<PAGE>
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For the Quarter Ended June 30, 1999 Commission File No. 0-26068
ACACIA RESEARCH CORPORATION
(Exact name of registrant as specified in its charter)
CALIFORNIA 95-4405754
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation organization)
55 SOUTH LAKE AVENUE, PASADENA CA 91101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (626)396-8300
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes X No .
--- ---
At August 11, 1999 10,824,186 shares of common stock, no par value, of the
Registrant were outstanding.
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ACACIA RESEARCH CORPORATION
Table Of Contents
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets.................................3
Consolidated Statements of Operations.......................4
Consolidated Statements of Cash Flows.......................5
Notes to Consolidated Financial Statements..................6
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................10
Item 3. Quantitative and Qualitative Disclosures
About Market Risk..........................................18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................18
Item 2. Changes in Securities...................................18
Item 3. Defaults Upon Senior Securities.........................18
Item 4. Submission of Matters to a Vote of
Security Holders........................................18
Item 5. Other Information.......................................19
Item 6. Exhibits and Reports on Form 8-K........................19
SIGNATURE.....................................................................19
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ACACIA RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
(Unaudited)
June 30, 1999 December 31, 1998
--------------------- ---------------------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents $ 5,720,000 $ 7,508,000
Management fees and other receivables 26,000 239,000
Receivables from affiliates 28,000 27,000
Prepaid expenses 165,000 96,000
Income tax receivable - 110,000
--------------------- ---------------------
Total current assets 5,939,000 7,980,000
Equipment, furniture, and fixtures, net 555,000 530,000
Notes receivable, net 29,000 38,000
Investment in affiliates, at equity 2,885,000 3,481,000
Partnership interests, at equity 1,432,000 1,832,000
Patents, net of accumulated amortization 4,056,000 4,610,000
Goodwill, net of accumulated amortization 1,267,000 1,158,000
Other assets, net of accumulated amortization 116,000 140,000
--------------------- ---------------------
$ 16,279,000 $ 19,769,000
===================== =====================
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses $ 314,000 $ 366,000
--------------------- ---------------------
Total current liabilities 314,000 366,000
Other liabilities 240,000 240,000
Notes payable, net of discount 1,261,000 1,222,000
--------------------- ---------------------
Total liabilities 1,815,000 1,828,000
--------------------- ---------------------
Minority interests 33,000 -
Stockholders' equity
Common stock, no par value; 30,000,000 shares authorized; 10,399,922
shares in 1999 and 10,190,815 shares in 1998
issued and outstanding 27,267,000 26,737,000
Warrants to purchase common stock 100,000 100,000
Accumulated deficit (12,936,000) (8,896,000)
--------------------- ---------------------
Total stockholders' equity 14,431,000 17,941,000
--------------------- ---------------------
$ 16,279,000 $ 19,769,000
===================== =====================
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
3
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ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
(Unaudited) (Unaudited)
Six Months Ended Three Months Ended
June 30, 1999 June 30, 1998 June 30, 1999 June 30, 1998
---------------- -------------- -------------- ---------------
<S> <C> <C> <C> <C>
Revenues:
Capital management fee income $ 91,000 $ 74,000 $ 30,000 $ 43,000
---------------- -------------- -------------- ---------------
Total Revenues 91,000 74,000 30,000 43,000
---------------- -------------- -------------- ---------------
Operating Expenses:
Research and development expenses 1,039,000 773,000 570,000 406,000
Marketing, general, and administrative expenses 1,775,000 1,270,000 945,000 785,000
Amortization of patents and goodwill 789,000 758,000 399,000 375,000
---------------- -------------- -------------- ---------------
Total Operating Expenses 3,603,000 2,801,000 1,914,000 1,566,000
---------------- -------------- -------------- ---------------
Operating Loss (3,512,000) (2,727,000) (1,884,000) (1,523,000)
---------------- -------------- -------------- ---------------
Other income (expense):
Interest income 145,000 86,000 73,000 70,000
Interest expense (83,000) (46,000) (42,000) (45,000)
Equity in income of partnerships 50,000 82,000 7,000 28,000
Equity in losses of affiliates (620,000) (203,000) (187,000) (165,000)
---------------- -------------- -------------- ---------------
Total other income (expense) (508,000) (81,000) (149,000) (112,000)
---------------- -------------- -------------- ---------------
Loss before income taxes and minority interests (4,020,000) (2,808,000) (2,033,000) (1,635,000)
Provision for income taxes (20,000) - (3,000) -
---------------- -------------- -------------- ---------------
Loss before minority interests (4,040,000) (2,808,000) (2,036,000) (1,635,000)
Minority interests - 247,000 - 70,000
---------------- -------------- -------------- ---------------
Net loss (4,040,000) (2,561,000) (2,036,000) (1,565,000)
================ ============== ============== ===============
Loss per common share
Basic ($0.39) ($0.33) ($0.20) ($0.17)
Diluted ($0.39) ($0.33) ($0.20) ($0.17)
Weighted average number of common and potential
common shares outstanding used in computation of
loss per share
Basic 10,278,458 7,823,939 10,346,238 8,961,832
Diluted 10,278,458 7,823,939 10,346,238 8,961,832
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
4
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ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
(Unaudited)
Six Months Ended
June 30, 1999 June 30, 1998
------------------ ------------------
<S> <C> <C>
Cash flows from operating activities:
Net loss $ (4,040,000) $ (2,561,000)
Adjustments to reconcile net loss to net
cash used in operating activities:
Depreciation and amortization 889,000 807,000
Amortization of discount on notes payable 40,000 20,000
Equity in loss of affiliates and partnerships 570,000 121,000
Minority interest in net loss - (247,000)
Compensation expense relating to stock options/warrants 50,000 49,000
Provision for write-down of notes and interest receivable 9,000 -
Changes in assets and liabilities, net of effects of acquisitions:
Management fees and other receivables, prepaid expenses,
patents and other assets 227,000 97,000
Accounts payable, accrued expenses, accrued compensation,
and other liabilities (52,000) (34,000)
------------------ ------------------
Net cash used in operating activities (2,307,000) (1,748,000)
------------------ ------------------
Cash flows from investing activities:
Advances to affiliates (3,000) (16,000)
Payments received on advances to affiliates 2,000 -
Capital contribution to equity investment (25,000) -
Purchase of additional equity in consolidated subsidiary (31,000) -
Withdrawals from partnerships 500,000 -
Purchase of equity investment - (2,558,000)
Proceeds from note receivable secured by common stock - 197,000
Purchase of partnership interest (49,000) -
Capitalized expenditures (101,000) (67,000)
------------------ -----------------
Net cash provided by (used in) investing activities 293,000 (2,444,000)
------------------ -----------------
Cash flows from financing activities:
Proceeds from notes payable - 1,400,000
Proceeds from exercise of stock options and warrants 193,000 3,071,000
Capital contributions from minority
shareholders of subsidiaries 33,000 -
Proceeds from sale of common stock, net of issuance costs - 8,400,000
------------------ -----------------
Net cash provided by financing activities 226,000 12,871,000
------------------ -----------------
(Decrease) increase in cash and cash equivalents (1,788,000) 8,679,000
Cash and cash equivalents, beginning 7,508,000 1,367,000
------------------ -----------------
Cash and cash equivalents, ending $ 5,720,000 $ 10,046,000
================== =================
Supplemental schedule of non-cash investing and financing activities:
Issuance of common stock for additional equity in consolidated
subsidiaries and affiliates $ 288,000 $ 3,035,000
Increase in equity investment due to receipt of affiliate stock as
payment on note receivable $ - $ 240,000
Increase of common stock to satisfy legal settlement payable $ - $ 226,000
Discount on notes payable from issuance of subsidiary's
warrants $ - $ 238,000
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
5
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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 such technologies will
be successful, and even if successful, that the development of such
technologies can be commercialized.
At June 30, 1999, the Company had significant economic interests in eight
enterprises and takes an active role in each enterprise's growth and
advancement. These companies are: CombiMatrix Corporation ("CombiMatrix"),
Greenwich Information Technologies LLC ("Greenwich Information
Technologies"), MerkWerks Corporation ("MerkWerks"), Signature-mail.com llc
("Signature-mail.com"), Soundbreak.com Incorporated ("Soundbreak.com"),
Soundview Technologies Incorporated ("Soundview Technologies"), Whitewing
Labs, Inc. ("Whitewing Labs"), and Acacia Capital Management. The Company,
doing business as Acacia Capital Management, is a general partner in two
private investment partnerships and is an investment advisor to two
offshore private investment corporations.
In June 1999, the Company purchased a total of 205,800 shares of common
stock of MerkWerks for a total purchase price of $319,000 consisting of
60,107 shares of common stock of the Company and $31,000 in cash. As a
result of the transaction, the Company increased its equity ownership in
MerkWerks from 89.6% to 99.9%. The acquisition was accounted for under the
purchase method. The excess of the purchase price over fair value of the
net assets acquired was assigned to goodwill of approximately $317,000,
which is being amortized over its estimated useful life of 3 years.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION - In the opinion of management, the accompanying
unaudited consolidated financial statements contain all adjustments which
consist only of normal recurring adjustments necessary to present fairly
the consolidated financial position of the Company and its subsidiaries at
June 30, 1999 and the consolidated results of operations and cash flows for
the three and six months ended June 30, 1999 and 1998. This interim
financial information and notes thereto should be read in conjunction with
the Company's Annual Report on Form 10-K for the year ended December 31,
1998. The Company's consolidated results of operations and cash flows for
interim periods are not necessarily indicative of the results to be
expected for any other interim period or the full year.
RECLASSIFICATIONS - Certain reclassifications of prior year's amounts have
been made to conform to the 1999 presentation.
3. NOTES RECEIVABLE
As of June 30, 1999 and December 31, 1998, 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 Labs. These notes
generally bear interest at 5% per annum and are generally secured by the
common stock sold. As of June 30, 1999 and December 31, 1998, two
promissory notes secured by the common stock of Whitewing Labs were valued
at the market value of the collateral held by the Company.
6
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ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
3. NOTES RECEIVABLE (Continued)
Notes receivable consist of the following at June 30, 1999 and December 31,
1998:
<TABLE>
<CAPTION>
June 30, 1999 Dec 31, 1998
----------------------------------------------------------------------------------------------------------
<S> <C> <C>
Notes Receivable $ 319,000 $ 319,000
Less: Reserve for Write-down (290,000) (281,000)
----------------------------------------------------------------------------------------------------------
$ 29,000 $ 38,000
----------------------------------------------------------------------------------------------------------
</TABLE>
Interest receivable on these notes amounted to approximately $10,000, as of
June 30, 1999 and December 31, 1998, and is included in management fees and
other receivables in the consolidated balance sheets.
4. NOTES PAYABLE
In March 1998, CombiMatrix completed a private debt financing raising
gross proceeds of $1.45 million through the issuance of 290 units, each
unit consisting of one $5,000 principal unsecured promissory note
("Subordinated Note") and common stock purchase warrants to purchase 500
shares of common stock. Each Subordinated Note bears interest at the
rate of 6% per annum on the outstanding principal balance. Accrued
interest is due and payable annually on January 15th of each year until
the Subordinated Notes are paid in full. Principal is due and payable in
full on the third anniversary of each Subordinated Note. Each common
stock purchase warrant entitles the holder to purchase one share of
CombiMatrix common stock at an exercise price of $2.00, subject to
adjustment, during a period of three years, expiring in March 2001. In
accordance with APB Opinion No. 14, "Accounting for Convertible Debt and
Debt Issued with Stock Purchase Warrants," $850 of each unit issued has
been attributed to the warrants included in each unit resulting in debt
discount. The Company invested $50,000 in this private placement. If,
prior to the maturity date of the Subordinated Notes, CombiMatrix has an
offering of its common stock or senior securities convertible into its
common stock that has gross proceeds exceeding $500,000 that does not
involve certain exempt transactions, the holders of the Subordinated
Notes shall be offered the opportunity to acquire shares of CombiMatrix
common stock in exchange for the then outstanding principal amount of
the Subordinated Notes. Holders will be entitled to only one opportunity
to exchange Subordinated Notes into CombiMatrix common stock.
5. COMMON STOCK SPLIT
On March 17, 1998, the Company announced that its Board of Directors
declared a two-for-one split of the Company's common stock in the form of a
stock dividend of one share of common stock for each share outstanding. The
Company distributed the stock dividend on June 12, 1998, for each share
held of record at the close of business on May 29, 1998. All references to
number of common shares and per share information in the consolidated
financial statements and related footnotes have been adjusted as
appropriate to reflect the stock split for all periods presented.
6. SEGMENT INFORMATION
The Company has two reportable segments: Investment Activities, including
investment advisory services and investments in development stage
companies, and CombiMatrix.
7
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ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
6. SEGMENT INFORMATION (Continued)
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.
CombiMatrix engages in a highly specialized and focused research effort in
combinatorial chemistry. It seeks to streamline the drug discovery process
and has demonstrated the preliminary feasibility of its proprietary
technologies.
The Company evaluates segment performance based on fees earned, and cost
versus earnings potential of future completed products or services.
Material intercompany transactions and transfers have been eliminated in
consolidation. The accounting policies of the segments are the same as
those described in the summary of significant accounting policies.
The table below presents information about the Company's reportable
segments for the six months ended June 30, 1999 and 1998.
<TABLE>
<CAPTION>
1999 Investment
Activities CombiMatrix Other Total
- ----------------------------------------------- ------------------ -------------------- --------------- --------------
<S> <C> <C> <C> <C>
Management fee income $91,000 - - $91,000
Amortization of Patents and Goodwill 782,000 - $7,000 789,000
Interest income 135,000 $10,000 - 145,000
Interest expense - 83,000 - 83,000
Equity in losses of affiliates 620,000 - - 620,000
Equity in income of partnerships 50,000 - - 50,000
Loss before minority interests and income
taxes 2,789,000 1,079,000 152,000 4,020,000
Segment assets 15,577,000 460,000 242,000 16,279,000
Investments in affiliates, at equity 2,885,000 2,885,000
Partnerships interests, at equity 1,432,000 1,432,000
Capital expenditures 77,000 24,000 - 101,000
1998 Investing
Activities CombiMatrix Other Total
- ----------------------------------------------- ------------------ -------------------- --------------- --------------
Management fee income $74,000 - - $74,000
Amortization of Patents and Goodwill 750,000 - $8,000 758,000
Interest income 70,000 $16,000 - 86,000
Interest expense - 46,000 - 46,000
Equity in losses of affiliates 203,000 - - 203,000
Equity in income of partnerships 82,000 - - 82,000
Loss before minority interests and income
taxes 1,827,000 662,000 319,000 2,808,000
Segment assets 20,914,000 1,061,000 179,000 22,154,000
Investments in affiliates, at equity 4,169,000 4,169,000
Partnerships interests, at equity 683,000 683,000
Capital expenditures 55,000 12,000 - 67,000
</TABLE>
8
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ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
7. SUBSEQUENT EVENTS
In July 1999, the Company received $2.1 million in proceeds from the
exercise of Common Stock Purchase Warrants to purchase 420,264 shares of
the Company's common stock.
In August 1999, CombiMatrix completed a private equity financing raising
gross proceeds of $4 million through the sale of 2,000,000 shares of
CombiMatrix common stock. The Company invested $2.3 million in this private
placement.
9
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
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 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 Year 2000 readiness, 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 its 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.
GENERAL
The following discussion is based primarily on the consolidated balance sheet
of the Company as of June 30, 1999, and on the operations of the Company for
the period from January 1, 1999 to June 30, 1999. The discussion compares the
activities for the six and three months ended June 30, 1999 to the activities
for the six and three months ended June 30, 1998.
This information should be read in conjunction with the accompanying
consolidated financial statements and notes thereto. In April 1998, the
Company acquired a 25% interest in a new affiliate company,
Signature-mail.com (formerly Internet Software LLC). The Company accounts for
this investment using the equity method.
RESULTS OF OPERATIONS
FOR THE SIX MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
REVENUES
CAPITAL MANAGEMENT FEES. During the six months ended June 30, 1999, capital
management fee income, which includes performance fee income, was $91,000
as compared to capital management fee income of $74,000 generated during
the six months ended June 30, 1998. The increase in capital management fee
income derived from the four investment funds managed by the Company during
the six months ended June 30, 1999 was primarily a result of the Company
collecting a performance fee on the twelve-month anniversary of a partner
in one of the domestic investment funds. Performance fees for the four
private investment funds managed by the Company are generally paid to the
Company at the end of the Company's (and the four funds') fiscal year.
However, in regard to the Company's two domestic private investment funds,
performance fees may not be paid until a partner
10
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has been invested in one of these funds for a period of twelve months.
Therefore, a performance fee may be paid to the Company on the twelve-month
anniversary of a partner's investment in a domestic private investment fund
and thereafter at the end of the fiscal year.
The Company also earns quarterly management fees that are based on a
percentage of the amount of money invested in the funds 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.
OPERATING EXPENSES
Total operating expenses increased to $3,603,000 during the six months ended
June 30, 1999 from $2,801,000 during the six months ended June 30, 1998
primarily due to expenses relating to the Company's move to larger office
facilities (including an increase in the Company's monthly lease payments), an
increase in the Company's business development activities, an increase in the
Company's head count and higher wages, and expenses relating to the expansion of
CombiMatrix's research and development efforts.
RESEARCH AND DEVELOPMENT EXPENSES. The Company incurred research and
development expenses of $1,039,000 for the six months ended June 30, 1999,
compared to expenses of $773,000 during the six months ended June 30, 1998.
Such expenses for the six months ended June 30, 1999 are comprised of
expenses incurred by CombiMatrix of $945,000, expenses incurred by
MerkWerks of $72,000, and expenses incurred by Soundview Technologies of
$22,000. Research and development expense for the six months ended June 30,
1998 are comprised of expenses incurred by CombiMatrix of $608,000,
expenses incurred by MerkWerks of $82,000, and expenses incurred by
Soundview Technologies of $83,000. During the six months ended June 30,
1999, CombiMatrix's expenses increased due to an increase in the number of
CombiMatrix personnel as it expanded its research and development efforts.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. For the six months ended
June 30, 1999, marketing, general and administrative expenses increased
to $1,775,000 as compared to $1,270,000 for the six months ended June
30, 1998. During the six months ended June 30, 1999, the Company's
expenses increased due to general expansion of the Company, including an
increase in office expenses relating to the Company's move to larger
office facilities, an increase in business development expenses as the
Company explores new business opportunities, and an increase in salaries
and fringe benefits primarily due to an increase in the number of
Company personnel as well as higher wages and payroll expenses.
Soundview Technologies' marketing, general and administrative expenses
were $140,000 in the six months ended June 30, 1999 and $50,000 for the
six months ended June 30, 1998.
AMORTIZATION OF PATENTS AND GOODWILL. The Company reported amortization
expenses relating to patents and goodwill of $789,000 during the six months
ended June 30, 1999 as compared to
11
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$758,000 during the six months ended June 30, 1998. As a result of the
Company's purchase of additional equity interests in Soundview Technologies
in July 1997 and January 1998 and in MerkWerks in January 1998 and
June 1999, the Company is incurring amortization expenses each quarter for
periods ranging from three to five years relating to the intangible assets
acquired. Amortization expenses at or above the six months ended June 30,
1999 level is expected to continue for the foreseeable future.
OTHER INCOME (EXPENSE)
The Company reported other expense of $508,000 for the six months ended June
30, 1999 compared to other expense of $81,000 for the six months ended June
30, 1998.
INTEREST INCOME. During the six months ended June 30, 1999, interest income
was $145,000 as compared to interest income during the six months ended
June 30, 1998, of $86,000. The increase is due to the Company having higher
cash balances in the six months ended June 30, 1999 as compared to the six
months ended June 30, 1998.
INTEREST EXPENSE. Interest expense in the six months ended June 30, 1999
was $83,000 as compared to $46,000 during the six months ended June 30,
1998. The expense incurred during the six months ended June 30, 1999 is
primarily attributable to CombiMatrix and relates to three-year 6%
unsecured subordinated promissory notes issued by CombiMatrix in a
private offering completed in March 1998. Warrants to purchase
CombiMatrix common stock were also issued in this private placement. For
financial statement purposes, the proceeds from the private placement
were allocated between the warrants and the notes resulting in a
discount on the notes. Such discount is amortized over the terms of the
notes and treated as additional interest expense. As a result, reported
interest is higher than the cash amount of interest that will actually
be paid to the noteholders. Subject to certain terms and conditions,
these notes are due and payable in March 2001. Interest on these notes
is payable each year on January 15 during the term of each note.
EQUITY IN INCOME OF PARTNERSHIPS. The Company reported equity in income of
partnerships of $50,000 for the six months ended June 30, 1999, compared to
$82,000 for the six months ended June 30, 1998. The decrease was a result
of lower returns generated by the partnerships' investment activities
and a decrease in the amount the Company has invested in the partnerships.
EQUITY IN LOSSES OF AFFILIATES. The Company reported equity in losses of
affiliates of $620,000 in the six months ended June 30, 1999, compared to
equity in losses of affiliates of $203,000 in the six months ended June 30,
1998. Losses during the six months ended June 30, 1999 are comprised of a
loss of $96,000 for the Company's investment in Whitewing Labs, a loss of
$135,000 for the Company's investment in Greenwich Information
Technologies, and a loss of $389,000 for the Company's investment in
Signature-mail.com, as determined by the equity method of accounting.
Losses for the six months ended June 30, 1998 are comprised of a loss of
$27,000 for the Company's investment in Whitewing Labs, a loss of $74,000
for the Company's investment in Greenwich Information Technologies and a
loss of $102,000 for the Company's investment in Signature-mail.com, as
determined by the equity method of accounting. Losses attributable to
Signature.mail.com during the six months ended June 30, 1998 include
only the period April through June, as the Company made this investment
in April 1998.
MINORITY INTERESTS
There were no minority interests in losses of consolidated subsidiaries in
the six months ended June 30, 1999 as compared to $247,000 in the six months
ended June 30, 1998. As of December 31, 1998, all minority interest balances
were depleted. In June 1999, Soundview Technologies received a $33,000
capital contribution from its minority shareholders, resulting in a minority
interest of $33,000 in the Company's Consolidated Balance Sheets.
12
<PAGE>
RESULTS OF OPERATIONS
FOR THE THREE MONTHS ENDED JUNE 30, 1999 AND JUNE 30, 1998
REVENUES
CAPITAL MANAGEMENT FEES. During the three months ended June 30, 1999,
capital management fee income, which includes performance fee income, was
$30,000 as compared to capital management fee income of $43,000 generated
during the three months ended June 30, 1998. The decrease in capital
management fee income derived from the four investment funds managed by the
Company during the three months ended June 30, 1999 was primarily a result
of lower returns generated by the funds' investment activities and a
decrease in money under management.
The Company also earns quarterly management fees that are based on a
percentage of the amount of money invested in the funds 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.
OPERATING EXPENSES
Total operating expenses increased to $1,914,000 during the three months ended
June 30, 1999 from $1,566,000 during the three months ended June 30, 1998
primarily due to expenses relating to the Company's move to larger office
facilities (including an increase in the Company's monthly lease payments), an
increase in the Company's business development activities, an increase in the
Company's head count and higher wages, and expenses relating to the expansion of
CombiMatrix's research and development efforts.
RESEARCH AND DEVELOPMENT EXPENSES. The Company incurred research and
development expenses of $570,000 for the three months ended June 30, 1999,
compared to expenses of $406,000 during the three months ended June 30,
1998. Such expenses for the three months ended June 30, 1999 are comprised
of expenses incurred by CombiMatrix of $527,000, expenses incurred by
MerkWerks of $31,000, and expenses incurred by Soundview Technologies of
$12,000. Research and development expense for the three months ended June
30, 1998 are comprised of expenses incurred by CombiMatrix of $312,000,
expenses incurred by MerkWerks of $40,000, and expenses incurred by
Soundview Technologies of $54,000. During the three months ended June 30,
1999, CombiMatrix's expenses increased due to an increase in the number of
CombiMatrix personnel as it expanded its research and development efforts.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. For the three months ended
June 30, 1999, marketing, general and administrative expenses increased to
$945,000 as compared to $785,000 for the three months ended June 30, 1998.
During the three months ended June 30, 1999, the Company's expenses
increased due to general expansion of the Company, including an increase in
office expenses relating to the Company's move to larger office facilities,
an increase in business development expenses as the Company explores new
business opportunities, and an increase in salaries and fringe benefits
primarily due to an increase in the number of Company personnel as well
13
<PAGE>
as higher wages and payroll expenses. Soundview Technologies' marketing,
general and administrative expenses were $19,000 in the three months ended
June 30, 1999 and $79,000 for the three months ended June 30, 1998.
AMORTIZATION OF PATENTS AND GOODWILL. The Company reported amortization
expenses relating to patents and goodwill of $399,000 during the three
months ended June 30, 1999 as compared to $375,000 during the three
months ended June 30, 1998. As a result of the Company's purchase of
additional equity interests in Soundview Technologies in July 1997 and
January 1998 and in MerkWerks in January 1998 and June 1999, the Company
is incurring amortization expenses each quarter for periods ranging from
three to five years relating to the intangible assets acquired.
Amortization expenses at or above the three months ended June 30, 1999
level is expected to continue for the foreseeable future.
OTHER INCOME (EXPENSE)
The Company reported other expense of $149,000 for the three months ended June
30, 1999 compared to other expense of $112,000 for the three months ended June
30, 1998.
INTEREST INCOME. During the three months ended June 30, 1999, interest
income was $73,000 as compared to interest income during the three months
ended June 30, 1998, of $70,000.
INTEREST EXPENSE. Interest expense in the three months ended June 30, 1999
was $42,000 as compared to $45,000 during the three months ended June 30,
1998. The expense incurred during the three months ended June 30, 1999 is
primarily attributable to CombiMatrix and relates to three-year 6%
unsecured subordinated promissory notes issued by CombiMatrix in a private
offering completed in March 1998. Warrants to purchase CombiMatrix common
stock were also issued in this private placement. For financial statement
purposes, the proceeds from the private placement were allocated between
the warrants and the notes resulting in a discount on the notes. Such
discount is amortized over the terms of the notes and treated as additional
interest expense. As a result, reported interest is higher than the cash
amount of interest that will actually be paid to the noteholders. Subject
to certain terms and conditions, these notes are due and payable in March
2001. Interest on these notes is payable each year on January 15 during the
term of each note.
EQUITY IN INCOME OF PARTNERSHIPS. The Company reported equity in income of
partnerships of $7,000 for the three months ended June 30, 1999, compared
to $28,000 for the three months ended June 30, 1998. The decrease was a
result of lower returns generated by the partnerships' investment
activities and a decrease in the amount the Company has invested in the
partnerships.
EQUITY IN LOSSES OF AFFILIATES. The Company reported equity in losses of
affiliates of $187,000 in the three months ended June 30, 1999, compared to
equity in losses of affiliates of $165,000 in the three months ended June
30, 1998. Losses during the three months ended June 30, 1999 are comprised
of a loss of $59,000 for the Company's investment in Whitewing Labs, a loss
of $58,000 for the Company's investment in Greenwich Information
Technologies, and a loss of $70,000 for the Company's investment in
Signature-mail.com, as determined by the equity method of accounting.
14
<PAGE>
Losses for the three months ended June 30, 1998 are comprised of a loss of
$23,000 for the Company's investment in Whitewing Labs, a loss of $40,000
for the Company's investment in Greenwich Information Technologies, and a
loss of $102,000 for the Company's investment in Signature-mail.com, as
determined by the equity method of accounting.
MINORITY INTERESTS
There were no minority interests in losses of consolidated subsidiaries
in the three months ended June 30, 1999 as compared to $70,000 in the three
months ended June 30, 1998. As of December 31, 1998, all minority interest
balances were depleted. In June 1999, Soundview Technologies received a
$33,000 capital contribution from its minority shareholders, resulting in a
minority interest of $33,000 in the Company's Consolidated Balance Sheets.
INFLATION
Inflation has not had a significant impact on the Company.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 1999, the Company had cash and cash equivalents of $5,720,000
and working capital of $5,625,000 on a consolidated basis. In May 1998, the
Company entered into a lease commitment for new office space to increase and
replace its existing office space. This lease commitment provides for minimum
monthly lease payments of $12,000 for a period of 60 months as compared to the
Company's previous monthly lease payment of approximately $3,000. The Company
moved into the new, larger office space in December 1998. The Company has no
other material commitments for capital expenditures at the present time.
Warrants issued by the Company in private placements completed in March
1998 and April 1998 contain call and redemption provisions should the closing
bid of the Company's Common Stock exceed $10.00, and $12.50, respectively for
twenty or more consecutive trading days. The exercise price for the Common
Stock underlying the warrants are $7.50, and $9.25 per share, respectively.
In the event the requirements to call the warrants are satisfied, the Company
may call such warrants and the Company expects that most, if not all, holders
to exercise such warrants in response. There can be no assurance that the
closing bid price of the Company's Common Stock will exceed all such
thresholds or that, if so, the Company will decide to call the warrants.
Subsequent to June 30, 1999, the Company exercised its redemption rights
with respect to the Common Stock Purchase Warrants purchased in a private
placement of securities completed in December 1997 and received $2.1 million
in such exercise. Also subsequent to June 30, 1999, CombiMatrix completed a
$4 million private equity financing of which the Company contributed $2.3
million.
The Company has no committed lines of credit or other committed funding.
However, the Company anticipates that existing working capital reserves will
provide sufficient funds for its operating expenses for at least the next twelve
months in the absence of making any major new investments. The Company intends
to seek additional financing to fund new or existing businesses. There can be no
assurance that the Company will not encounter unforeseen difficulties that may
deplete its capital resource more rapidly than anticipated. Any efforts to seek
additional funds could be made through equity, debt, or other external financing
and there can be no assurance that additional funding will be available on
favorable terms, if at all. Such financing transactions may be dilutive to
existing investors.
YEAR 2000 ISSUES
Many of the world's computer systems (including those in non-information
technology equipment and systems) currently record years in a two-digit format,
rather than four, to define the applicable year. Computer systems that recognize
a date using "00" as the year 1900 rather than the year 2000 may produce errors
or system failures. In addition, the fact that the Year 2000 is a non-standard
leap year may create difficulties for some systems. A few systems may also be
affected by certain dates in the month of
15
<PAGE>
September 1999. Because the activities of many businesses are affected by
dates or are date-related, the inability to use such date information
correctly could lead to business disruption in the U.S. and internationally
(the "Year 2000" Issue). The potential costs and uncertainties associated
with the Year 2000 Issue will depend on a number of factors, including
software, hardware and the nature of the industry in which a company
operates. Additionally, companies must coordinate with other entities with
which they electronically interact.
The following discussion contains forward-looking statements within the
meaning of the "safe harbor" provisions of the Private Securities Litigation
Reform Act of 1995, including the following: estimated timetables for
implementation and completion of the phases of the Company's Year 2000 plan;
projections of expenditures regarding the Year 2000 plan; statements regarding
the possible effects of the Year 2000 Issue on the Company's business and that
of third parties with whom the Company does business; and possible contingency
plans of the Company. The statements contained in this section are also "Year
2000 Readiness Disclosures" as provided for in the Year 2000 Information and
Readiness Disclosure Act.
The Company has reviewed its systems and programs to identify those
subject to the Year 2000 Issue, and has upgraded and/or modified its affected
internal systems to achieve compliance. In addition, the Company is working
with its major external suppliers to assess their compliance and remediation
efforts and the Company's exposure to them. The Company is in various stages
of testing and making software repairs and upgrades to those systems and
programs that it believes will be affected by the Year 2000 Issue. Because
the Year 2000 project is an ongoing company-wide endeavor, the state of the
Company's and its majority-owned subsidiaries', MerkWerks, CombiMatrix,
Soundview Technologies and Soundbreak.com ("Subsidiaries"), progress changes
daily. With the exception of the financial figures, which are provided as of
June 30, 1999, the information contained in this disclosure is made as of
August 12, 1999 which is the latest practical date for providing such
information. The Company is monitoring and assisting its minority-owned
affiliates, Signature-mail.com and Greenwich Information Technologies, in
addressing the Year 2000 Issue as it applies to their businesses. The
Company's other minority-owned affiliate, Whitewing Labs, is a publicly
traded company. Information pertaining to the Year 2000 Issue as it applies
to Whitewing Labs is available in its reports filed with the SEC.
Although the Company relies on computer technology to conduct business
and has the potential to be affected by the Year 2000 Issue, most of the
Company's internal systems are not affected. However, due to the
interdependent nature of computer systems, particularly with regard to the
Company's investment advisory services, the Company and its Subsidiaries may
be adversely impacted by the Year 2000 Issue depending on whether it, its
Subsidiaries, or other entities not affiliated with the Company address this
issue successfully.
The Company's Year 2000 compliance plan is comprised of four phases:
Assessment, Remediation, Testing and Implementation.
The Assessment phase includes preparing an inventory of systems that the
Company anticipates will be affected by the Year 2000 Issue as well as
creating a strategy to evaluate and address potential problems. The Company
and its affiliates have completed final Assessment of important internal
systems.
In the Remediation phase, software corrections, upgrades, software
patches, and bug fixes will be made to remedy identified Year 2000
deficiencies in software, hardware, operating systems, network devices and
phone systems. The Remediation phase also includes sending questionnaires
requesting Year 2000 compliance assurances to vendors of such systems. The
majority of the Company's internal systems have completed the Remediation
phase. However, the Company's Subsidiaries are in the process of the
Remediation phase. The Company expects that the Subsidiaries'
16
<PAGE>
Remediation of their important components will be completed by September 30,
1999. Certain systems that are insignificant to the Company's and its
Subsidiaries' operations may not be made Year 2000 compliant by December 31,
1999, but the Company does not anticipate that this would have a materially
adverse impact on the Company's or Subsidiaries' business, results of
operations or financial condition.
Testing will be conducted on both existing and new systems which may be
affected by the Year 2000 Issue as well as systems that have been fixed,
upgraded or otherwise altered in the Remediation phase during 1999.
The Company's investment advisory services is dependent upon a complex
worldwide network of information technology systems that contain date fields,
including data feeds to the Company's internal systems as well as stock
market links. The Company's ability to minimize the effects of the Year 2000
Issue is highly dependent upon the efforts of third parties. The failure of
organizations such as securities exchanges, securities clearing
organizations, banks, vendors, clients or governmental regulatory agencies to
resolve their own processing issues with respect to the Year 2000 Issue in a
timely manner could have a materially adverse effect on the Company's
business, results of operations, or financial condition, threatening the
Company's ability to manage client assets, communicate information to
clients, management of fund portfolios on a day-to-day basis, and comply with
federal securities laws as well as compromise record-keeping and other
compliance systems. The Securities Industry Association recently conducted
Beta tests and an industry-wide simulation that were run in "future time" and
employed test scripts to check functionality. These tests resulted in
problems completing a minimal amount of mock trades due to Year 2000 changes.
Other than third-party long distance telephone and data lines and public
utility suppliers of electrical power, the Company's business operations are
not heavily dependent on non-information technology ("non-IT") components,
systems or third-party vendors. The Company is conducting an assessment of
Company managed or leased non-IT components including building, mechanical,
air conditioning, electrical, security and conveyance systems for Year 2000
compliance. Most of these non-IT systems cannot easily be tested for Year
2000 compliance; however, the Company does not believe that the failure of
any of its non-IT systems, other than electrical or long distance data and
voice lines, would have a materially adverse effect upon its business,
results of operations or financial condition.
The Company is in the process of developing a contingency plan, which it
expects to complete by October 1999. However, alternatives to use of normal
systems, especially those systems relevant to the Company's investment
advisory services, or supplies of electricity or long distance voice and data
lines are limited. A broader failure of third-party systems, in particular,
externally managed data lines, communication systems, telephone or electrical
systems would materially and adversely affect the Company's ability to carry
on business operations in any regular fashion. Although the Company is
investigating alternative solutions, it is not clear that an adequate
contingency plan can be developed for such failures.
Based upon current information, the Company estimates that the total
cost of implementing its Year 2000 plan, including costs associated to the
redeployment of existing personnel who have and will spend significant
administrative time and effort in addressing the Year 2000 Issue, will not be
material. The Company has incurred, to date, less than $5,000 in direct Year
2000 costs. However, Year 2000 cost estimates may change as the Year 2000
approaches, during which time the Company's and its Subsidiaries' Year 2000
readiness efforts are expected to become more defined. Costs incurred
relating to making the Company's and its Subsidiaries' systems Year 2000
compliant are being expensed in the period in which they are incurred. Future
cost are not expected to exceed $10,000.
The Company's expectations about future costs and the timely completion of
its Year 2000 modifications are subject to uncertainties that could cause actual
results to differ materially from what has been discussed above. Factors that
could influence the amount of future costs and the effective timing of
remediation efforts include, the success of the Company in identifying computer
programs and non-
17
<PAGE>
information technology systems that are subject to the Year 2000 Issue, the
nature and amount of programming and testing required to upgrade or replace
each of the affected programs and systems, the nature and amount of testing,
the rate and magnitude of related labor and consulting costs, and the success
of the Company's external counterparties and suppliers in addressing the Year
2000 Issue.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company is not a party to derivative financial instruments at or
during the six and three month periods ended June 30, 1999. The Company's
financial instruments, other than instruments carried on the equity basis,
are its fixed notes payable of $1,241,000 which are discussed in Note 4 to
the June 30, 1999 consolidated financial statements.
PART II - OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
None
ITEM 2. CHANGES IN SECURITIES
SALES OF UNREGISTERED SECURITIES
In June 1999, the Company completed a series of related transactions, which
resulted in the acquisition by the Company of additional equity ownership in
MerkWerks in exchange for issuances of 60,107 shares of the Company's common
stock. A total of 15 transactions were completed. The Company's sales of
these shares of its common stock were exempt from registration, as private
placements, under Section 4(2) of the Securities Act of 1933, as amended, and
Regulation D promulgated thereunder.
WARRANT CALL
In June 1998, the Company exercised its redemption rights with respect to all
outstanding Common Stock Purchase Warrants purchased in a private placement
of securities completed in December 1997. All were exercised prior to the
redemption time (July 28, 1999). The shares issued were privately placed to
the holders of the Common Stock Purchase Warrants in accordance with
Section 4(2) of the Securities Act of 1933, as amended.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The annual meeting of shareholders was held on May 20, 1999. The business at
the meeting was the election of directors, and ratification of the selection
of PricewaterhouseCoopers LLP as the Company's independent accountants for
the year ending December 31, 1999. Each of the proposals was adopted.
The number of votes for and withheld for each director were as follows:
NAME FOR WITHHELD
- ---- --- --------
Paul R. Ryan 6,644,913 751,740
R. Bruce Stewart 6,633,863 762,790
Thomas B. Akin 6,640,863 755,790
Fred A. de Boom 6,289,513 1,017,140
Edward W. Frykman 6,289,513 1,017,140
18
<PAGE>
The number of votes for, against, and abstaining for the ratification of
PricewaterhouseCoopers LLP were as follows:
FOR AGAINST ABSTAINING
--- ------- ----------
7,291,103 51,050 53,700
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS
27 Financial Data Schedule
(b) REPORTS ON FORM 8-K
None.
SIGNATURE
Pursuant to the requirements 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.
ACACIA RESEARCH CORPORATION
By: /s/ R. BRUCE STEWART
-------------------------
R. Bruce Stewart
Chief Financial Officer (principal financial officer)
Date: August 12, 1999
19
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