purchase price of $4,225,000 consisting of
400,000 shares of common stock of the Company, $500,000 in cash, and the
issuance of non-recourse promissory notes to each of the two individuals
in the aggregate principal amount of $900,000. These notes were repaid
prior to December 31, 1997. The Soundview Shares represent 35% of the
outstanding capital stock of Soundview Technologies. As a result of the
transaction, the Company owned over 50% of the outstanding common stock
of Soundview Technologies. The acquisition was accounted for under the
purchase method. The excess of the purchase price over the fair value of
the net assets acquired was assigned to patent and goodwill of
approximately $4,061,000 and $836,000, respectively. The results of
operations of Soundview Technologies have been consolidated with those
of the Company since the date of the acquisition (see Note 2).
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION - The accompanying consolidated financial
statements include the accounts of the Company and its majority-owned
subsidiaries. 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 less than 20% and does not
exercise significant influence over the investee.
CASH AND CASH EQUIVALENTS - The Company considers all highly liquid,
short-term investments with original maturities of three months or less
when purchased to be cash equivalents.
MANAGEMENT FEES - Management fees include asset-based and
performance-based fees earned from two domestic private investment
partnerships in which the Company is general partner and two offshore
investment corporations for which the Company serves as an investment
advisor. These asset management fees are recognized when earned in
accordance with the respective partnership and management agreements.
Management fees also include income from other consulting and capital
management services provided by the Company to other parties. These fees
are recognized when the related services are provided. Included in
management fees in 1996 was $1,400,000 earned from services provided to
Soundview Technologies.
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
PATENTS AND GOODWILL - Patents, once issued, and goodwill are amortized on
the straight-line method over their estimated remaining useful lives.
FAIR VALUE OF FINANCIAL INSTRUMENTS - The carrying value of cash and
cash equivalents, capital withdrawals receivable from partnerships,
management fees and other receivables, accounts payable and accrued
expenses, accrued compensation, legal settlement payable, note payable,
and stock subscription receivable approximates fair value due to their
short term maturity. The carrying value of notes receivable approximates
the fair value of the underlying collateral. The fair value of receivables
from affiliates is not determined due to their related party nature.
STOCK-BASED COMPENSATION - Compensation cost of stock options issued to
employees is accounted for in accordance with APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations.
Compensation cost attributable to such options is recognized based on
the difference, if any, between the closing market price of the stock on
the date of grant and the exercise price of the option. Compensation
cost of stock options and warrants issued to non-employee service
providers is accounted for under the fair value method required by
Statement of Financial Accounting Standards No. 123, "Accounting for
Stock-Based Compensation" ("SFAS 123").
RESEARCH AND DEVELOPMENT EXPENSES - Research and development costs are
charged to expense as incurred.
INCOME TAXES - Income taxes are accounted for using an asset and
liability approach that requires the recognition of deferred tax assets
and liabilities for the expected future tax consequences of events that
have been recognized in the Company's financial statements or tax
returns. A valuation allowance is established to reduce deferred tax
assets if all, or some portion, of such assets will more than likely not
be realized.
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 the straight-line basis over the
estimated useful lives of the assets, ranging from three to ten years.
ORGANIZATION COSTS - Organization costs are recorded at cost and are
amortized on the straight-line basis over a period of five years.
(LOSS) EARNINGS PER SHARE - (Loss) earnings per share is computed in
accordance with Statement of Financial Accounting Standards No. 128,
"Earnings Per Share" ("SFAS 128"), which became effective for the
Company in 1997. SFAS 128 established new standards for computing and
presenting earnings per share ("EPS") and superseded APB Opinion No. 15,
"Earnings Per Share." SFAS 128 replaces the presentation of primary and
fully diluted EPS on the face of the income statement with basic and
diluted EPS for all entities with complex capital structures. It also
requires a reconciliation of the numerator and denominator of the basic
EPS computation to the numerator and denominator of the diluted EPS
computation. EPS for 1996 and 1995 has been restated, as appropriate,
to reflect the Company's adoption of SFAS 128 and the restatement of
1996 consolidated financial statements as a result of the Soundview
Shares acquisition. (See Note 1 and "Restatement" below.) Reconciliations
of the denominators used in the computation of (loss) earnings per
share as required by SFAS 128 are as follows:
<PAGE>
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
<TABLE>
<CAPTION>
1997 1996 1995
---- ---- ----
<S> <C> <C> <C>
Weighted Average number of
common shares outstanding
used in computation of basic EPS 2,481,143 1,913,007 1,700,797
Dilutive effect of outstanding
stock options and warrants (a) 444,737 575,210 665,809
--------- --------- ---------
Weighted average number of
common and potential common
shares outstanding used in
computation of diluted EPS 2,925,880 2,488,217 2,366,606
--------- --------- ---------
--------- --------- ---------
</TABLE>
(a) Potential common shares in 1997 have been excluded from the per
share calculation because the effect of their inclusion would be
anti-dilutive.
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.
RECLASSIFICATIONS - For financial statement reporting purposes certain
reclassifications of prior years' amounts have been made to conform to
the 1997 presentation.
RESTATEMENTS - As a result of the Soundview Shares acquisition (see
Note 1), the Company's consolidated balance sheet as of December 31, 1996
and its operating results and cash flows for the year then ended, have
been restated to account for the Company's 16.4% ownership interest in
Soundview Technologies on the equity method from March 1996 (Soundview
Technologies inception) through July 5, 1997. Previously, the Company
accounted for its investment in Soundview Technologies during this
period on the cost method. The effect of this restatement is to increase
previously reported 1996 equity in losses of affiliates by $275,987 and
decrease net income by a corresponding amount in the consolidated
statement of operations. In addition, retained earnings at December 31,
1996 was reduced by $275,987.
The following pro forma information presents a summary of consolidated
results of operations of the Compamy and Soundview Technologies as if
the acquisition has occurred as of the beginning of fiscal year 1996, with
adjustments to give effect to amortization of patents and goodwill and
intercompany transactions:
<TABLE>
<CAPTION>
December 31, 1997 December 31, 1996
<S> <C> <C>
Net Revenues $443,959 $2,644,752
Net Loss $(3,488,037) $(1,348,432)
Loss per share,
Basic and Diluted $(1.41) $(0.70)
</TABLE>
EFFECT OF NEW ACCOUNTING PRONOUNCEMENTS - In June 1997, the Financial
Accounting Standards Board issued Statement of Financial Accounting
Standards No. 130, "Comprehensive Income" ("SFAS 130"), and No. 131,
"Disclosures about Segments of an Enterprise and Related Information"
("SFAS 131"). In February 1998, the Financial Accounting Standards Board
issued Statement of Financial Accounting Standards No. 132, "Employers'
Disclosures about Pension and Other Postretirement Benefits" ("SFAS
132"). SFAS 130 and SFAS 131 will become effective for the Company in
1998. The adoption of SFAS 130 and SFAS 131 deals only with disclosure
matters and is not expected to have a material effect on the Company's
consolidated financial statements. SFAS 132 is not applicable to the
Company.
<PAGE>
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. EQUIPMENT, FURNITURE, AND FIXTURES
Equipment, furniture, and fixtures consist of the following at December
31, 1997 and December 31, 1996:
<TABLE>
<CAPTION>
1997 1996
------------- ------------
<S> <C> <C>
Computer equipment $141,735 $106,371
Furniture and fixtures 118,665 89,172
Laboratory equipment 73,482 40,050
Leasehold improvements 12,532 11,892
-------- -------
346,414 247,485
Accumulated depreciation and
amortization (104,753) (45,436)
--------- --------
Total equipment, furniture, and fixtures $241,661 $202,049
--------- --------
--------- --------
</TABLE>
4. NOTES RECEIVABLE
As of December 31, 1997 and 1996, the Company held promissory notes
currently due and payable from individuals related to the sale of a portion
of the Company's investment in Whitewing. These notes generally bear
interest at 5% per annum and are generally secured by the common stock
sold. As of December 31, 1997 and 1996, two promissory notes secured by
the common stock of Whitewing Labs, Inc. were valued at the market value
of the collateral held by the Company. Write-downs of $272,093 in 1997
(including related accrued interest of $92,434) and $559,250 in 1996
were charged to marketing, general and administrative expenses in the
respective consolidated statements of operations.
Notes receivable consist of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- -----------
<S> <C> <C>
Notes receivable $1,114,917 $1,192,250
Less: Reserve for write-down (738,909) (559,250)
---------- ----------
$ 376,008 $ 633,000
---------- ----------
---------- ----------
</TABLE>
Interest receivable on these notes amounted to approximately $9,867 and
$85,500, as of December 31, 1997 and 1996, respectively, and were
included in management fees and other receivables in the consolidated
balance sheets.
<PAGE>
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. INVESTMENT IN AFFILIATES AND PARTNERSHIP INTERESTS
Investments and partnership interests carried at equity and the Company's
ownership in each consist of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
---- ----
<S> <C> <C>
Whitewing Labs, Inc. 18% 18%
Acacia Capital Partners, L.P. 31% 36%
Acacia Growth Fund, L.P. 16% 29%
Greenwich Information Technologies LLC 30% 30%
</TABLE>
The investment in Whitewing amounted to $466,469 at December
31, 1997 and $640,101 at December 31, 1996. The market value of the
Company's investment in Whitewing was approximately $431,292
and $1,064,918 at December 31, 1997 and 1996, respectively. Whitewing
had total assets of $2,215,393 and $3,720,256 at December 31, 1997 and
1996, respectively, and total liabilities of $29,988 and $561,042 at
December 31, 1997 and 1996, respectively. Whitewing reported net losses
attributable to common shareholders of $943,652, $2,428,062 and $69,554,
and net sales of $3,581,811, $3,537,480 and $3,445,085 in 1997, 1996 and
1995 respectively. Officers of the Company continue to have significant
representation on the Board of Directors of Whitewing.
The investment in Greenwich Information Technologies amounted to
$738,333 at December 31, 1997 and $854,570 at December 31, 1996.
Greenwich Information Technologies had total assets of $2,355,200
and $2,809,661 at December 31, 1997 and 1996, respectively, and reported
net losses of $387,457 and $105,511 in 1997 and 1996, respectively.
The investment in Acacia Capital Partners, L.P. amounted to $285,366 and
$361,427 as of December 31, 1997 and 1996, respectively. The investment
in Acacia Growth Fund, L.P. amounted to $301,027 and $263,978 as of
December 31, 1997 and 1996, respectively.
6. RELATED PARTY TRANSACTIONS
At December 31, 1997, the Company had no receivables from affiliates.
At December 31, 1996, receivables from affiliates included advances
to Whitewing Labs, Inc. of approximately $37,000 and to Soundview
Technologies of approximately $15,000. These receivables arose from
non-interest bearing advances to the affiliates.
The revenues reported in 1996 included sales of investments to Dr. Robert
Ching, a stockholder, in the amount of $600,000.
The revenues reported in 1995 included sales of investments to Dr. Robert
Ching, a stockholder, in the amount of $580,000, and sales of investments
to Mark Rosen, a stockholder, in the amount of $510,000.
<PAGE>
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. PROVISION FOR INCOME TAXES
Provision (benefit) for income taxes consists of the following:
<TABLE>
<CAPTION>
FEDERAL STATE TOTAL
------- ------- -------
<S> <C> <C> <C>
1997
Current $ (60,000) $ 0 $ (60,000)
Deferred (149,136) (40,996) (190,132)
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)
</TABLE>
A reconciliation of the federal statutory income tax rate and the
effective income tax rate is as follows:
<TABLE>
<CAPTION>
1997 1996 1995
------- ------- -------
<S> <C> <C> <C>
Statutory federal tax rate (34.0)% 34.0% 34.0%
State income taxes, net of federal benefit 0 8.4 2.8
Amortization of intangible assets 4.6 0 0
Unrealized benefit of net operating losses 22.3 0 0
Net operating loss carryforwards 0.0 0.0 (20.0)
Tax benefit from nonqualified options 0.0 24.1 3.7
Other, net 0.0 (7.9) (7.0)
------- ------- -------
(7.1)% 58.6% 13.5%
------- ------- -------
------- ------- -------
</TABLE>
The Company utilized net operating loss carryforwards of $1,249,223 and
$954,547 to offset taxable income in 1995 for federal and California
income tax purposes, respectively. At December 31, 1997, the Company had
federal and California state income tax net operating loss carryforwards
("NOLs") of approximately $820,000 and $410,000, respectively, expiring
between 2002 and 2012, excluding NOLs at MerkWerks, CombiMatrix and
Soundview Technologies. The use of the NOLs will result in a benefit to
paid-in-capital when realized. The aggregate tax NOLs at MerkWerks,
CombiMatrix, and Soundview Technologies exceeded $500,000 at December
31, 1997. However, the use of these NOLs are limited to the separate
earnings of the respective subsidiaries. The Company has established a
valuation allowance against its net deferred tax assets at December 31,
1997 as their realization is uncertain.
The tax effects of temporary differences and carryforwards that give
rise to significant portions of deferred assets and liabilities consist
of the following at December 31, 1997 and 1996:
<TABLE>
<CAPTION>
1997 1996
----------- ----------
<S> <C> <C>
State income taxes $ 0 $ 272
Reserves for notes receivable 365,791 0
Bases of investments in affiliates 565,594 (184,762)
Depreciation and amortization (8,855) (8,741)
Accrued liabilities 177,403 0
----------- ----------
1,099,933 (193,231)
Valuation allowance (1,099,933) 0
----------- ----------
$ 0 $(193,231)
----------- ----------
----------- ----------
</TABLE>
<PAGE>
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCK OPTIONS AND WARRANTS
In 1993, the Company adopted a stock option plan (the "1993 Plan")
which authorized the granting of both options intended to qualify as
"incentive stock options" under Section 422A of the Internal Revenue
Code ("Incentive Stock Options") and stock options that are not
intended to so qualify ("Nonqualified 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. Nonqualified 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, 1997, 4,000 shares were available for grant.
In March 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 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.
In April 1996, the Board of Directors adopted the 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
10,000 shares of Nonqualified Stock Options to non-employee directors
upon initial election to the Board of Directors and 1,000 shares
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, 1997, 38,000 shares were
available for grant.
In 1996, the Company also granted to two employees of a subsidiary of the
Company options to purchase 20,000 shares of the Company's common stock
at an exercise price of $5.38 per share. Such options were granted
outside the 1993 and 1996 plans and vest over four years and expire in
March 2001.
In 1997, the Company granted to two consultants options to purchase
40,000 shares of the Company's common stock, 12,000 at an exercise price
of $5.00 and 28,000 at an exercise price of $7.00. Such options were
granted outside the 1993 and 1996 plans and vest over periods ranging
from six months to sixteen months.
<PAGE>
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. STOCK OPTIONS AND WARRANTS (continued)
The following is a summary of common stock option activities:
<TABLE>
<CAPTION>
EXERCISE WEIGHTED
SHARES PRICES AVERAGE PRICE
---------- ----------- -------------
<S> <C> <C> <C>
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 forfeited (105,000) $2.00 $2.00
---------
1996
Balance at December 31, 1995 890,725 $1.50-$5.25 $2.64
Options granted 421,775 $5.38-$10.50 $6.30
Options exercised (109,000) $1.50-$5.25 $2.00
Options forfeited (9,000) $5.00 $5.00
---------
1997
Balance at December 31, 1996 1,194,500 $1.50-$10.50 $3.97
Options granted 330,100 $4.25-$7.78 $6.21
Options exercised (256,200) $1.50-$5.25 $3.28
---------
Balance at December 31, 1997 1,268,400 $1.50-$10.50 $4.70
---------
---------
Exercisable at December 31, 1995 813,225 $1.50-$5.25 $2.34
Exercisable at December 31, 1996 750,500 $1.50-$5.50 $2.49
Exercisable at December 31, 1997 649,900 $1.50-$10.50 $3.09
<CAPTION>
Number of Weighted Outstanding Excercisable
Range of Outstanding Average Remaining Weighted Average Number Weighted Average
Exercise Prices Options Contractual Life Exercise Price Exercisable Exercise Price
- --------------- ------- ---------------- -------------- ----------- --------------
<S> <C> <C> <C> <C> <C>
$1.500-$4.999 507,125 1.1608 yrs $2.1346 440,125 $1.8125
$5.000-$9.999 741,275 3.1672 yrs $6.2910 204,775 $5.6614
$10.000-$14.999 20,000 3.2904 yrs $10.5000 5,000 $10.5000
--------- --------
1,268,400 649,900
--------- --------
--------- --------
</TABLE>
The weighted average fair value of options granted during 1997, 1996, and 1995
for which the exercise price equals the fair market price on grant date was
$4.551, $4.159, and $3.432, respectively. The weighted average fair value of
options granted during 1997 and 1995 for which the exercise price is less
than the fair market price on grant date was $2.794 and $3.480, respectively.
There are no outstanding options granted during 1996 that were less than the
fair market price. The weighted average fair value of options granted during
1997 for which the exerise price exceeds the fair market price on grant date
was $2.833. There are no outstanding options granted during 1996 and 1997 that
exceeded the fair market price.
The Company has issued warrants to purchase 723,122 shares of the Company's
common stock as of December 31, 1997. Of this total, warrants to purchase
100,000 shares with a per share exercise price of $2.00 were issued to an
individual who later became an officer and director of the Company. In 1996,
warrants to purchase 8,500 shares were issued to consultants with a per
share exercise price of $6.75. In 1997, warrants to purchase 516,202 shares
were issued in conjunction with two privately placed equity financings and
warrants to purchase 98,420 shares were issued to consultants and other third
parties with per share exercise prices ranging from $5.50 to $10.00. The
total number of warrants to purchase stock exercisable at December 31, 1997
is 673,122, with a weighted average exercise price of $7.4529, and a weighted
average remaining contractual life of 2.8 years.
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 standard, the
Company may either adopt the 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.
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:
<TABLE>
<CAPTION>
1997 1996 1995
--------- --------- --------
<S> <C> <C> <C>
Net income, as reported $(2,859,379) $ 17,002 $1,831,311
Net income, pro forma $(3,371,110) $(258,985) $1,656,051
Basic earnings per share, as reported $(1.15) $0.01 $1.08
Basic earnings per share, pro forma $(1.36) $(0.14) $0.97
Diluted earnings per share, as reported $(1.15) $0.01 $0.77
Diluted earnings per share, pro forma $(1.36) $(0.14) $0.70
</TABLE>
The fair values of options were determined using the Black-Scholes
model, assuming risk free interest of 6.02%, 6.31%, and 5.91% in 1997,
1996, and 1995, respectively, volatility of approximately 75%, with
contractual life of three to five years, and no expected dividends.
<PAGE>
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
9. STOCK SUBSCRIPTION AND NOTE RECEIVABLE SECURED BY COMMON STOCK
Stock subscriptions receivable of $88,752 at December 31, 1996
consist of promissory notes due from individuals for the purchase of
common stock and the exercise of stock options. These notes generally
bear interest at 4% to 5% per annum. The notes were paid in full in
1997.
Note receivable secured by common stock of $196,800 at December 31,
1997 and $187,500 at December 31, 1996, respectively, represents amounts
loaned to a stockholder secured by the Company's common stock. These
amounts have been classified as contra-equity because in the event the
stockholder fails to remit payment, the Company will receive shares of the
Company's common stock. Subsequent to December 31, 1997 and through March
24, 1998, payments of approximately $102,000 were received.
10. COMMITMENTS AND CONTINGENCIES
The Company leases office facilities under an operating lease through
November 1998, with options to renew the lease at a rate determined by
the Consumer Price Index at the time of renewal. One of the Company's
majority-owned subsidiaries leased laboratory space under an operating
lease through April 1999. Rent expense in 1997, 1996 and 1995 was
approximately $122,714, $67,493 and $29,083, respectively.
At December 31, 1997, future minimum lease payments for operating
leases are as follows:
<TABLE>
<CAPTION>
<S> <C>
1998 $ 202,020
1999 65,250
---------
$ 267,270
---------
---------
</TABLE>
LITIGATION - On May 7, 1997, the Company entered into a Settlement
Agreement terminating a lawsuit brought by Ann P. Hodges, a former
director of the Company, and her husband Christopher D. Hodges. The
suit alleged that the Company breached a contract with Ann Hodges by
improperly refusing to permit her to exercise an option to purchase
100,000 shares of common stock of the Company, and sought $950,000 in
damages from the Company. Under terms of the Settlement Agreement, the
Hodges have received $25,000 in cash and options to purchase 120,600
shares of the Company's Common Stock at an exercise price equal to $4.25
per share. The underlying shares will vest over a period of 18 months,
and remain exercisable until the Hodges realize total profits of up to
$475,000 (measured as the aggregate difference between the market value
of the shares on the date of exercise and the exercise price). If,
following the exercise or termination of the option, the Hodges have not
realized profits of $475,000, the Company would be obligated to make a
cash payment to the Hodges equal to the shortfall. The estimated
fair value of the options granted under this settlement is $435,000 plus
the $25,000 cash paid and was charged to legal settlement expense in the
consolidated statements of operations in 1997. At March 25, 1998 the
remaining estimated liability was $30,000.
<PAGE>
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. GAIN ON ISSUANCE OF STOCK BY AFFILIATE
In February 1996, Whitewing 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.
12. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest in 1997, 1996 and 1995 was $39,468, $1,511 and
$23,492, respectively. The Company paid cash for income taxes in the
amount of $251,885 in 1996. In 1997, the Company issued $2,825,000 in
common stock and $900,000 in promissory notes to acquire 35% of
additional ownership interest in Soundview Technologies.
13. SEGMENT INFORMATION
The results for the year ended December 31, 1997 and 1996 include the
consolidated balances of MerkWerks. MerkWerks is engaged in the
business of software development. As of December 31, 1997, there have
been no sales related to these operations. These financial statements
include $117,753 in 1997 and $86,295 in 1996 of administrative expenses
that were incurred by MerkWerks. The total assets of MerkWerks at
December 31, 1997 and 1996 are $11,170 and $51,876, respectively. Assets
of the subsidiary consist of cash, equipment, and organization costs,
net of amortization and depreciation.
The results for the year ended December 31, 1997 and 1996 include the
consolidated balances of CombiMatrix. CombiMatix is engaged in the
business of developing new technologies in the field of drug discovery.
These financial statements include operating expenses of $621,204 in
1997 and $420,887 in 1996. The total assets of CombiMatrix at December
31, 1997 and 1996 are $357,432 and $261,162, respectively. Assets of the
subsidiary consist of cash, equipment, prepaid expenses, patent and
organization costs, net of depreciation and amortization.
The results for the year ended December 31, 1997 include the
consolidated balances of Soundview Technologies. Soundview Technologies
owns important intellectual property relating to V-Chip technology.
These financial statements include operating expenses of $305,555 in
1997. The total assets of Soundview Technologies at December 31, 1997 are
$218,688.
14. SUBSEQUENT EVENTS
In January 1998, the Company acquired increased equity ownership in four
of its affiliate companies in a series of independent transactions in
exchange for issuances of shares of Acacia Research's common stock. The
Company increased its ownership of Soundview Technologies from 51.4% to
66.7%; MerkWerks from 69.5% to 89.6%; Greenwich Information Technologies
from 30.02% to 33.33 %; and CombiMatrix from 51.4% to 52.7%.
On March 17, 1998, the Company announced that its Board of Directors
declared a two-for-one split of the Company's common stock subject to
approval by shareholders of an amendment of the Company's Articles of
Incorporation to increase the number of authorized common shares. The
split will be effected through a dividend of one share of common stock
for each common share outstanding. The proposed amendment will be voted
on by shareholders of record as of April 6, 1998 at the Company's annual
shareholders meeting on May 19, 1998. If approved, the Company will
distribute the stock dividend on or about June 12, 1998, for each share
held of record at the close of business on May 29, 1998.
In March 1998, CombiMatrix completed a private placement of units of 6%
unsecured subordinated promissory notes and common stock purchase
warrants raising gross proceeds of $1.45 million. CombiMatrix will use
the net proceeds of the private placement as working capital for general
corporate purposes and research and development of its technologies.
<PAGE>
EXHIBIT 10.8
January 5, 1995
AGREEMENT BETWEEN
ACACIA RESEARCH CORPORATION AND PAUL RYAN
The following sets forth the terms and conditions of the agreement between
Acacia Research Company (referred to as "Acacia") and Paul Ryan (referred to
as "Ryan").
Whereas "Acacia" is a corporation registered as an investment advisor with
the Securities & Exchange Commission which plans to utilize its proprietary
computer models for selecting stocks and other financial assets in managing
money through a series of limited investment partnerships (referred to as
"Funds") and plans to become a corporate general partner of such "Funds", and
Whereas "Ryan" who by virtue of his prior experience as a general partner of
a "Fund" and his successful completion of required NASD exam criteria meets
the regulatory requirements of a "Fund" general partner and has agreed to
become a general partner of "Funds" with "Acacia" and will work with "Acacia"
in creating said "Funds" and has agreed to be the portfolio manager of these
"Funds".
The parties agree to the following:
"Acacia" and "Ryan" will both be general partners of the Acacia Fund, L.P.,
now in legal formation, and to a companion offshore "fund" to be formed, and
future "Funds" which the parties may establish.
"Acacia" will be responsible for:
1. Providing the proprietary computer models and the continual information
those models generate, which will be utilized by "Ryan" as the portfolio
manager in selecting stocks and mutual funds which the "Fund" will hold
as either long or short positions.
2. Be responsible as the corporate general partner for the maintenance of
accurate records of the dissemination of Offering Circulars and storage
of investor Subscription Agreements.
3. The financial costs of the legal formation of the Funds, which will be
amortized over 5 years as expenses of the Fund.
"Ryan" will be responsible for:
1. Preparing the Fund's Partnership Agreement and Offering Circular in
collaboration with the legal counsel of Shartsis, Friese & Ginsburg and
the independent auditor review by Coopers & Lybrand.
2. Providing "Acacia" with an accurate record of the distribution of
Offering Circulars and properly executed Subscription Agreements from
limited partners.
<PAGE>
January 5, 1995
3. Conduct the day to day activities of the Fund, including primary asset
allocation decisions, made with the input from "Acacia's" computer models,
execution of equity trades, and accurate records of the "Fund's"
investment positions, which will be available to "Acacia" on a daily
basis.
4. Determine when the "Fund" will utilize any leverage in its investment
positions, within the limits provided for by the "Fund's" partnership
agreement.
"Acacia" and "Ryan" will be jointly responsible for:
1. The marketing of investment partnership interests to parties known to
them.
2. The selection of a "Prime Broker", who will be the custodian of the
"Fund's" assets and clearing agent for all of the "Fund's" trading
activities.
3. Issuance of Quarterly Reports to limited partners and overseeing the
annual certified audit and issuance of appropriate tax information to
limited partners.
4. Providing the independent auditor with the information required to
instruct the "Fund's" custodian to pay the appropriate quarterly
management fee to "Acacia".
The parties further agree that "Acacia" shall receive a 75% proration of the
performance fee for acting as a general partner of the "Fund" and "Ryan"
shall receive a 25% proration for his participation as a general partner. It
is intended that the performance fee will be 20% of the realized and
unrealized gains of the "Fund" for each one year measurement period.
The Parties further agree that "Acacia" and "Ryan" will receive a similar
75%/25% proration of the annual 1% management fee, once the "Fund's" capital
exceeds $5 million. Until the "Fund" reaches the $5 million threshold,
"Acacia" will receive 100% of the management fee.
It is further agreed that "Acacia" will reimburse "Ryan" for pre-approved
reasonable expenses, including on-line quote service and telephone.
1. "Acacia" will also compensate "Ryan" a total of $9,000 during the months
of January and February 1995 for his efforts in organizing the "Fund".
2. The parties agree that if either party voluntarily resigns as a general
partner of the "Fund", they shall receive a pro-rata share of annual
compensation, based upon the number of months during the year that they
served as a general partner.
In the event of the death of "Ryan" or the corporate dissolution of
"Acacia", each party would receive its normal compensation for the full
year in which the involuntary resignation occurs, and no compensation
thereafter.
<PAGE>
January 5, 1995
The Parties agree that any dispute which may arise regarding their activities
as general partners of "Funds" will be settled by arbitration.
The parties may mutually agree to modify this agreement at any time.
Agreed to:
/s/ R. Bruce Stewart /s/ Paul R. Ryan
- ----------------------------- -----------------------------
R. Bruce Stewart, President Paul R. Ryan
Acacia Research Corporation
<PAGE>
EXCLUSIVE MARKETING AND LICENSING AGREEMENT
dated as of
September 11, 1996,
between
H. LEE BROWNE, individually,
H. LEE BROWNE, dba
Greenwich Information Technologies
and
GREENWICH INFORMATION TECHNOLOGIES LLC
<PAGE>
TABLE OF CONTENTS
<TABLE>
<CAPTION>
SECTION PAGE
<S> <C>
Recitals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE I
DEFINITIONS. . . . . . . . . . . . . . . 1
1.1 Definitions. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1
ARTICLE II
MARKETING, PROMOTION
AND RELATED TRANSACTIONS . . . . . . . . . . . 3
2.1 Grant of Rights. . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.2 Duties of LLC. . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
2.3 Future Licenses. . . . . . . . . . . . . . . . . . . . . . . . . . . 4
2.4 Other Obligations of DBA . . . . . . . . . . . . . . . . . . . . . . 4
2.5 Consideration. . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
ARTICLE III
REPRESENTATIONS AND WARRANTIES . . . . . . . . . . 4
3.1 Representations and Warranties of DBA. . . . . . . . . . . . . . . . 4
3.2 Representations and Warranties of LLC. . . . . . . . . . . . . . . . 5
ARTICLE IV
CONTINUING COVENANTS AND AGREEMENTS. . . . . . . . . 5
4.1 Covenants of DBA . . . . . . . . . . . . . . . . . . . . . . . . . . 5
4.2 Covenants of LLC . . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE V
INDEMNIFICATION. . . . . . . . . . . . . . 6
5.1 Obligations of DBA . . . . . . . . . . . . . . . . . . . . . . . . . 6
5.2 Obligations of LLC . . . . . . . . . . . . . . . . . . . . . . . . . 6
ARTICLE VI
GENERAL . . . . . . . . . . . . . . . 6
6.1 Amendments; Waivers. . . . . . . . . . . . . . . . . . . . . . . . . 6
6.2 Schedules; Exhibits; Integration . . . . . . . . . . . . . . . . . . 6
6.3 Governing Law. . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
6.4 No Assignment. . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
</TABLE>
i
<PAGE>
<TABLE>
<CAPTION>
SECTION PAGE
<S> <C>
6.5 Headings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
6.6 Counterparts . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
6.7 Parties in Interest. . . . . . . . . . . . . . . . . . . . . . . . . 7
6.8 Notices. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
6.9 Remedies; Waiver . . . . . . . . . . . . . . . . . . . . . . . . . . 8
6.10 Attorney's Fees. . . . . . . . . . . . . . . . . . . . . . . . . . . 9
6.11 Representation By Counsel; Interpretation. . . . . . . . . . . . . . 9
6.12 Severability . . . . . . . . . . . . . . . . . . . . . . . . . . . . 9
</TABLE>
ii
<PAGE>
EXCLUSIVE MARKETING AND LICENSING AGREEMENT
This Exclusive Marketing and Licensing Agreement is entered into as of
September 11, 1996, between GREENWICH INFORMATION TECHNOLOGIES LLC, a Delaware
limited liability company ("LLC"), H. LEE BROWNE, individually ("HLB"), and H.
LEE BROWNE, dba Greenwich Information Technologies ("DBA").
R E C I T A L S
WHEREAS, DBA is the "Assignee" of certain patent rights pursuant to an
Assignment Agreement dated February 5, 1992 between H. Lee Browne and Paul Yurt
(collectively, the "Assignors") and H. Lee Browne, dba Greenwich Information
Technologies, which is attached hereto as Exhibit A (the "1992 Assignment
Agreement").
WHEREAS, DBA and LLC desire to use certain cash available to the LLC for
working capital purposes related to the exploitation and licensing of the Patent
Rights (as defined in the 1992 Assignment Agreement), and with the understanding
that HLB will have operational control of LLC, DBA, in connection therewith,
desires to appoint LLC as the exclusive marketing and licensing agent for the
Patent Rights with sole rights to determine the exploitation and licensing of
the Patent Rights.
WHEREAS, DBA desires to become a member of LLC and is entering into this
Agreement as partial consideration for a 66.67% membership interest in LLC.
A G R E E M E N T
In consideration of the mutual promises contained herein and intending to
be legally bound, the parties agree as follows:
ARTICLE I
DEFINITIONS
1.1 DEFINITIONS. For all purposes of this Agreement, except as otherwise
expressly provided or unless the context otherwise requires,
(a) the terms defined in this Article I have the meanings assigned to them
in this Article I and include the plural as well as the singular,
(b) all references in this Agreement to designated "Articles," "Sections"
and other subdivisions are to the designated Articles, Sections and other
subdivisions of the body of this Agreement,
(c) pronouns of either gender or neuter shall include, as appropriate, the
other pronoun forms, and
1
<PAGE>
(d) the words "herein," "hereof" and "hereunder" and other words of
similar import refer to this Agreement as a whole and not to any particular
Article, Section or other subdivision.
As used in this Agreement and the Exhibits delivered pursuant to this
Agreement, the following definitions shall apply.
"ACTION" means any action, complaint, investigation, petition, suit or
other proceeding, whether civil or criminal, in law or in equity, or before any
arbitrator or Governmental Entity.
"AFFILIATE" means a Person that directly or indirectly, through one or more
intermediaries, controls, or is controlled by, or is under common control with,
a specified Person.
"AGREEMENT" means this Exclusive Marketing and Licensing Agreement by and
between DBA and LLC, as amended or supplemented together with all Exhibits
attached hereto or incorporated herein by reference.
"APPROVAL" means any approval, authorization, consent, qualification or
registration, or any waiver of any of the foregoing, required to be obtained
from, or any notice, statement or other communication required to be filed with
or delivered to, any Governmental Entity or any other Person.
"ASSIGNORS" is defined in the Recitals hereof.
"CONTRACT" means any agreement, arrangement, bond, commitment, franchise,
indemnity, indenture, instrument, lease, license or understanding, whether or
not in writing.
"ENCUMBRANCE" means any claim, charge, lease, covenant, easement,
encumbrance, security interest, lien, option, pledge, rights of others, or
restriction (whether on voting, sale, transfer, disposition or otherwise),
whether imposed by agreement, understanding, law, equity or otherwise.
"GOVERNMENTAL ENTITY" means any government or any agency, bureau, board,
commission, court, department, official, political subdivision, tribunal or
other instrumentality of any government, whether federal, state or local,
domestic or foreign.
"LAW" means any constitutional provision, statute or other law, rule,
regulation, or interpretation of any Governmental Entity and any Order.
"LOSS" means any action, cost, damage, disbursement, expense, liability,
loss, deficiency, diminution in value, obligation, penalty or settlement of any
kind or nature, whether foreseeable or unforeseeable, including but not limited
to, interest or other carrying costs, penalties, legal, accounting and other
professional fees and expenses
2
<PAGE>
incurred in the investigation, collection, prosecution and defense of claims
and amounts paid in settlement, that may be imposed on or otherwise incurred
or suffered by the specified person.
"1992 ASSIGNMENT AGREEMENT" is defined in the Recitals hereof.
"ORDER" means any decree, injunction, judgment, order, ruling, assessment
or writ.
"PATENT RIGHTS" means the patents subject to the 1992 Assignment Agreement.
"PERMIT" means any permit, license, authorization, plan, directive, consent
order or consent decree of or from any Governmental Entity or Person.
"PERSON" means an association, a corporation, an individual, a partnership,
a trust or any other entity or organization, including a Governmental Entity.
ARTICLE II
MARKETING, PROMOTION
AND RELATED TRANSACTIONS
2.1 GRANT OF RIGHTS.
DBA hereby grants to LLC exclusive, perpetual, irrevocable, worldwide
rights to market, promote and license the Patent Rights and to arrange for the
commercial exploitation of the Patent Rights and any related technology owned or
controlled by DBA. LLC shall have all rights to promote, market and license to
others the Patent Rights on such terms and conditions as it may determine in its
sole and absolute discretion. DBA shall have the right to prosecute infringers
of the Patent Rights in accordance with the 1992 Assignment Agreement; provided,
however, that LLC shall have all economic interests and rights in the proceeds
of such prosecution subject to DBA's obligations, if any, under the 1992
Assignment Agreement to pay a portion of such proceeds to the Assignors. LLC
shall pay all costs and expenses related to the prosecution of infringers of the
Patent Rights and any Persons who breach or violate the terms of any license or
sublicense of the Patent Rights.
2.2 DUTIES OF LLC.
LLC agrees to use commercially reasonable efforts to promote, market and
arrange for the commercial exploitation of the Patent Rights, through licensing
or otherwise. LLC shall pay all costs and expenses related to such promotion,
marketing and licensing activities. LLC shall be solely responsible to arrange
for licensing or assigning rights in the Patent Rights to third parties on
commercially reasonable terms. LLC shall pay all costs and expenses related to
(i) obtaining and maintaining the Patent Rights and all related patent rights on
behalf of DBA; and (ii) the prosecution of
3
<PAGE>
infringers of the Patent Rights and any Persons who breach or violate the
terms of any license or sublicense of the Patent Rights.
2.3 FUTURE LICENSES.
In the event LLC determines to license the Patent Rights to any third
party, DBA shall promptly grant to LLC a license, with right to sublicense,
in scope, duration and such other terms as are no less broad than the
proposed license to the third party; PROVIDED, HOWEVER, that the license from
DBA to LLC will be royalty free. Such license shall be granted
contemporaneously with the consummation of the license of the Patent Rights
by the LLC to such third party. Any and all payments or other proceeds
received by LLC in respect of such licenses granted to third parties shall be
the sole property of LLC and DBA and the Assignors shall have no rights or
interests therein, subject to (i) DBA's obligations, if any, under the 1992
Assignment Agreement to pay a portion of such proceeds to the Assignors, and
(ii) subject to HLB's rights, if any, to receive distributions as a member of
LLC under the Operating Agreement.
2.4 OTHER OBLIGATIONS OF DBA.
DBA agrees that he shall remain responsible for making all necessary
payments to the Assignors under the 1992 Assignment Agreement. If DBA fails
to make payments to Assignors when due, LLC shall have full right (but not
the obligation) to withhold distributions otherwise owing to HLB, as a member
of LLC, and make payments directly to Assignors. This is in addition to any
other remedy LLC may have hereunder. To the extent LLC proposes any
transaction which requires the consent of the Assignors, DBA will use his
best efforts to procure such consent.
2.5 CONSIDERATION.
HLB is receiving a membership interest in LLC and is entering into this
Agreement, as Assignor, as partial consideration for such membership interest.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 REPRESENTATIONS AND WARRANTIES OF DBA. DBA has all necessary power
and authority to execute, deliver and perform this Agreement and any related
agreements referred to herein. The execution, delivery and performance of this
Agreement and any related agreements by DBA will not violate, or constitute a
breach or default (whether upon lapse of time and/or the occurrence of any act
or event or otherwise) under any Contract of DBA, result in the imposition of
any Encumbrance against the Patent Rights or DBA's rights under the 1992
Assignment Agreement (except in favor of LLC), violate any Law or require any
Approval or filing or registration with, or the issuance of any Permit by, any
other Person or Governmental Entity. This
4
<PAGE>
Agreement and any related agreements constitute the legally valid and binding
obligation of DBA, enforceable against DBA in accordance with its terms
except as such enforceability may be limited by bankruptcy, insolvency,
reorganization, moratorium and other similar laws and equitable principles
relating to or limiting creditors' rights generally. The 1992 Assignment
Agreement, in the form attached hereto as Exhibit A, is in full force and
effect and has not been modified, amended or otherwise altered. DBA has
performed all obligations required to be performed by him under the 1992
Assignment Agreement, and DBA is not in default under the 1992 Assignment
Agreement. DBA has not granted, assigned, licensed or transferred any rights
in the Patent Rights to any Person, except for such matters as are no longer
in effect and under which no Person has any continuing right to use or
exploit the Patent Rights. DBA has not received any notice to the effect (or
is otherwise aware) that any Person claims that the Patent Rights (or any
claims asserted in the Patent Rights) are invalid or that there was any prior
art relating to the Patent Rights which would cause the Patent Rights to be
invalid. Except as previously disclosed to LLC, there are no Actions
pending, or to DBA's knowledge, threatened, relating to the Patent Rights or
the 1992 Assignment Agreement.
3.2 REPRESENTATIONS AND WARRANTIES OF LLC. LLC is a limited liability
company duly organized, validly existing and in good standing under the laws of
the State of Delaware. LLC has all necessary corporate power and authority to
carry on its business as now being conducted. LLC has the necessary corporate
power and authority to execute, deliver and perform this Agreement and any
related agreements to which it is a party. This Agreement constitutes the
legal, valid and binding obligation of LLC, enforceable against it in accordance
with its terms except as such enforceability may be limited by bankruptcy,
insolvency, reorganization, moratorium and other similar laws and equitable
principles relating to or limiting creditors' rights generally. The execution,
delivery and performance of this Agreement and any related agreements by LLC
will not violate the provisions of, or constitute a breach or default whether
upon lapse of time and/or the occurrence of any act or event or otherwise under
(a) the operating agreement of LLC, (b) any Law to which LLC is subject or
(c) any Contract to which LLC is a party.
ARTICLE IV
CONTINUING COVENANTS AND AGREEMENTS
4.1 COVENANTS OF DBA.
Other than to LLC, DBA shall not sell, transfer, assign, license, Encumber
or otherwise convey or dispose of any right or interest in or to the Patent
Rights. DBA shall not amend, modify or alter the 1992 Assignment Agreement
without the prior written approval of LLC, unless such amendment or modification
(i) relates to DBA's payment obligations to the Assignors pursuant to the 1992
Assignment Agreement, and (ii) does not and will not result in an adverse effect
on LLC's interests hereunder, or under the Collateral Assignment of Assignment
Agreement dated the date hereof between HLB and LLC. DBA shall comply with all
obligations under the 1992 Assignment Agreement to make payments to the
Assignors and take all action necessary to maintain his rights to the Patent
Rights and other rights under the 1992
5
<PAGE>
Assignment Agreement. DBA shall notify LLC promptly in writing upon becoming
aware of any (i) claim by either Assignor of a breach or nonperformance of
the 1992 Assignment Agreement by DBA or (ii) Action or Order relating to the
Patent Rights or any claim by any Person alleging that the Patent Rights are
invalid.
4.2 COVENANTS OF LLC.
LLC shall not, directly or indirectly, enter into any transaction involving
the Patent Rights with any affiliate of LLC or DBA, on terms that are less
favorable to LLC than those that might be obtained at the time from unrelated
third parties. LLC, on behalf of DBA, shall perform the duties of DBA under the
1992 Assignment Agreement other than making payments to the Assignors.
ARTICLE V
INDEMNIFICATION
5.1 OBLIGATIONS OF DBA. DBA agrees to indemnify and hold harmless LLC,
and its members, directors, officers, employees, affiliates, agents and assigns
from and against any and all Losses of LLC, directly or indirectly, as a result
of, or based upon or arising from any inaccuracy in or breach or nonperformance
of any of the representations, warranties, covenants or agreements made by DBA
in or pursuant to this Agreement (whether or not of a material nature).
5.2 OBLIGATIONS OF LLC. LLC agrees to indemnify and hold harmless DBA
from and against any Losses of DBA, directly or indirectly, as a result of, or
based upon or arising from, any inaccuracy in or breach or nonperformance of any
of the representations, warranties, covenants or agreements made by LLC in or
pursuant to this Agreement.
ARTICLE VI
GENERAL
6.1 AMENDMENTS; WAIVERS. This Agreement and any Exhibit attached hereto
may be amended only by agreement in writing of all parties. Any amendment,
waiver or consent by LLC hereunder must be approved by the "senior members" or a
majority in interest of the members of LLC, in each case excluding HLB. No
waiver of any provision nor consent to any exception to the terms of this
Agreement or any agreement contemplated hereby shall be effective unless in
writing and signed by the party to be bound and then only to the specific
purpose, extent and instance so provided.
6
<PAGE>
6.2 SCHEDULES; EXHIBITS; INTEGRATION. Each Schedule and Exhibit delivered
pursuant to the terms of this Agreement shall be in writing and shall constitute
a part of this Agreement, although Schedules need not be attached to each copy
of this Agreement. This Agreement, together with such Schedules and Exhibits,
and the Pledge Agreement and the Collateral Assignment of Assignment Agreement
each dated the date hereof between HLB and LLC, constitute the entire agreement
among the parties pertaining to the subject matter hereof and supersede all
prior agreements and understandings of the parties in connection therewith.
6.3 GOVERNING LAW. This Agreement and the legal relations between the
parties shall be governed by and construed in accordance with the laws of the
State of Connecticut except to the extent that certain matters are preempted by
federal law or are governed by the law of the jurisdiction of organization of
LLC.
6.4 NO ASSIGNMENT. Except as otherwise provided herein, neither this
Agreement (nor related agreements pursuant to this Agreement) nor any rights or
obligations under any of them are assignable.
6.5 HEADINGS. The descriptive headings of the articles, sections and
subsections of this Agreement are for convenience only and do not constitute a
part of this Agreement.
6.6 COUNTERPARTS. This Agreement and any amendment hereto or any other
agreement (or document) delivered pursuant hereto may be executed in one or more
counterparts and by different parties in separate counterparts. All of such
counterparts shall constitute one and the same agreement (or other document) and
shall become effective (unless otherwise therein provided) when one or more
counterparts have been signed by each party and delivered to the other party.
6.7 PARTIES IN INTEREST. This Agreement shall be binding upon and inure
to the benefit of each party, and nothing in this Agreement, express or implied,
is intended to confer upon any other person any rights or remedies of any nature
whatsoever under or by reason of this Agreement. Nothing in this Agreement is
intended to relieve or discharge the obligation of any third person to any party
to this Agreement.
6.8 NOTICES. Any notice or other communication hereunder must be given in
writing and either (a) delivered in person, (b) transmitted by telex, telefax or
telecommunications mechanism or (c) mailed by certified or registered mail,
postage prepaid, receipt requested as follows:
IF TO LLC ADDRESSED TO:
Greenwich Information Technologies LLC
Two Soundview Drive
Greenwich Connecticut 06830
Attention: Chief Executive Officer
7
<PAGE>
WITH COPIES TO:
Acacia Research Corporation
12 S. Raymond Avenue
Pasadena, California 91105
Attention: President
and
O'Melveny & Myers LLP
400 South Hope Street
Los Angeles, California 90071
Attention: D. Stephen Antion, Esq.
IF TO HLB, ADDRESSED TO:
H. Lee Browne
Two Soundview Drive
Greenwich, Connecticut 06830
IF TO DBA, ADDRESSED TO:
H. Lee Browne, dba
Greenwich Information Technologies
Two Soundview Drive
Greenwich, Connecticut 06830
WITH A COPY TO:
Finn, Dixon & Herling
One Landmark Square, Suite 1400
Stamford, Connecticut 06901
Attention: Brett Dixon, Esq.
or to such other address or to such other person as either party shall have
last designated by such notice to the other party. Each such notice or other
communication shall be effective (i) if given by telecommunication, when
transmitted to the applicable number so specified in (or pursuant to) this
Section 6.8 and an appropriate answer back is received, (ii) if given by
mail, three days after such communication is deposited in the mails with
first class postage prepaid, addressed as aforesaid or (iii) if given by any
other means, when actually delivered at such address.
6.9 REMEDIES; WAIVER. To the extent permitted by Law, all rights and
remedies existing under this Agreement and any related agreements or documents
are cumulative to, and not exclusive of, any rights or remedies otherwise
available under applicable Law. No failure on the part of any party to exercise
or delay in exercising any
8
<PAGE>
right hereunder shall be deemed a waiver thereof, nor shall any single or
partial exercise preclude any further or other exercise of such or any other
right.
6.10 ATTORNEY'S FEES. In the event of any Action for the breach of this
Agreement or misrepresentation by any party, the prevailing party shall be
entitled to reasonable attorney's fees, costs and expenses incurred in such
Action. Attorneys fees incurred in enforcing any judgment in respect of this
Agreement are recoverable as a separate item. The preceding sentence is
intended to be severable from the other provisions of this Agreement and to
survive any judgment and, to the maximum extent permitted by law, shall not be
deemed merged into any such judgment.
6.11 REPRESENTATION BY COUNSEL; INTERPRETATION. LLC and DBA acknowledge
that each party to this Agreement has been represented by counsel in
connection with this Agreement and the transactions contemplated by this
Agreement. Accordingly, any rule of Law or any legal decision that would
require interpretation of any claimed ambiguities in this Agreement against
the party that drafted it has no application and is expressly waived. The
provisions of this Agreement shall be interpreted in a reasonable manner to
effect the intent of DBA and LLC.
6.12 SEVERABILITY. If any provision of this Agreement is determined to
be invalid, illegal or unenforceable by any Governmental Entity, the
remaining provisions of this Agreement shall remain in full force and effect
provided that the essential terms and conditions of this Agreement for all
parties remain valid, binding and enforceable.
[Remainder of page intentionally left blank]
9
<PAGE>
IN WITNESS WHEREOF, each of the parties hereto has caused this Agreement to
be executed by its duly authorized officers as of the day and year first above
written.
GREENWICH INFORMATION TECHNOLOGIES LLC
By: /s/ H. Lee Browne
----------------------------
Its: Chief Executive Officer
H. LEE BROWNE, individually
H. LEE BROWNE, dba Greenwich Information
Technologies
/s/ H. Lee Browne
----------------------------
Accepted and Agreed:
ACACIA RESEARCH CORPORATION
By: /s/ Kathryn King-Van Wie
Its: Vice President, Operations
S-1
<PAGE>
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the incorporation by reference in the Prospectus
constituting part of the Registration Statements on Form S-3 (Nos. 333-33857,
333-34773, 333-39415, 333-45397) and in the Registration Statement on Form
S-8 (No. 333-22197) of Acacia Research Corporation of our report dated March
25, 1998 appearing on page F-1 of this Form 10-K.
/s/ PRICE WATERHOUSE LLP
Price Waterhouse LLP
Los Angeles, California
March 25, 1998
<PAGE>
EXHIBIT 23.2
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the filing of our report dated March 25, 1998 appearing
on page F-2 of this Form 10-K and to the incorporation by reference of such
report in the Prospectus constituting part of the Registration Statements on
Form S-3 (Nos. 333-33857, 333-34773, 333-39415, 333-45397) and in the
Registration Statements on Form S-8 (No. 333-22197) of Acacia Research
Corporation.
/s/ FINOCCHIARO & CO.
Finocchiaro & Co.
Pasadena, California
March 25, 1998
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