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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-K
/X/ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999.
OR
/ / TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998.
OR
/ / TRANSACTION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO ________
COMMISSION FILE NUMBER 0-26068
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ACACIA RESEARCH CORPORATION
(Exact nameName of registrantRegistrant as specifiedSpecified in its charter)
CALIFORNIA 95-4405754
(State or other jurisdiction of (I.R.S. Employer
incorporation organization) Identification No.)
55 SOUTH LAKE AVENUE, PASADENA CA 91101
(Address of principal executive offices)Its Charter)
DELAWARE 95-4405754
(State or Other jurisdiction of (I.R.S. Employer
Incorporation Organization) Identification No.)
55 SOUTH LAKE AVENUE, PASADENA CA 91101
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (626) 396-8300
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
COMMON STOCK, NO$0.001 PAR VALUE
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Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark that disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. / /
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 30, 199917, 2000 was approximately $38,659,800.$635,358,000. (All officers
and directors of the registrant are considered affiliates.)
At March 30, 199917, 2000 the registrant had 10,310,81514,235,431 shares of Common Stock,
no$0.001 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant'sour definitive proxy statement for itsour Annual Meeting of
Shareholders to be filed with the Commission within 120 days after the close of
the registrant'sour fiscal year are incorporated by reference into Part III.
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FORM 10-K ANNUAL REPORT
FISCAL YEAR ENDED DECEMBER 31, 1999
ACACIA RESEARCH CORPORATION
ITEM PAGE
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PART I
1. Business.................................................... 2
2. Property.................................................... 19
3. Legal Proceedings........................................... 19
4. Submission of Matter to Vote of Security Holders............ 19
PART II
5. Market for Registrant's Common Equity and Related
Stockholder Matters......................................... 20
6. Selected Financial Data..................................... 22
7. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 23
7A. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 28
8. Financial Statements and Supplementary Information.......... 28
9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure.................................... 28
PART III
10. Directors and Executive Officers of the Registrant.......... 29
11. Executive Compensation...................................... 29
12. Security Ownership of Certain Beneficial Owners and
Management.................................................. 29
13. Certain Relationships and Related Transactions.............. 29
PART IV
14. Exhibits, Financial Statement Schedules and Reports on
Form 8-K.................................................... 29
ITEM 1. BUSINESS
GENERAL
Acacia Research Corporation, a CaliforniaDelaware corporation, (the "Company"),originally incorporated
in California in January 1993 and reincorporated in Delaware in December 1999.
As used in this Form 10-K, "company," "we," "us," "our," "Acacia" and
"Acacia Research" refer to Acacia Research Corporation and its subsidiary
companies.
GENERAL
Acacia Research internally develops and operates majority-owned subsidiaries
as well as acquires strategic positions in other entities. Through our
subsidiaries, we engage in a variety of technology-related businesses:
OWNERSHIP % AS OF 3/15/00
COMPANY NAME DESCRIPTION OF BUSINESS ON AN AS CONVERTED BASIS
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Acacia Launchpad LLC................. An incubator that will provide seed 100.0%
capital, management support and an
environment for the rapid development
of start-up Internet companies.
CombiMatrix Corporation.............. A technology company currently 51.8%(1)
developing a proprietary biochip array
processor system that integrates
semiconductor technology with new
developments in biotechnology and
chemistry.
The EC Company....................... A provider of business-to-business 7.6%
Internet exchange transactions for
mid-market suppliers.
Greenwich Information Technologies
LLC................................ A marketing and licensing agent for 33.3%
several patents relating to
video-on-demand and audio-on-demand
technology.
Mediaconnex Communications, Inc...... An on-line business-to-business company 31%
focused on the $90 billion advertising
market.
MerkWerks Corporation................ A technology company currently 99.9%
developing a utility software product
for use with CD-Recordable computer
drives.
Signature-mail.com llc............... A provider of on-demand software that 25%
allows users to personalize their
e-mail and computer documents with
handwritten signatures, greetings and
drawings.
Soundbreak.com Incorporated.......... A virtual music company that operates a 66.9%
dynamic website that fuses the live
entertainment value of radio with the
power of the Internet.
2
OWNERSHIP % AS OF 3/15/00
COMPANY NAME DESCRIPTION OF BUSINESS ON AN AS CONVERTED BASIS
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Soundview Technologies Inc........... A technology company which owns 66.7%
intellectual property related to the
telecommunications field, including
audio and video blanking systems, also
known as "V-chip".
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(1) We entered into a shareholder agreement with the Vice President of Research
and Development at CombiMatrix which provides for the collective voting of
shares owned by us and this individual for the election of certain directors
to CombiMatrix's Board of Directors as designated by the individual and us,
and certain restrictions on the sale or transfer of the individual's shares
of common stock in CombiMatrix.
We provide our subsidiary companies numerous operational and management
services, especially in early stages of their development. Our corporate staff
provides hands-on assistance in the areas of marketing, strategic planning,
business development, technology, accounting and finance, human resources,
recruiting and legal. We also support our subsidiaries by providing, locating
and structuring financing.
Our centralized infrastructure of experienced professionals allows the
management of our subsidiary companies to focus on developing their core
business at significant cost savings to them while we gain deeper knowledge and
experience that can benefit other companies in our portfolio. We believe,
however, that the entrepreneurial energy and creativity of the managers of our
subsidiaries is a diversified companyan essential component of their success and consequently we plan
to keep our subsidiaries as independent businesses with the opportunity to go
public. The entrepreneurs and their teams retain or are granted equity ownership
and incentives in their own companies. This strategy enables us to partner with
highly motivated entrepreneurs who have the opportunity to reap the rewards of
their efforts by taking their companies public or participating in the value
they create.
Our growth strategy is to continue to develop and acquire new businesses
that makes directhave significant market potential and high earnings growth potential.
Although investments in new companies can increase risk in the short term, we
believe that in the long term we can realize substantial gains even if not all
of our subsidiaries are successful.
In 1999, we increased our emphasis on Internet related companies, which
involved developing and provides management servicesacquiring new companies in this area. We also recruited
additional personnel at the parent level to emerging businesses.
The Company intendssupport our increased activity and
further our business goals. Many of our new managers are experienced executives
with an understanding of the need to create new strategies for the new medium of
the Internet.
We intend to continue expanding the company through the internal development
of itsour present operations and other business opportunities, as well as the
acquisition of additional business ventures or increased ownership positions in
itsour existing holdings.
Present operations currently consist of significant
ownership positions in seven enterprises.
ENTERPRISES
The Company participates in the formation of, and invests in, emerging or
early-stage 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
intellectual property rights and experienced management. The Company continually
seeks and evaluates investment opportunities that have the potential of earning
significant returns in either new business ventures or by increasing its equity
position in its existing holdings. The Company has in the past, and may again in
the future, raise capital specifically for the purpose of permitting it to make
an investment that the Company believes is attractive.
The Company has significant economic interests in seven enterprises that it
has formed and takes an active role in each company's growth and advancement.
The Company's current enterpriseSUBSIDIARIES
As our portfolio includes the following: (i)
CombiMatrix Corporation ("CombiMatrix"); (ii) Greenwich Information Technologies
LLC ("Greenwich Information Technologies"); (iii) MerkWerks Corporation
("MerkWerks"); (iv) Signature-mail.com llc ("Signature-mail.com"); (v) Soundview
Technologies Incorporated ("Soundview Technologies"); (vi) Whitewing Labs, Inc.
("Whitewing Labs"); and (vii) Acacia Capital Management (CombiMatrix, MerkWerks,
Greenwich Information Technologies, Signature-mail.com Soundview Technologies,
and Whitewing Labs are collectively referred to hereinafter as the
"Affiliates").
The Companyreflects, we generally investsinvest in start-up ventures with no
operating histories, unproven technologies andand/or products and, in some cases,
theventures in need for
identification and implementation of experienced management. Because of the uncertainties and
risks associated with such start-up ventures, our 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 faceswe face potential losses of business opportunities and
possible deterioration of the terms of available financings and equity
investments in start-up ventures. Furthermore, the Companywe may lack sufficient financial
resources to fully fund additional ventures in
3
which itwe could participate and which may be dependent upon external financing to
provide sufficient capital, depending on the number and scope of the ventures
that could be financed.
TheACACIA LAUNCHPAD LLC
Launchpad was formed in November 1999 under the laws of the State of
Delaware as a limited liability company. Launchpad provides seed capital and an
environment that enables ideas to grow and get to market quickly. Once a company
is past the incubation stage, we can provide additional funding through direct
investments and capital secured from other strategic venture capitalinvestors as well
as ongoing operational support.
Launchpad provides start-ups with seed money, expertise, and an
infrastructure in a formal, staged process. At each stage of the process, the
new business is marked byevaluated for viability and readiness for further investment.
The Launchpad process improves the likelihood of a high degree of risk, including
risks associated with identifying and developing new business opportunities,
difficulties selecting ventures with acceptable likelihoods ofstart-up's success, and
future profitability,efficiently invests Acacia Research funds in a cross-section of high potential
Internet companies with large market potential.
Launchpad enables Acacia Research to be involved at the high riskearliest stages 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 inherentdevelopment, while reducing risk and uncertainty.
1
capital requirements. This is
achieved by aggregating start-ups under the umbrella of Launchpad, whose
experienced team provides on-going management, expertise, and evaluation for the
entire start-up phase.
Launchpad utilizes a formal, staged process for developing companies.
Proposals for new companies are developed internally as well as brought in from
outside entrepreneurs. In both cases, the proposals are evaluated and developed
in a well-structured approach. The process quickly focuses the team towards
building a successful company, or determining that Launchpad's resources should
be concentrated elsewhere.
COMBIMATRIX CORPORATION
CombiMatrix was incorporated in October 1995 under the laws of the State of
California. CombiMatrix is a development stage company engaged in researchthe
development of a proprietary universal biochip with applications in the
genomics, proteomics and
development to commercialize its proprietary technology relating to combinatorial chemistry synthesis on a semiconductor chip.markets. CombiMatrix has
developed a combinatorial chemistry system that synthesizesunique method to synthesize DNA, peptides and analyzes
chemical arrayslibraries on
a semiconductor chip in a short amount of time. Thewith electrochemically generated reagents. CombiMatrix's
first generation of chips eachprototype chip contains 1,024 individually addressable
siteselectrodes the diameter of a human hair where chemicals suchare synthesized. The
CombiMatrix biochip system consists of a fluid delivery station where chemicals
are stored and dispensed, semiconductor chips where chemicals are synthesized
and a computer controller. Production of arrays using this technology is fully
automated and controlled entirely by software, allowing utilization of the
Internet as DNA, small molecules or peptides are synthesized.a link between proprietary array design software and automated
ArrayChip production capabilities.
CombiMatrix's technology potentially represents a significant advance over
existing biochip technologies and other platforms for combinatorial chemistry.
The first application of the technology that CombiMatrix is pursuing is in the
field of genomics, where CombiMatrix is developing a platform technology that allowsbiochip for chemical
synthesis directly at individually addressable sites on a semiconductor chip.
This is accomplished by using electrochemistry to produce chemical reagents at
selected chemical reactor sites on a chip. As a consequence, different chemicals
can be synthesized at different sites. The result is an arraythe analysis of
many different
chemicals on a semiconductor chip. These chemicals can be segments of DNA,
peptides or drug candidates. The chemicals in this array can be tested
simultaneously and in parallel. Such arrays have great utility in the area of
chemical discovery. The uses of these arrays that are of greatest interest to
CombiMatrix in the near term are genomic, proteomic and drug discovery
applications.
One of CombiMatrix's key inventions is its method which allows chemical
reagents that are generated IN SITU by electrochemistry at specific chemical
reactor locations to be confined to those specific locations solely by solutions
in which the chip is immersed. This method obviates the need to isolate each
chemical reactor from its neighbors using glass walls or other physical
confinement systems. CombiMatrix uses the term "virtual reactor" to describe its
technology for isolation of chemical reactors on its chips from one another
without physical walls. Huge numbers of virtual reactors can operate in close
proximity to each other on CombiMatrix's chips.DNA. CombiMatrix believes that this technology may be applied to the technologies it is developing could yield
significant advantagesfields of
genetic analysis and disease management. CombiMatrix also intends to develop the
genomic chip in the speed, cost, and effectivenessfield of drug discovery, over existing approacheswhere genomic information is used
to discover and to validate new targets for pharmaceutical intervention.
CombiMatrix is also developing the chip in the emerging field of proteomics
where analysis of DNA is correlated to the levels of proteins in patient
samples. Many researchers believe that automate combinatorial chemistry. CombiMatrix's
technologies for automating the combinatorial synthesisanalysis of compounds,proteomic information
will lead to the development of new drugs and better disease management.
Once CombiMatrix demonstrates the feasibility of its approach in each
market, it intends to enter into strategic alliances with major participants to
speed commercialization in multiple applications. However,
4
no assurances can be given that CombiMatrix, even if successful in developing
its technologies, would be significantly faster,able to successfully implement collaborative efforts
with the major participants.
CombiMatrix has been awarded three contracts from the Federal government
with respect to its biochip technology. In July 1999, CombiMatrix was awarded a
Phase I SBIR contract from the Department of larger scale, and yield a much
lower per compound cost than existing technologies that use optical markers or
labeled beads. Further,Energy to develop microarrays of
affinity probes for the array format that CombiMatrix is developing could
allow very small volumesanalysis of test solutions togene product, which may be used when screeningto expedite
the drug discovery process in the pharmaceutical industry. In July 1999,
CombiMatrix was awarded a Phase I SBIR Department of Defense contract to use
CombiMatrix's proprietary biochip technology to develop nanode array sensor
microchips to enable simultaneous detection of chemical and biological warfare
agents. CombiMatrix was awarded a Phase II SBIR Department of Defense contract
for active
compounds against receptor proteins and require only microlitersthe use of solutions
for comprehensive screening of large libraries of compounds, reducing assay
costs. In some cases, receptors may be availableits biochip technology to develop nanode array sensor microchips
in such small quantities that
microliters of solution may be all that is available.January 2000.
CombiMatrix has ten pending patent applications for its technologies. To
date, no patents have been issued in the United States or any major foreign
countries. The Company's investmentHowever, in June 1999, CombiMatrix is subject toreceived a Notice of Allowance
from 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,U.S. Patent and the impact of
applicable laws and regulations. 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. CombiMatrix has incurred consistent operating losses
since its inception and has been expanding its operations and the development of
its proprietary technologies which has resulted in significant increases in
expenses. To date, CombiMatrix has generated no revenues and is not expected to
generate significant, if any, revenuesTrademark Office for the near future.core patent on its novel
biochip technology.
In April 1996, we entered into a shareholder agreement with CombiMatrix's
ability to achieve profitability will be dependent upon the ability of
CombiMatrix to raise additional funds through the sale of equity in CombiMatrix
and there can be no assurance that CombiMatrix will be able to raise such funds.
2
CombiMatrix intends to vigorously protect its intellectual property rights.
There can be no assurance, however, that CombiMatrix's pending patent
applications 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 applications, if issued, 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 owns 4,179,000 shares, or 52.7%, of CombiMatrix common stock at
a cost of $522,000, both in cash and the Company's stock. In March 1998,
CombiMatrix completed a private placement of three year notes and warrants to
purchase CombiMatrix common stock, which raised gross proceeds of $1.45 million.
The Company participated in this financing, investing $50,000. The Company has
also loaned CombiMatrix an aggregate of $634,000 as of March 30, 1999.
R. Bruce Stewart, the Company's Chairman and Chief Financial Officer, is the
Chairman and Treasurer of CombiMatrix; and 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. Kathryn King-Van Wie, the
Company's Chief Operating Officer, serves as Corporate Secretary of CombiMatrix.
Donald D. Montgomery, Ph.D.,
Vice President of Research and Development of
CombiMatrix and Brooke P. Anderson, Ph.D., Director of Engineering of
CombiMatrix are also directors. The three independent directors are Mark G.
Edwards, Rigdon Currie, and Paul Low, Ph.D. 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 lines 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 Companyus and this individual for the election of certain directors to
CombiMatrix's Board of Directors as designated by the individual and the Company andus as well
as certain restrictions on the sale or transfer of the individual's shares of
common stock in CombiMatrix.
GREENWICH INFORMATION TECHNOLOGIES LLC
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
and audio-on-demand ("information-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 similar functionality with music or other audio
files. Information-on-demand is one of the primary applications of interactive
entertainment.
Greenwich Information Technologies does not currently own any patents.
Greenwich Information Technologies is the licensing agent with respect to three
issued U.S. patents and one application pending.pending, for which it has received a
Notice of Allowance. Foreign rights include patents issued in Japan, Mexico, and
the Republic of China as
well asand a "Notice of Intention to Grant a European Patent"patent from the European
3
Patent Office covering
Austria, Belgium, Denmark, France, Germany, Greece, Italy, Luxembourg, Monaco,
The Netherlands, Spain, Sweden, Switzerland, and the United Kingdom and an
application pending in South Korea. Those patents that have already been issued
were issued in the past six 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 isMEDIACONNEX COMMUNICATIONS, INC.
Mediaconnex was incorporated in December 1999 under 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, H. Lee Browne, is a party to an Assignment
Agreement with the other co-inventorlaws of the technologyState of
California as a business-to-business e-commerce company focused on the
$90 billion advertising market. Mediaconnex is creating a digital marketplace
for the sale of broadcast commercial inventory. Leveraging the speed,
flexibility and co-ownerconnectivity of the patents that grants Mr. BrowneInternet, Mediaconnex plans to work with
broadcasters and media buyers to improve 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. Mr. Browne holds a majority membership interest in Greenwich
Information Technologies and is also the chief executive officer of Soundview
Technologies as well as holder of a significant membership interest in
Signature-mail.com, two affiliates of the Company. 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 Technologiesmedia sales process. By partnering
with Mediaconnex, broadcasters will be able to profitably marketsell greater amounts of
commercial inventory, expand their base of media buyers, increase revenues and
license its rightsdecrease costs.
5
Mediaconnex plans to generate revenues through transactional commissions for
all media being purchased through 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 sold a portion, 3.31%, of its membership interest in Greenwich
Information Technologies to third parties in 1996 and subsequently purchased
this 3.31% membership interest in January 1998 in exchange for 102,034 shares of
the Company's common stock in a series of related transactions. The Company does
not hold a majority of the board, and 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.Mediaconnex marketplace.
MERKWERKS CORPORATION
MerkWerks was incorporated in September 1995 under the laws of the State of
California and is a software development company, whose first product will bedeveloping software for use
with CD-recordable disk drives for Macintosh platforms. The product will beis called CD
WonderWriter-TM- or WonderWriter-TM-. MerkWerks is in the developmental stage
and, to date, has not completed the development of any
productsits product or generated any
revenues. Norevenues and 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 thatproduct. During 1999, MerkWerks had to rewrite a market for such products will develop.
During 1998, MerkWerks experiencedlarge
portion of its code to remedy technological problems with the development
of WonderWriter, delayingthat arose in 1998 that
delayed the release of this product, and as a result the
Company reorganized MerkWerks' personnel and the feature setproduct. During this period, however, MerkWerks was reevaluated
before continuing with the ongoing development.
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
4
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 accessbetter define its product.
WonderWriter-TM- is a user friendly CD mastering environment providing
highly automated mastering options. The product is focused towards the novice CD
copying and mastering market where sophisticated CD layout options are not
needed, but where a simple to use interface is critical.
MerkWerks is currently exploring sales and use its proprietary
information to develop similar competing technologies. If the unauthorized use
of its proprietary rights developed to any substantial degree, MerkWerks'
businesslicensing opportunities with
hardware 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 $460,000 as of
March 30, 1999. 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 purchased 401,359 shares of MerkWerks common stock in
exchange for 171,950 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; and Kathryn
King-Van Wie, the Company's Chief Operating Officer, serves as a director and
Corporate Secretary of MerkWerks.manufacturers.
SIGNATURE-MAIL.COM LLC
Signature-mail.com was formed as a limited liability corporation under the
laws of the State of Delaware in October 1997. The Company1997 and we invested in
Signature-mail.com in April 1998. In February 1999, Signature-mail.com publicly
launched its on-demand software service, which allows users to personalize their
e-mail and computer documents with handwritten signatures, greetings, and
drawings. Version 1.0 of Signature-mail-TM- includes contributions of the
approximately 10,000 people who participated in beta testing.
Signature-mail.com's website is a "virtual manufacturing plant"-- open--open 24 hours a
day, 7 days a
5
week--producing customized software within seconds of receiving
customers' orders. Signature-mailSignature-mail.com is compatible with the latest PC e-mail
programs including Netscape Communicator/Messenger, Microsoft IE4/Outlook
Express, Outlook 98, AOL 4.0, and Eudora Pro 4.1. Version 1.0 stores up to 25
handwritten images that the user creates. Each image, as well as its size and
color, can be changed for each use with a simple click of the mouse. However,
becausesince its first software product has just been released, the market acceptance
of such a product is uncertain. In addition, the software industry is highly
competitive.
Thus,competitive, and consequently, there can be no assurance that Signature-mail.com
will obtain significant revenues or profitability.
Signature-mail.com's mission is to become the leading provider of software
services that personalize e-mail with proprietary mass customization
technologies. The companySignature-mail.com will sell through electronic and conventional
media and deliver its products directly to customers online. Signature-mail.com
has fiveseveral patent applications pending for unique features as well as methods
used for the automated mass customization of the production and delivery of
Signature-mail.Signature-mail.com. Signature-mail.com is also developing additional proprietary
technologies for other platforms and products. To date, no patents have yetbeen
issued and there can be no assurance that patents will issue,be issued, that their
validity will be upheld if challenged or that they will have sufficiently broad
scope to effectively limit competition for its software product.
SOUNDBREAK.COM INCORPORATED
Soundbreak.com was incorporated in May 1999 under the laws of the State of
California and has developed a dynamic music website that fuses the live
entertainment value of radio with Internet technology. The Company's investmentsite was launched on
February 15, 2000.
6
Soundbreak.com expects its music programming to attract an audience in Signature-mail.comthe
15-35 year old demographic group. Furthermore, Soundbreak.com believes that this
music will attract a high concentration of college students (18-24 year olds),
and thus, initial consumer marketing efforts will be aimed at that demographic
group. According to Jupiter Communications, there currently are 11.8 million
college students on the Internet, and that group is subjectexpected to grow to
13.0 million by 2002.
Soundbreak.com will provide streaming audio and video, engaging website
content, and community tools such as chat rooms, discussion boards and instant
messaging. Soundbreak.com's core feature is the music. Soundbreak.com's staff of
professional digital jockeys (DJs) provides live hosting of music 24 hours a
day. In addition, Soundbreak.com will provide 24-hour live technical support
through an instant messaging system to assist users experiencing problems
hearing the music on their computers. Cameras provide our users with streaming
video of our DJs and studio. Soundbreak.com's website, which was designed by
professional artists, provides users with an attractive visual experience.
Initial focus groups conducted by Soundbreak.com suggest that members of our
target market find the site attractive, engaging, and different from other
online music sites.
In addition to the risks
associatedsights and sounds, Soundbreak.com's website provides
users with title, track and album information on the most recently played songs,
information about our DJs and access to a database of music events throughout
the world. Soundbreak.com has community features typical of websites (e.g., chat
rooms, discussion boards and instant messaging), and also invites users to
submit music and artwork for consideration to be used on the site.
Soundbreak.com's music staff is committed to playing famous artists, new technologiesartists
and software, includinguser-submitted music in regular rotations. Soundbreak.com wants users to
play a part in developing the viabilitylook and feel of Signature-mail.com's technologies, unknown customer acceptance, difficulties in
obtaining financing, the ability to obtain intellectual property protection,
competition,Soundbreak.com.
Soundbreak.com anticipates relying on three sources of revenue. First,
Soundbreak.com will offer "in-stream" advertisements (i.e., audio, radio-style
ads), website advertising and the impactsponsorship of applicable laws and regulations. In addition,
Signature-mail.com intends to pursue collaborations with Internet or software
companies, which may include the licensingspecial music events. Second,
Soundbreak.com will offer two types of its technologies. No assurances
can be given that Signature-mail.come-commerce. Users will be able to
successfully implement
collaborative efforts with Internet or software companies, norpurchase a wide variety of music and CD's directly from our playlists.
Soundbreak.com is also creating a private label Soundbreak-branded shopping
environment specifically appealing to our audience. Soundbreak.com will receive
a portion of the profit on all sales from both music and merchandise that
itoriginate at our site. Third, Soundbreak.com is sending targeted weekly e-mail
newsletters to registered users who have signed up for them. Sponsorship and
advertising can be placed in these newsletters through both text and audio
links.
Soundbreak.com's growth will have
sufficient capital or be able to identifycome from marketing the current site and assemble a qualified and effective
management team to pursue such efforts. Signature-mail.com has incurred
operating losses since its inception. To date, Signature-mail.com has generated
no revenues. Signature-mail.com's ability to achieve profitability will be
dependent, in part, uponthen
replicating the abilitySoundbreak.com model for fans of Signature-mail.com to raise additional
funds through the sale of equity in Signature-mail.com as well as engage
additional personnel to implement itsdifferent music genres.
Soundbreak.com's marketing plans for the current site include a combination of
grass roots marketing, traditional off-line marketing and there can be no
assurance that Signature-mail.com will be ableonline marketing.
Soundbreak.com has already begun a grass roots marketing effort. Soundbreak.com
has over 40 field and campus reps in the top 24 domestic markets and is planning
to raise such funds or attract
qualified personnel.
Signature-mail.com intendsexpand to vigorously protect its intellectual property
rights. There can be no assurance, however, that Signature-mail.com's pending
patent applications will issue or that a third party will not violate, or
attempt to invalidate, Signature-mail.com's intellectual property rights.
Signature-mail.com 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
Signature-mail.com's technology will not be reverse-engineered by third parties
without violating Signature-mail.com's proprietary rights. Signature-mail.com's
existing protections also may not preclude competitors from developing products
with features and prices similar to or better than those of Signature-mail.com.
The Company acquired a 25% membership interest in Signature-mail.com
(formerly known as Internet Software LLC) in April 1998 for a purchase price of
$2.5 million. The Company has certain rights as a non-controlling investor
including rights to approve certain material transactions and to participate on
a pro rata basis in any non-strategic private equity offering completed by
Signature-mail.com.
Although a senior member of Signature-mail.com,include the Company does not control
a majority of the board of three senior members. Similarly, the Company has no
control over the day to day operations of Signature-mail.com, which are
currently directed by the chief executive officer, H. Lee Browne, an individual
who is also the chief executive officer of Soundview Technologies and Greenwich
Information Technologies, two affiliates of the Company. The Company accounts
for its interest in Signature-mail.com on the equity method.
6
top 30 international markets.
SOUNDVIEW TECHNOLOGIES INC.
Soundview Technologies was formedincorporated in March 1996 as aunder the laws of the
state of Delaware corporation and has acquired and is developing 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 a method for implementing the
V-chip system in parallel with the existing closed-captioning circuits already
in place in televisions. The FCC adopted this method as the technical standard
for new televisions sold in the United States that will be required to have
V-chip technology. The FCC regulations require that half of all new television
models with screens 13 inches or larger incorporate the V-chip by July 1, 1999.
By January 1, 2000, all such televisions must have the V-chip.
7
Soundview Technologies' patent was issued in November 1985 and expires in
July 2003. In April 1998, the U.S. Patent and Trademark Office issued a
reexamination certificate confirming the approval of all existing and newly
added claims of its issued patent. The reexamination was requested by Soundview
Technologies in August 1996 to confirm the strength of its patent in light of
other existing patents. Over 30 new prior art references were introduced and
examined during the process, which took more than eighteen months for the Patent
Office to complete. As a result, patentability of all original claims as issued
was confirmed and 17 new claims more specific to the V-chip implementation were
granted. 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 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. Soundview Technologies has also developed a V-chip set-top
retrofit device, the V Chip Converter-TM-, for use with the approximately
250 million television sets in the United States that will beare "deaf" to V-chip
signals; however, Soundview Technologies has no plans to market this device in
the foreseeable future.
On July 17, 1998, PG Distribution, Inc. of Omaha, Nebraska filed a complaint
in the United States District Court, District of Delaware, against Soundview
Technologies Incorporated, seeking a declaratory judgement that United States
Patent No. 4,554,584 (relating to a video and audio blanking system) is invalid.
On October 5, 1998, PG Distribution, Inc. and Parental Guide Company, LLC filed
a notice of dismissal of the litigation against Soundview Technologies and
agreed to pay royalties to Soundview Technologies under a non-exclusive,
non-transferable license to make, use and sell, or lease products under the
claims of Soundview Technologies' patent.
The Company owns 4,179,000 shares, or 66.7%, of Soundview Technologies
common stock at a cost of $7.3 million, both in cash and in the Company's stock.
The Company has also loaned Soundview Technologies an aggregate of $464,000 as
of March 30, 1999. 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. H. Lee Browne, chief executive officer of
Soundview Technologies, David H. Schmidt, Vice President and Director of
Technology of Soundview Technologies and Carl Elam, the inventor of Soundview
Technologies issued U.S. patent, are also directors. Carl Elam is currently a
consultant to Soundview Technologies and has contributed to Soundview
Technologies' new patent applications in the area of television transmission and
receiving. Prior to this, Mr. Elam, a Captain in the United States Air Force,
worked as a radar counter measures engineer at Wright-Patterson Air Force base,
where he was awarded patents for several inventions in communications
technology. These patents were classified and for military use only. The chief
executive officer of
7
Soundview Technologies, H. Lee Browne, also has significant membership interests
in Greenwich Information Technologies and Signature-mail.com, two other
affiliates of the Company.
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 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.
WHITEWING LABS
Whitewing Labs was incorporated on July 29, 1993 under the laws of the State
of California. Whitewing Labs develops, or seeks to acquire through license,
nutritional supplements that can be directly marketed to the over age forty
market in the United States. Products are formulated with natural ingredients,
and contain no preservatives, synthetics, artificial colors, lactose, starch or
sugar. Whitewing Labs currently markets 29 different products that are intended
to offer alternatives to conventional treatments for symptoms associated with
the aging process.
Whitewing Labs conducted its initial public offering in February 1996. The
Company owns 692,209 shares of the common stock of Whitewing Labs, representing
23.5% of the outstanding shares and has voting control over 789,709 shares of
common stock or 27.0% of the outstanding shares as of December 31, 1998.
Whitewing Labs stock and warrants trade on the Nasdaq SmallCap Market under the
symbols "WWLI" and "WWLI-W," respectively. The closing price per share of
Whitewing Labs' common stock was $ 1/2 as of March 30, 1999.
R. Bruce Stewart, the Company's Chairman and Chief Financial Officer, is
Chairman of the Board of Directors of Whitewing Labs and Paul R. Ryan, the
Company's President and Chief Executive Officer, is also a member of the Board
of Directors of Whitewing Labs.
Since Whitewing Labs is a publicly traded company, information about
Whitewing Labs is publicly available. Any person seeking such information should
review its reports filed under the Securities Exchange Act of 1934, which are
available on the Securities and Exchange Commission's ("SEC") website at
http://www.sec.gov.
ACACIA CAPITAL MANAGEMENT
The Company, doing business asOn December 31, 1999, we closed our Acacia Capital Management is a registered
investment advisor anddivision.
Acacia Capital Management was a general partner ofin 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 theand was an investment advisor to two offshore private investment
corporations. Client funds are invested primarily in large-cap U.S. equities. During the past
two years, the activities of Acacia Capital Management has been responsible for
100% of the Company's operating revenues.
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. At December 31, 1998, assets under management in the four funds totalled
approximately $22 million.
8
Capital management 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.
The level of management and performance fee revenue received by the Company
will depend upon the amount of money invested in the funds managed by the
Company, which in turn will depend to a large extent upon the performance of the
funds managed by the Company. There can be no assurance that the Company will
prove successful in raising any additional capital for the investment funds
managed by the Company.
DOMESTIC PRIVATE INVESTMENT PARTNERSHIPS
Each domestic 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. However, business decisions made on
behalf of the Company as a general partner are made by the Company's executive
management or board of directors. 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. The Company pays no management or performance fees on its own
direct investments as a general partner, therefore Mr. Ryan receives no
management or performance fees on the Company's investments in the partnerships.
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 interests in its two private
investment funds was approximately $1.8 million in the aggregate at December 31,
1998. The Company's board of directors decides the appropriate allocations of
the Company's available cash in the private investment funds and may, in its
discretion, make contributions to or withdrawals from the funds.
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 risksCosts 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 willexiting this business were not result
in material losses for the partnership. On the other hand, if
9
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, with advance notice
to the general partners, withdraw all or part of its capital account as of any
June 30 or December 31 following the first anniversary of the partner's
admission to the partnership. The general partners may waive these withdrawal
restrictions for any partner.
OFFSHORE INVESTMENT FUNDS
The Company is the investment advisor to two offshore private investment
corporations, both of which are Cayman Islands exempted companies. Bank of
Bermuda, with offices in Bermuda and New York, is the administrator, registrar,
and transfer agent for these funds.
The Company will be allocated on an annual basis a performance fee based on
a percentage of the annual net profits attributable to the investment of each
shareholder of the two private investment corporations. The Company will also be
entitled to annual management fees payable by the funds based on a percentage of
the value of each fund's capital account. Subsequent to the distribution of
advisory fees that may be payable to consultants or brokers, the Company will
receive three-fourths, and Mr. Ryan will receive one-fourth, of both the
performance and management fees. The Company will not be reimbursed by the
offshore funds for any of its expenses incurred in managing these funds'
investments. The assets of these offshore funds are exposed to many of the same
risks inherent in the Company's domestic private investment partnerships.material.
COMPETITION
The Company expectsWe expect 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 greater than our own.
Our portfolio of Internet businesses compete in the electronic technology
and Internet service arenas. The market for Internet products and services is
rapidly evolving and highly competitive. Although we believe that the diverse
segments of the Company.
The Company,Internet market will provide opportunities for more than one
supplier of products and services similar to ours, it is possible that a single
supplier may dominate one or more market segments. We believe the principal
competitive factors in itsthis market are name recognition, performance, ease of
its investment advisoryuse, variety of value-added services, encounters competition from all other sourcesfunctionality and features, and quality of
investment management and
advice, including public mutual funds, other private investment funds, money
managers, commercial banks, insurancesupport. Competitors include a wide variety of companies and stock brokerages, manyorganizations,
including Internet software, content, service and technology companies,
telecommunication companies, cable companies and equipment/technology suppliers.
Some of which have substantially greater capital and other resources, and offer a wider
range of financial services.
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
10
material facts to,our existing competitors, as well as a dutynumber of potential new
competitors, have greater financial, technical and marketing resources than our
own.
We may also be affected by competition from licensees of our products and
technology. There can be no assurance that our competitors will not develop
Internet products and services that are superior to avoid misleading, each investment
limited partnership for which the Company acts as an investment advisor. In
addition, the Company isthose of our own or that
achieve greater market acceptance than our offerings. Moreover, a number of our
current advertising customers, licensees and partners have also required to provide, on an annual basis, a free
brochure that provides additional information about the Company, its investment
advisoryestablished
relationships with certain of our competitors, and future advertising customers,
licensees and partners may establish similar relationships. We may also compete
with online services and fees charged,other website operators as well as traditional off-line
media such as print and must promptly disclose anytelevision for a share of advertisers' total advertising
budgets. There can be no assurance that we will be able to compete successfully
against our current or future competitors or that competition will not have a
material disciplinary actions taken by federal or California regulatory authorities
against the Company or anyadverse effect on our business, results 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,operations and the use of certain charts, graphs and
formulas.financial
condition.
8
REGULATION
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 believesWe believe that itsour anticipated principal activities will
not subject the Companyus to regulation under the Investment Company Act. However, the
Investment Company Act may also be deemed to be applicable to a company which
does not intend to be characterized as an investment company but which,
nevertheless, engages in activities which may be deemed to be within the
definitional scope of certain provisions of the Investment Company Act. In such
an event, the Companywe may become subject to certain restrictions relating to the Company'sour
activities, including restrictions on the nature of itsour 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,record-keeping,
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'sour activities from time to time with a view toward
reducing the likelihood that the
Companywe could be classified as an "investment company."
RESEARCH AND DEVELOPMENT
Although we are not involved in research and development at this time, our
consolidated subsidiaries are so involved. CombiMatrix incurred research and
development related expenses of $1,667,000, $1,513,000 and $621,000 in 1999,
1998 and 1997, respectively.
Our affiliates develop and market a variety of technology and Internet
related products and services. These industries are characterized by rapid
technological development. We believe that our future success will depend in
large part on our subsidiaries' ability to continue to enhance their existing
products and services and to develop other products and services, which
complement existing ones. In order to respond to rapidly changing competitive
and technological conditions, we expect our subsidiaries to continue to incur
significant research and development expenses during the initial development
phase of new products and services as well as on an on-going basis.
EMPLOYEES
The CompanyWe and itsour consolidated subsidiaries have a total of twenty-eight93 full-time employees. The CompanyWe and its Affiliatesour
subsidiaries also rely on a number of key consultants and advisors. The Company believesWe believe
that itsour future success will depend in large part on itsour ability to retain itsour
key personnel and on itsour ability to attract, retain, train, and motivate
additional highly skilled and dedicated employees. Neither the Companywe nor any of the Affiliatesour
subsidiaries are a party to any collective bargaining agreement. The Company hasWe have never
experienced a work stoppage and believesbelieve that itsour relations with itsour employees
are excellent. From time to time, the Companywe 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 1998,
CombiMatrix, MerkWerks, and Soundview Technologies incurred research and
development related expenses of $1,513,000, $228,000, and $139,000,
respectively.
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'sour 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-
119
looking statements. Such statements address future events and conditions
concerning product development, 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
Companywe and its affiliatesour
subsidiaries operate, and other circumstances affecting anticipated revenues and
costs. The CompanyWe expressly disclaimsdisclaim 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'sour 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.
FACTORS THAT MAY AFFECT FUTURE RESULTS
BECAUSE OUR BUSINESS OPERATIONS ARE SUBJECT TO MANY INHERENT AND UNCONTROLLABLE
RISKS, WE CANNOT ASSURE OUR SUCCESS.
We have significant economic interests in nine companies and take an active
role in each enterprise's growth and advancement. Our business operations are
therefore subject to numerous risks and all of the challenges, expenses and
uncertainties inherent in the establishment of new business enterprises. Many of
these risks and challenges are subject to outside influences over which we have
no control, including technological advances, uncertain market acceptance,
competition, increases in operating costs including costs of supplies,
personnel, equipment, the availability and cost of capital, changes in general
economic conditions and governmental regulation imposed under federal, state or
local laws. We cannot assure that our business ventures will be able to market
any product on a commercial scale, that these business ventures will ever
achieve or maintain profitable operations or that they, or we, will be able to
remain in business.
INVESTING IN EMERGING COMPANIES CARRIES A HIGH DEGREE OF RISK.
Becoming involved in emerging companies is marked by a high degree of risk,
including difficulties in selecting ventures with viable business plans and
acceptable likelihoods of success and future profitability. There is a high
probability of loss associated with investments in start-ups. We must also
dedicate significant amounts of financial resources, management attention and
personnel to identify and develop each new business opportunity, without any
assurance that these expenditures will prove fruitful.
We generally invest in start-up ventures with no operating histories,
unproven technologies and products and, in some cases, start-up ventures needing
identification and implementation of experienced management. Because of the
uncertainties and risks associated with such start-up ventures, substantial
losses associated with failed ventures should be expected. In addition, markets
for venture capital in the United States are increasingly competitive. As a
result, business opportunities may be lost and the terms of available financing
and equity investments in start-ups may deteriorate. Also, we may be unable to
participate in additional ventures because we lack the financial resources to
provide them with full funding. We, as well as our subsidiaries, may need to
depend on external financing to provide sufficient capital.
OUR OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY IN THE FUTURE.
Our operating results may vary significantly from quarter to quarter due to
a variety of factors, including:
- the operating results of our current and future subsidiaries;
10
- the nature and timing of our investments in new businesses;
- our decisions to acquire or divest interests in our current and future
subsidiaries may create changes in losses or income and amortization of
goodwill;
- changes in our methods of accounting for our current and future
subsidiaries may cause us to recognize gains or losses under applicable
accounting rules;
- the timing of the sales of securities of our current and future
subsidiaries; and
- the cost of future acquisitions could increase from intense competition
from other potential acquirers of technology-related companies or ideas.
We also expect to incur significant start-up expenses in pursuing and
developing new business ventures. To date, we have lacked a consistent source of
recurring revenue.
OUR FUTURE PLANS DEPEND GREATLY ON INCREASED USE OF THE INTERNET BY BUSINESSES
AND INDIVIDUALS AND THUS OUR BUSINESS MAY SUFFER IF USE OF THE INTERNET FAILS TO
GROW IN THE FUTURE.
Our future plans depend greatly on increased use of the Internet for
providing services and conducting business. Commercial use of the Internet is
currently at an early stage of development and the future of the Internet is not
clear. Because a significant amount of our resources will be allocated to our
existing and future Internet companies, our business may suffer if commercial
use of the Internet fails to grow in the future.
IF THE U.S. OR OTHER GOVERNMENTS REGULATE THE INTERNET MORE CLOSELY, OUR
BUSINESS MAY BE HARMED.
Because of the Internet's popularity and increasing use, new laws and
regulations may be adopted. These laws and regulations may cover issues such as
privacy, pricing, content and taxation of Internet commerce. If the U.S. or
other governments enact any additional laws or regulations it may impede the
growth of the Internet and our Internet-related businesses and we could face
additional financial burdens.
OUR SUBSIDIARIES' OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY.
CombiMatrix, The GC Company, Greenwich Information Technologies, Launchpad,
Mediaconnex, MerkWerks, Signature-mail.com, Soundbreak.com, and Soundview
Technologies have generated no meaningful revenues to date. We anticipate that
these subsidiaries' operating results are likely to vary significantly as a
result of a number of factors, including:
- the timing of new product introductions by each of these subsidiaries;
- the stage of development of the business of each subsidiary;
- the feasibility of the companies' technologies and techniques;
- the novelty of the technology owned by these subsidiaries;
- the level of product acceptance;
- the strength of each of these subsidiaries' intellectual property rights,
each subsidiary's ability to exploit and commercialize its technology;
- the volume and timing of orders received and product line maturation;
- the impact of price competition;
- each subsidiary's ability to access distribution channels. Many of these
factors are beyond the subsidiaries' control.
11
We cannot provide any assurance that any subsidiary will experience growth
in the future or be profitable on an operating basis in any future period.
THE UNCERTAINTY OF EMERGING COMPANIES AND THE POTENTIAL LACK OF MARKET
ACCEPTANCE OF THEIR PRODUCTS DECREASES THE POSSIBILITY OF OUR SUCCESS.
COMBIMATRIX. CombiMatrix was incorporated in October 1995 and began
operations in April 1996. CombiMatrix is developing a proprietary method to
synthesize DNA, peptides and chemical libraries on an active semiconductor chip
with electrochemically generated reagents. Although CombiMatrix has been awarded
three federal contracts, CombiMatrix is a developmental stage company without
any significant current revenues. Its current activities relate almost
exclusively to research and development.
Our investment in CombiMatrix is subject to the risks associated with new
technologies, including the viability of its technologies, unknown market
acceptance, difficulties in obtaining financing, the strength of its
intellectual property protection, increasing competition, and the ability to
convert technology into revenues. In addition, because the technologies critical
to the success of this industry are in their infancy, we cannot assure that
CombiMatrix will be able to successfully implement its technologies. If its
technologies are successful, CombiMatrix intends to pursue collaborations with
pharmaceutical companies, which may include screening drug companies' or
CombiMatrix's libraries and possibly licensing internally developed chemical
compounds. We cannot assure that CombiMatrix, even if successful in developing
its technologies, would be able to successfully implement collaborative efforts
with pharmaceutical companies.
CombiMatrix intends to vigorously protect its intellectual property rights.
We cannot assure, however, that CombiMatrix's pending patent applications 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 patents,
if issued, would materially adversely affect CombiMatrix's business, operating
results, financial condition and prospects.
Other companies may be able to reverse-engineer CombiMatrix's technology
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.
GREENWICH INFORMATION TECHNOLOGIES. Greenwich Information Technologies was
formed in June 1996 and is the exclusive marketing and licensing agent for a
number of domestic and international patents and other intellectual property
pertaining to information-on-demand systems. To date, Greenwich Information
Technologies has yet to license any of its patents or other intellectual
properties and has had a minimal level of operations. Although Greenwich
Information Technologies believes that it has marketing and licensing rights to
enforceable patents, we cannot assure that other companies will not challenge
the underlying patents to these rights or develop competing technologies that
infringe upon these patents. Furthermore, whether or not competing products
emerge, it is uncertain if and to what extent Greenwich Information Technologies
will be able to profitably market and license its rights to the information on-
demand technology.
SIGNATURE-MAIL.COM. Signature-mail.com was formed in October 1997 and has
developed software services for use on the Internet that personalize e-mail with
proprietary mass customization technologies. To date, Signature-mail.com has not
generated any revenues. We cannot provide assurance that Signature-mail.com will
ever be able to successfully market its products.
Signature-mail.com has five patent applications pending for unique features
as well as methods used for the automated mass customization of the production
and delivery of e-mail. To date, no patents have yet been issued and we cannot
provide assurance that patents will be issued, that their validity will be
upheld if challenged or that they will have sufficiently broad scope to
effectively limit competition for its software product.
12
Our investment in Signature-mail.com is subject to the risks associated with
new technologies and software, including the viability of Signature-mail.com's
technologies, difficulties in obtaining financing, the ability to obtain
intellectual property protection, competition, and rapid technological change.
SOUNDVIEW TECHNOLOGIES. Soundview Technologies was formed in March 1996 to
commercialize patent rights of a method of video and audio blanking technology,
also known as V-chip technology, that screens objectionable television
programming and blocks it from the viewer. Although Soundview Technologies
believes that it owns an enforceable patent on this technology, we cannot assure
that other companies will not challenge Soundview Technologies' patent rights or
develop competing technologies that do not infringe Soundview Technologies'
patent. Additionally, whether or not competing products emerge, it is uncertain
if and to what extent Soundview Technologies will be able to profitably exploit
its technology. The issued patent that Soundview Technologies owns expires in
July 2003.
MERKWERKS. MerkWerks was formed in September 1995 as a software development
company, and its first product is expected to be software for use with
CD-Recordable disk drives for Macintosh platforms. MerkWerks is in the
developmental stage and, to date, has not completed the development of any
products or generated any revenues. We cannot provide assurance that MerkWerks
will ever be able to successfully develop or market its products. Merkwerks'
product is substantially behind schedule and Merkwerks has scaled back its
operations to conserve cash while continuing product development.
The success of MerkWerks' software depends on whether it is accepted by
original equipment manufacturers (OEMs) that produce CD-Recordable disk drives.
We cannot assure that MerkWerks' software, if and when completed, will gain the
acceptance of OEMs or ever be incorporated into CD-Recordable disk drives.
SOUNDBREAK.COM. Soundbreak.com was formed in May 1999 and launched its
lifestyle Internet site in February 2000 that combines a 24-hour worldwide
web-cast highlighting new music hosted by on-air DJs with rich graphics, a music
merchandise store, a strong community area that encourages participation and
feedback, and other features. Soundbreak.com is in the developmental stage and
the market acceptance for Soundbreak.com is uncertain. In addition, the industry
it is entering is a rapidly changing and highly competitive environment. We
cannot provide assurance that Soundbreak.com will generate revenues or achieve
profitability.
Soundbreak.com's success will be dependent on its ability to develop or
obtain sufficiently compelling content to attract and retain an audience, its
ability to form partnerships for music and merchandise fulfillment and
distribution, and its ability to successfully market and establish its presence
on the Internet. In addition, Soundbreak.com will depend upon intellectual
property rights and licensed material and any intellectual property claims
against Soundbreak.com can be costly and could result in the loss of significant
rights.
LAUNCHPAD. Launchpad was formed in November 1999 to incubate and accelerate
the development of new Internet companies. Launchpad will provide seed capital
and an environment that enables ideas to grow and get to market quickly. Using
our marketing, finance, strategic planning, recruiting, and legal resources
together with Launchpad's development teams, entrepreneurs can focus solely on
developing great products and services. Once a company is past the incubation
stage, we can provide additional funding through direct investments and capital
secured from other strategic venture investors. Launchpad's business model is
new and unproven and may not be able to develop successful Internet business.
MEDIACONNEX. Mediaconnex was formed in December 1999, and is developing
software that performs inventory and sales management functions for television
and cable broadcasters. The software can then broadcast the data over the
Internet to provide business to business Internet services between the
broadcasters and the buying community where sales, research and information
requests will occur. To date,
13
Mediaconnex has not generated any revenues. We cannot provide assurance that
Mediaconnex will ever be able to successfully market its services.
WE CANNOT PROVIDE ASSURANCE THAT OUR SUBSIDIARIES WILL BE ABLE TO OBTAIN
NECESSARY ADDITIONAL FINANCINGS.
To date, our subsidiaries have primarily relied upon selling equity
securities, including sales to and loans from us, to generate the funds they
needed to finance implementing their plans of operations. Our subsidiaries may
be required to obtain additional financing through bank borrowings, debt or
equity financings or otherwise, which would require us to make additional
investments or face a dilution of our equity interest.
We cannot assure that our subsidiaries will continue to be able to obtain
financing or obtain financing on favorable terms.
OUR SUCCESS DEPENDS ON OUR ABILITY TO RESPOND TO THE RAPID CHANGES IN TECHNOLOGY
AND DISTRIBUTION CHANNELS.
The markets for our subsidiaries' products and services are characterized
by:
- rapidly changing technology;
- evolving industry standards;
- frequent new product and service introductions;
- shifting distribution channels; and
- changing customer demands.
Our success will depend on our subsidiaries' ability to adapt to this
rapidly evolving marketplace. Our subsidiaries may be unable to adequately adapt
products and services or acquire new products and services that can compete
successfully. In addition, our subsidiaries may be unable to establish and
maintain effective distribution channels.
BECAUSE WE AND OUR SUBSIDIARIES ARE SUBJECT TO INTENSE COMPETITION IN THE
INTERNET MARKET, WE MAY BE UNSUCCESSFUL AND COMPETITION MAY DRIVE OUR POTENTIAL
REVENUES DOWN.
The market for technology and Internet products and services is highly
competitive. Moreover, the market for Internet products and services lacks
significant barriers to entry, enabling new businesses to enter this market
relatively easily. Competition in the market for Internet products and services
may intensify in the future. Numerous well-established companies and smaller
entrepreneurial companies are focusing significant resources on developing and
marketing products and services that will compete with our products and
services. In addition, many of our current and potential competitors have
greater financial, technical, operational, and marketing resources. We may not
be able to compete successfully against these competitors in selling our goods
and services. Competitive pressures may also force prices for Internet goods and
services down and these price reductions may reduce our potential revenues.
SELLING ASSETS OF, OR INVESTMENTS IN, THE COMPANIES THAT WE HAVE ACQUIRED AND
DEVELOPED PRESENTS RISKS.
An element of our business plan involves selling, in public or private
offerings, our subsidiaries and future subsidiary companies, or portions
thereof, that we have acquired and developed. Market and other conditions
largely beyond our control affect:
- our ability to engage in these sales;
- the timing of these sales; and
14
- the amount of proceeds from these sales.
OUR GROWTH PLACES STRAINS ON OUR MANAGERIAL, OPERATIONAL, AND FINANCIAL
RESOURCES.
Our growth has placed, and is expected to continue to place, a significant
strain on our managerial, operational and financial resources. Further, as the
number of our subsidiary companies and their respective businesses grow, we will
be required to manage multiple relationships. Any further growth by us or our
subsidiary companies or an increase in the number of strategic relationships
will increase this strain on our managerial, operational, and financial
resources. This strain may inhibit our ability to achieve the rapid execution
necessary to successfully implement our business plan. In addition, our future
success depends on our ability to expand our organization to match the growth of
our business and our subsidiary companies.
IF OUR SUBSIDIARY COMPANIES ARE SUCCESSFUL, THEY WILL NEED QUALIFIED MARKETING
AND SALES PERSONNEL. WE CANNOT ASSURE THAT OUR SUBSIDIARY COMPANIES WILL BE ABLE
TO ASSEMBLE AND RETAIN THE NECESSARY MANAGEMENT AND MARKETING TEAMS.
CombiMatrix, Greenwich Information Technologies, Mediaconnex, MerkWerks,
Signature-mail.com, Soundbreak.com, and Soundview Technologies have generated no
significant revenues to date. We cannot assure that these companies will be able
to meet their anticipated working capital needs to develop their products and
services. If they fail to properly develop these products and services, they
will be unable to generate meaningful product sales. If they successfully
develop commercially viable products and services, these companies will need to
expand their management personnel. Some of these companies will require our
assistance to identify and implement experienced management teams, but we cannot
provide assurance that these companies will successfully assemble qualified and
effective management teams.
Additionally, unlike Greenwich Information Technologies and Soundview
Technologies, which intend to primarily license their respective technologies to
third parties for commercial exploitation, CombiMatrix and MerkWerks currently
intend to develop, market, sell and license their respective products and
services directly to customers. Because CombiMatrix and MerkWerks have not
completed the research and development of their products, they have not hired
marketing and sales personnel or finalized strategic marketing plans. We cannot
assure that CombiMatrix and MerkWerks will be able to attract and retain
qualified marketing and sales personnel or that any marketing efforts undertaken
by the companies will be successful.
FOR OUR BUSINESS AND OUR SUBSIDIARIES TO SUCCEED, WE MUST ATTRACT AND RETAIN
QUALIFIED PERSONNEL. BECAUSE OF INTENSE COMPETITION FOR THESE INDIVIDUALS, WE
MAY FACE DIFFICULTIES IN RETAINING, ATTRACTING AND MOTIVATING THESE INDIVIDUALS.
Our success will depend on our ability to attract, retain and motivate the
qualified personnel that will be essential to our current plans and future
development. Competition for qualified personnel is intense and we cannot
provide assurance that we will successfully retain our existing key employees or
attract and retain any additional personnel we may require. In particular, the
success of our business and each of our affiliates will also be greatly
determined by our ability to retain and motivate the individuals discussed in
the following paragraphs.
COMBIMATRIX. CombiMatrix's success will significantly depend upon the
continued services of CombiMatrix's Vice President-Research and Development. We
maintain key person life insurance coverage with respect to this individual in
the amount of $1,000,000.
GREENWICH INFORMATION TECHNOLOGIES. Greenwich Information Technologies'
success will significantly depend upon the continued services of H. Lee Browne,
Greenwich Information Technologies' President and Chief Executive Officer.
Neither we nor Greenwich Information Technologies maintain key person life
insurance coverage for Mr. Browne.
15
OUR AFFILIATES FACE INTENSE COMPETITION AND WE CANNOT ASSURE THAT THEY WILL BE
SUCCESSFUL.
COMBIMATRIX. The pharmaceutical and biotechnology industries are subject to
intense competition and rapid and significant technological change. Many
organizations are actively attempting to identify and optimize compounds and
build libraries for potential pharmaceutical development. If CombiMatrix's
technologies are successful, CombiMatrix will compete directly with the research
departments of pharmaceutical companies, biotechnology companies, other
combinatorial chemistry companies, and research and academic institutions. In
addition to having existing strategic relationships with pharmaceutical
companies, many of these competitors have greater financial and other resources,
and more experience in research and development than CombiMatrix. Historically,
pharmaceutical companies have maintained close control over their research
activities, including the synthesis, screening, and optimization of chemical
compounds. Many of these companies, which represent the greatest potential
market for CombiMatrix's services and compounds, are developing combinatorial
chemistry and other methodologies to improve productivity. In addition, these
companies may already have large collections of compounds previously synthesized
or ordered from chemical supply catalogs or other sources which they may screen
new targets against.
Other sources of compounds include compounds extracted from natural
products, such as plants and microorganisms, and compounds created using
rational drug design. CombiMatrix is joined by academic institutions,
governmental agencies and other research organizations in conducting research in
these areas, either on their own or through collaborative efforts.
CombiMatrix anticipates that it will face increased competition in the
future as new companies enter the market and advanced technologies become
available. CombiMatrix's processes may be rendered obsolete or uneconomical by
technological advances or entirely different approaches developed by one or more
of CombiMatrix's competitors. The existing approaches of CombiMatrix's
competitors or new approaches or technology developed by CombiMatrix's
competitors may be more effective than those developed by CombiMatrix.
SIGNATURE-MAIL.COM. The software industry is highly competitive.
Signature-mail.com seeks to achieve a competitive advantage through proprietary
technology. Signature-mail.com has five pending patent applications. However, no
patents have been issued yet and we cannot assure that the patents will be
issued, that they will withstand challenges to their validity or that they will
have sufficiently broad scope to effectively limit competition for its software
product.
MERKWERKS. There are a number of CD-Recordable disk drive software packages
on the market. MerkWerks' first product is not yet complete or ready for sale.
Thus, the acceptance of MerkWerks' software in the market is unproven and
speculative. The markets for software products are intensely competitive and are
characterized by rapid changes in technological standards. 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 dominate
distribution channels and 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 its business, financial condition and operating
results.
SOUNDBREAK.COM. The market for the online promotion and distribution of
music and related merchandise is highly competitive and rapidly changing. The
number of websites competing for the attention and spending of consumers,
advertisers and users has increased, and we expect it to continue to increase
because there are few barriers to entry to Internet commerce. Soundbreak.com
faces competitive pressures from numerous actual and potential competitors.
Competition is likely to increase significantly as new companies enter the
market and current competitors expand their services. Certain companies have
16
announced agreements to work together to offer music over the Internet, and
Soundbreak.com may face increased competitive pressures as a result. Many of
Soundbreak.com's current and potential competitors in the Internet and music
entertainment businesses may have substantial competitive advantages, including:
longer operating histories; significantly greater financial, technical and
marketing resources; greater brand name recognition; existing customer bases;
and more popular content.
These competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements and devote greater resources
to develop, promote and sell their products or services than Soundbreak.com can.
Web sites maintained by existing and potential competitors may be perceived by
consumers, artists, talent management companies and other music-related vendors
or advertisers as being superior to Soundbreak.com's website.
MEDIACONNEX. The market for the sale of commercial inventory for television
and cable broadcasters is highly competitive and rapidly changing. In addition
to the long-standing traditional sales channels, there are a number of newly
created web-based sites competing for market acceptance among the broadcasters
and media buyers. Because Mediaconnex's software is not yet complete, acceptance
of its software and business model in the market is unproven and speculative.
Moreover, because there are few barriers to entry, competition is likely to
increase, including the probability of established competitors expanding their
current offering of services. Many of the current and potential competitors to
Mediaconnex may have substantial competitive advantages relative to Mediaconnex,
including longer operating histories as well as greater financial, technical or
marketing resources.
WE CANNOT ASSURE THAT WE WILL BE ABLE TO EFFECTIVELY PROTECT OUR SUBSIDIARIES'
PROPRIETARY TECHNOLOGY.
The success of the business of CombiMatrix, Greenwich Information
Technologies, Signature-mail.com, Soundview Technologies, Mediaconnex, and
MerkWerks relies, to varying degrees, on proprietary rights and their protection
or exclusivity. CombiMatrix, Greenwich Information Technologies,
Signature-mail.com and Soundview Technologies will depend largely on the
protection of enforceable patent rights. Mediaconnex, CombiMatrix and
Signature-mail.com currently have applications on file with the U.S. Patent and
Trademark Office seeking patents on their core technologies, while Greenwich
Information Technologies and Soundview Technologies have patents or rights to
patents that have been issued as well as have additional patents pending.
MerkWerks intends to rely on a combination of statutory and common law,
copyright, trademark and trade secret law, and licensing agreements to protect
its software product. We cannot assure that pending patent applications will
issue, third parties will not violate, or attempt to invalidate the
subsidiaries' intellectual property rights, or certain aspects of the
subsidiaries' intellectual property will not be reverse-engineered by third
parties without violating the subsidiaries' proprietary rights.
In addition to the protection that may be afforded by patents and the
various laws protecting proprietary rights, the subsidiaries enter into
confidentiality agreements with third parties and generally limit access to
information relating to their intellectual property. Despite these precautions,
third parties may be able to gain access to and use their intellectual property
to develop similar competing technologies and/or products. Any substantial
unauthorized use of the affiliates patent and other proprietary rights could
materially and adversely affect their business and operational results.
BECAUSE EACH SUBSIDIARY'S SUCCESS GREATLY DEPENDS ON THEIR ABILITY TO DEVELOP
AND MARKET NEW PRODUCTS AND SERVICES, WE CANNOT ASSURE THAT OUR SUBSIDIARIES
WILL BE SUCCESSFUL IN THE FUTURE.
The markets for each subsidiary's products are also marked by extensive
competition, rapidly changing technology, frequent product improvements, and
evolving industry standards. The success of each subsidiary will depend on its
ability to develop and market new products and services or enhance existing ones
to meet the evolving needs of the market. We cannot assure that our affiliates'
existing or future products and
17
services will be successful or profitable. In addition, we cannot assure other
developers' products, services or technologies will not render our subsidiaries'
products and services noncompetitive or obsolete.
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, WE CANNOT ASSURE THAT OUR
OPERATIONS WILL BE PROFITABLE.
We commenced operations in 1993 and, accordingly, have a limited operating
history. Our prospects must be considered in light of the risks, expenses, and
difficulties frequently encountered by companies with such limited operating
histories. Since we have a limited operating history, we cannot assure that our
operations will be profitable or that we will generate sufficient revenues to
meet our expenditures and support our activities.
To date, we have relied upon the sale of our equity securities to generate
the funds needed to finance the implementation of our plan of operations. In the
past, we have also relied on gains from the sale of investment securities,
including those of CombiMatrix, Soundview Technologies, and MerkWerks, as well
as equity interests in Greenwich Information Technologies as additional sources
of revenue. To date, we have not experienced any significant liquidity event
with respect to our affiliates.
WE MAY NEED TO SEEK ADDITIONAL FINANCING IN THE FUTURE, BUT CANNOT PROVIDE
ASSURANCE THAT WE WILL BE ABLE TO OBTAIN NEEDED FINANCING ON FAVORABLE TERMS.
As of December 31, 1999, we had working capital of $39.9 million and
stockholders' equity of $45.3 million based on our consolidated financial
statements. However, a portion of these funds were held by our consolidated
subsidiaries and thus are restricted to use in the business of the particular
subsidiary.
We cannot assure that we will not encounter unforeseen difficulties that may
deplete our capital resources more rapidly than anticipated. Any efforts to seek
additional funds could be made through equity, debt, or other external
financings, however, we cannot assure that additional funding will be available
on favorable terms, if at all.
ALTHOUGH WE HOLD MINORITY POSITIONS IN CERTAIN SUBSIDIARIES, WE DO NOT HAVE THE
ABILITY TO CONTROL THEIR DECISION MAKING OR DAY TO DAY OPERATIONS.
GREENWICH INFORMATION TECHNOLOGIES. We currently maintain a membership
interest of 33.3% in Greenwich Information Technologies. Although we are a
senior member of Greenwich Information Technologies, we do not hold a majority
of the board of three senior members, and we have no control over its day-to-day
operations. The day-to-day operations are currently directed by the Chief
Executive Officer, H. Lee Browne.
SIGNATURE-MAIL.COM. We have a membership interest of 25% in
Signature-mail.com. Although we are a senior member of Signature-mail.com, we do
not hold a majority of the board of three senior members, and we have no control
over its day-to-day operations. The day-to-day operations are currently directed
by the Chief Executive Officer, H. Lee Browne.
MEDIACONNEX. We currently own 73.77% of the outstanding Series A Preferred
Stock of Mediaconnex. The holders of the Series A Preferred Stock, voting
together as a class, have the right to designate two members to the Board of
Directors giving us the right to control 40% of the Board of Directors. To date,
Paul Ryan, our President and Chief Executive Officer, and Peter Frank, our Chief
Financial Officer, have been appointed to the Board of Directors. This minority
position and board representation gives us influence over, but not the ability
to control, the decision-making at Mediaconnex. The day-to-day operations are
currently controlled by Sean Atkins, the President and a member of the Board of
Directors of Mediaconnex.
EC COMPANY. We own a 7.6% interest in EC Company and have no board
representation. We thus do not have the ability to control the decision-making
at EC Company.
18
ITEM 2. PROPERTY
The Company leasesWe lease a 5,449 square foot and a 3,480 square foot office in Pasadena,
California. SuchThese lease terminatesagreements terminate in November 2003.April 2003 and December 2001,
respectively. MerkWerks isand Launchpad are currently located at the Company'sour facilities.
The Company'sOur other consolidated subsidiaries, CombiMatrix, Soundbreak.com, and Soundview
Technologies, lease facilities in the San Francisco, California, West Hollywood,
California and Greenwich, Connecticut areas, respectively. The Company may seekWe are presently
seeking other facilities to accommodate itsour growing business, including other
wholly-ownedwholly owned divisions or subsidiary companies. (See Note 12 of the Consolidated Financial
Statements.)
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
DuringOn December 9, 1999, we held a special meeting of stockholders. At the
quarter ended December 31, 1998 theremeeting, the following matters were no matters submittedconsidered and approved:
1. A proposal to a votechange our state of incorporation from California to
Delaware was approved, with 6,015,357 shares of Common Stock voted for this
proposal, 196,044 shares of Common Stock voted against this proposal, and
40,560 shares of Common Stock abstaining from the vote.
2. A proposal to increase the number of authorized shares of common
stock from 30,000,000 to 60,000,000 and to authorize the issuance of up to
20,000,000 shares of preferred stock was approved, with 5,882,463 shares of
common stock voted for this proposal, 308,281 shares of common stock voted
against this proposal, and 61,219 shares of common stock abstaining from the
vote.
3. Amendments to the Company's security holders.1996 Stock Option Plan were approved,
with 5,769,828 shares of common stock voted for this proposal, 365,828
shares of common stock voted against this proposal, and 116,225 shares of
common stock abstaining from the vote.
19
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS.
RECENT MARKET PRICES
The Company's Common StockOur common stock began trading under the symbol ACRI on the Nasdaq National
Market System on July 8, 1996. Prior to the Company'sour listing on the Nasdaq National
Market System and subsequent to June 15, 1995 when the Company'sour Registration Statement on
Form SB-2 became effective under the Securities Act of 1933, as amended (the
"Securities Act"), the Company's Common Stockour 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.our common stock.
The markets for securities, such as the Company's Common Stockour 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'sour industry and the investment markets generally, as well as
economic conditions and quarterly variations in the
Company'sour results of operations, may
adversely affect the market price of the
Company's Common Stock.our common stock.
On March 16, 1998, the Company's boardour Board of directorsDirectors declared a two-for-one split of
the Company's Common Stockour common stock in the form of a 100% stock dividend (the
"Stock Split"). The Companydividend. We distributed the
12
stock
dividend on or about June 12, 1998 for each share held of record at the close of
business on May 29, 1998. All share information presented herein is adjusted for
the Stock Split.stock split.
The high and low bid prices for the Company's Common Stockour common stock as reported by the Nasdaq
Stock Market for the periods indicated are as follows as adjusted for the Stock Split.stock
split. Such prices are interdealer prices without retail markups, markdowns or
commissions, and may not necessarily represent actual transactions.
FISCAL YEAR 1997 HIGH LOW
- -------------------------------------------------- -------- --------------------- -----------
FISCAL YEAR 1999
First Quarter................................... $4Quarter............................................... $ 4 15/16 $ 3 1/4 $2 7/8
Second Quarter.................................. $3 3/8 $1Quarter.............................................. $ 9 $ 3 1/2
Third Quarter................................... $6 $3Quarter............................................... $16 3/164 $ 6 5/8
Fourth Quarter.................................. $6 3/16 $3Quarter.............................................. $32 7/8 $14 1/8
FISCAL YEAR 1998
- --------------------------------------------------
First Quarter.................................... $9Quarter............................................... $ 9 1/2 $2$ 2 3/4
Second Quarter.................................. $9Quarter.............................................. $ 9 7/8 $6$ 6 5/8
Third Quarter................................... $8Quarter............................................... $ 8 7/8 $2$ 2 7/8
Fourth Quarter.................................. $6Quarter.............................................. $ 6 25/32 $3$ 3 5/8
On March 26, 1999,17, 2000, the closing bid and asked quotations for the Company's
Common Stockour common stock
were $3 15/16$47.00 and $3 31/32,$47.69, respectively, per share.
On March 30, 1999,17, 2000, there were approximately 208257 owners of record of the
Company's Common Stock.our
common stock. The majority of the outstanding shares of the Common
Stockcommon stock are
held by a nominee holder on behalf of an indeterminable number of ultimate
beneficial owners.
DIVIDEND POLICY
To date, the Company haswe have not declared or paid any cash dividends with respect to itsour
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.company. Consequently, no
cash dividends are expected to be paid in the foreseeable future. Further, there
can be no assurance that theour proposed operations of the
Company will generate revenues and cash
flow needed to declare a cash dividend or that the Companywe will have legally available
funds to pay dividends.
20
DESCRIPTION OF SECURITIES
The Company isWe are authorized to issue up to 30,000,00060,000,000 shares of Common Stock,
withoutcommon stock, $0.001
par value, of which 10,310,81514,235,431 shares of Common Stockcommon stock have been issued and are
outstanding as of March 26, 1999.17, 2000 and 20,000,000 shares of preferred shares,
$0.001 par value, none of which are issued or outstanding. Holders of the Common Stockcommon
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 Stockcommon 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.therefore.
Upon the liquidation, dissolution, or winding up of the Company,company, the holders of
Common Stockcommon stock are entitled to share ratably in all assets of the Companycompany which
are legally available for distribution, after payment of all debts and other
liabilities. Holders of Common Stockcommon stock have no preemptive, subscription,
redemption, or conversion rights.
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.
13our common stock.
21
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below as of December 31, 19981999 and
December 31, 19971998 and for the years ended December 31, 1999, 1998, and 1997 and 1996 hashave
been derived from the Company'sour audited consolidated financial statements included
elsewhere herein, and should be read in conjunction with those financial
statements (including the notes thereto). The selected financial data as of
December 31, 1997, 1996, 1995, and 19941995 and for the years ended December 31, 19951996 and
19941995 have been derived from audited consolidated financial statements not
included herein, but which were previously filed with the SEC.
CONSOLIDATED STATEMENTS OF OPERATIONS DATA:Securities and
Exchange Commission (the "SEC").
(RESTATED)(3)
-----------------------------------------------------------------------1999 1998 1997(3) 1996 1995
1994
------------- ------------- ------------- ------------------------- ----------- ----------- ----------- -----------
Revenues
Capital management fee income.........income..... $ 122,000 $ 382,000 $ 491,000 $ 58,000 $ 3,000
$ 0
Management fee income................. 0 0income............. -- -- -- 1,400,000 0 0
------------- ------------- ------------- ---------------
------------ ----------- ----------- ----------- -----------
Total Revenues........................Revenues.................... 122,000 382,000 491,000 1,458,000 3,000
0
Operating Expenses(1).................................. 9,686,000 6,224,000 3,911,000 2,640,000 1,399,000
724,000
------------- ------------- ------------- ------------------------- ----------- ----------- ----------- -----------
Operating Loss..........................Loss...................... (9,564,000) (5,842,000) (3,420,000) (1,182,000) (1,396,000)
(724,000)
Other income (expense)................................ (842,000) (545,000) (100,000) 1,604,000 3,515,000
(100,000)
------------- ------------- ------------- ------------------------- ----------- ----------- ----------- -----------
(Loss) income before income taxes
and minority interest.....................interest............. (10,406,000) (6,387,000) (3,520,000) 422,000 2,119,000
(824,000)
Benefit (provision)(Provision) benefit for income
taxes.... 0taxes............................. (20,000) -- 250,000 (606,000) (288,000)
(4,000)
------------- ------------- ------------- ------------------------- ----------- ----------- ----------- -----------
(Loss) income before minority
interests.............................interests......................... (10,426,000) (6,387,000) (3,270,000) (184,000) 1,831,000
(828,000)
Minority interests......................interests.................. 2,229,000 198,000 411,000 201,000 0 0
------------- ------------- ------------- ---------------
------------ ----------- ----------- ----------- -----------
Net (loss) income.......................income................... $ (6,189,000) $ (2,859,000)(8,197,000) $(6,189,000) $(2,859,000) $ 17,000 $ 1,831,000
$ (828,000)
------------- ------------- ------------- ------------- -----------
------------- ------------- ------------- ------------- -----------============ =========== =========== =========== ===========
(Loss) earnings per common share
Basic.................................Basic............................. $ (0.75) $ (0.69) $ (0.58) $ 0.00 $ 0.54
Diluted........................... $ (0.28)
Diluted...............................(0.75) $ (0.69) $ (0.58) $ 0.00 $ 0.39 $ (0.28)
Weighted average number of common
and potential common shares for
computation of (loss) earnings per
share(2)
Basic.................................Basic............................. 10,871,423 8,971,272 4,962,286 3,826,014 3,401,584
3,007,146
Diluted...............................Diluted........................... 10,871,423 8,971,272 4,962,286 4,976,434 4,733,212
3,007,146
14
CONSOLIDATED BALANCE SHEET DATA:
(RESTATED)
-------------------------------------------------------------------1999 1998 1997(3) 1996(3) 1995
1994
------------- ------------ ------------ ------------ --------------------- ----------- ----------- -----------
Total assets................................assets........................ $ 19,769,00051,791,000 $19,769,000 $ 8,854,000 $ 5,175,000 $ 3,844,000
Long-term indebtedness.............. $ 779,000
Long-term indebtedness......................-- $ 1,222,000 $ 0-- $ 0-- $ 0--
Total liabilities................... $ 0
Total liabilities...........................1,633,000 $ 1,828,000 $ 447,000 $ 837,000 $ 358,000
Minority interests.................. $ 352,000
Minority interests..........................4,896,000 $ 0-- $ 227,000 $ 380,000 $ 11,000
Stockholders' equity................ $ 0
Stockholders' equity........................ $ 17,941,00045,262,000 $17,941,000 $ 8,180,000 $ 3,959,000 $ 3,475,000 $ 427,000
- --------------------------------------------------
(1) Includes write-downs in 1999, 1998, 1997 and 1996 of $9,000, $101,000
$272,000 and $559,000, respectively, relating to three promissory notes held
by the Companycompany which are secured by the stock of Whitewing Labs, Inc. and
the Company.
(See Note 4 to the Consolidated Financial Statements).company.
(2) Potential common shares in 1999, 1998, 1997, and 19941997 have been excluded from per
share calculation because the effect of their inclusion would be
anti-dilutive.
(3) In 1997, the Companycompany acquired a controlling interest in Soundview
Technologies. The 1996 amounts have been restated for the effects of the
Company'scompany's increased interest in Soundview Technologies. Prior to this
restatement, the Companycompany reported losses of $161,000 in equity in earnings
of affiliates and net income of $293,000 (See Note 1 and 2 to the
Consolidated Financial Statements).
15$293,000.
22
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
GENERAL
Acacia Research is currently engaged in developing new technology-related
businesses. By providing seed capital, critical management and technical advice,
and on-going operational support, we provide an infrastructure that allows
early-stage companies to focus on their core strengths: creating new products
and services. This support, in turn, allows developing businesses the
opportunity to reduce their time to market. We also obtain ownership positions,
through strategic investments, in businesses that fit well with our existing
operating companies.
The Company's financial conditionventure capital business is marked by a high degree of risk due to
inherent uncertainties. There are uncertainties associated with identifying and
resultsdeveloping new business opportunities, selecting ventures with acceptable
likelihood of operations can only be
understood with reference tosuccess and future profitability, and in the Company's business and ongoing activities. The
Company is a diversified Company that makes direct investments and provides
management services to emerging businesses. Although the Company has relied upon
the sale of its own as well as its holdingscompetitive nature of
the Affiliates' equity securitiesventure capital business. Identifying and developing each new business
opportunity requires us to generate the capital needed to finance the implementationdedicate significant amounts of its planfinancial resources,
management attention, and personnel, with no assurance that these expenditures
will be recouped. We also have operations involving businesses that hold
intellectual property rights, most of operations, the Company's strategywhich are involved in developing new or
unproven technologies. There is to retain the majority of its current
holdings,no assurance that any or all such technologies
will be successful, 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 wheneven if successful, 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 varioussuch
technologies can be commercialized. In addition, we have operations in Internet
businesses which are subject to the risks associated with Internet start-ups.
These include the viability of the business enterprisesstrategy, unknown customer
acceptance, difficulties in obtaining financing, the ability to establish operationsobtain
intellectual property rights, competition, and promote growththe impact of applicable laws and
cash flow in each enterprise, but continually seeks and evaluates investment
opportunities that have the potential of earning significant returns in either
new business ventures or by increasing its equity positions in its existing
holdings.
Capital management fees include asset-based and performance-based fees
earned from the four private investment funds managed by Acacia Capital
Management. Management fees include income from consulting and management
services provided by the Company to its Affiliates. The Company, however, does
not regularly charge its Affiliates for such services at this time.regulations.
In the following discussion and analysis, the period to periodperiod-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 1996,1999, the Company's financial condition and results of
operations were highlighted primarily by the Company's activities relatinginvestment in our new subsidiary,
Soundbreak.com, and the expansion associated with CombiMatrix's research and
development. In 1998, the financial condition and results of operations were
highlighted primarily by the investment in Signature-mail.com, and the expenses
associated with CombiMatrix's increased research and development efforts, and
expenses related to investmentsan increase in CombiMatrix, Soundview
Technologies, and Greenwich Information Technologies, as well as the impact of
the initial public offering of Whitewing Labs, and to a lesser extent the sale
of a portion of the Company's interests in these Affiliates. In addition, in
1996, the Company expended significant resources developing and expanding its
investment advisory services.headcount. In 1997, the Company's financial condition
and results of operations 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 CommissionSEC relating to the Soundview Technologies
acquisition and the registration of shares of the
Company's Common Stock. In 1998, the Company's financial condition and results
of operations were highlighted primarily by the investment in
Signature-mail.com, and the expenses associated with CombiMatrix's increased
research and development efforts, and expenses related to an increase in
headcount at the Company.our common stock.
As a result of the impact of each of these activities that the Company haswe have
undertaken and will continue to undertake, as well as the start-up nature of
most of our subsidiaries, 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.
ACQUISITIONS
On July 6, 1997,ACQUISITION AND OPERATING ACTIVITIES
During 1999, we and our majority-owned subsidiaries began to significantly
increase financing, acquisition and operating activities. We intend to continue
to invest in growing our business and developing new Internet and
technology-related subsidiaries. Financing activities are listed in the
Company acquired over 50%Liquidity and Capital Resources section that follows. Highlights of the
outstanding common
stock of Soundview Technologiesacquisition 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
16
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 Soundview Technologies on a consolidated
basis.
In January 1998, the Company completed a series of independent, but related
transactions with certain individuals owning equity interests in CombiMatrix,
Greenwich Information Technologies, MerkWerks, and Soundview Technologies, which
increased the Company's equity interest in these companies as follows:
CombiMatrix--from 51.4% to 52.7%; Greenwich Information Technologies--from
30.02% to 33.33%; MerkWerks--from 69.5% to 89.6%; and Soundview
Technologies--from 51.4% to 66.7%.
On April 2, 1998, the Company acquired a 25% membership interest in
Signature-mail.com (formerly Internet Software LLC) for a purchase price of
$2,500,000. The Company's investment was made with the proceeds of a private
equity financing, made in part to finance the investment, where the Company
raised gross proceeds of $3.65 million through the sale of 317,393 units, each
unit consisting of one share of the Company's Common Stock and one Common Stock
Purchase Warrant. The Company accounts for this investment using the equity
method.
RESULTS OF OPERATIONS
1998 COMPARED TO 1997
REVENUES
The Company reported net revenues of $382,000activities for the year ended December 31, 1999
include:
SECOND QUARTER:
- Formation of Soundbreak.com, a majority-owned subsidiary that has
developed a dynamic music website that fuses the live entertainment value
of radio with the power of the Internet.
23
- Purchase of additional shares of common stock of MerkWerks which increased
our equity ownership from 89.6% to 99.9%.
FOURTH QUARTER:
- Formation of Launchpad, a wholly owned subsidiary whose mission is to
incubate and accelerate the development of new Internet businesses.
- Acquisition of a 31% ownership interest in Mediaconnex.
- Closing of Acacia Capital Manangement division, which was a general
partner in two private investment partnerships and an investment advisor
to two offshore private investment corporations.
- Purchase of a 7.6% interest in EC Company, which was finalized in January
2000.
EFFECT OF VARIOUS ACCOUNTING METHODS ON OUR RESULTS OF OPERATIONS
The various interests that we acquire in our subsidiaries are accounted for
under two broad methods: consolidation and equity method. The applicable
accounting method is generally determined based on our voting interest in a
subsidiary.
CONSOLIDATION. Subsidiary companies in which we directly or indirectly own
more that 50% of the outstanding voting securities are generally accounted for
under the consolidation method of accounting. Under this method, a subsidiary
company's accounts are reflected within our Consolidated Statements of
Operations. Participation of other shareholders in the earnings or losses of a
consolidated subsidiary is reflected in the caption "Minority Interests" in our
Consolidated Statement of Operations. Minority interests adjust our consolidated
net results of operations to reflect only our share of the earnings or losses of
the subsidiary. As of December 31, 1998, ("1998")we accounted for three of our
subsidiaries under the consolidation method. As of December 31, 1999, we
accounted for five of our subsidiaries under this method.
Our subsidiaries accounted for under the consolidation method of accounting
at December 31, 1999 and December 31, 1998 included:
OWNERSHIP
SUBSIDIARY -------------------
SINCE 12/31/99 12/31/98
---------- -------- --------
CONSOLIDATION METHOD:
CombiMatrix Corporation........................... 1995 50.0% 52.7%
MerkWerks Corporation............................. 1995 99.9% 89.6%
Soundview Technologies Incorporated............... 1996 66.7% 66.7%
Soundbreak.com Incorporated....................... 1999 73.6% --
Acacia Launchpad LLC.............................. 1999 100.0% --
EQUITY METHOD. Subsidiaries whose results we do not consolidate, but over
whom we exercise significant influence, are generally accounted for under the
equity method of accounting. Whether or not we exercise significant influence
with respect to a subsidiary depends on an evaluation of several factors
including, among others, representation on the subsidiary's Board of Directors
and ownership level, which is generally 20% to 50% interest in the voting
securities of the partner company, including voting rights associated with our
holdings in common, preferred and other convertible instruments in the
subsidiary. Under the equity method of accounting, a subsidiary's accounts are
not reflected within our Consolidated Statements of Operations; however, our
share of the earnings or losses of the subsidiary is reflected in the caption
"Equity income (loss) of affiliates" in the Consolidated Statements of
Operations. As of December 31, 1999 and December 31, 1998, we accounted for four
and three subsidiaries, respectively, under the
24
equity method of accounting. Our subsidiaries accounted for under the equity
method of accounting at December 31, 1999 and 1998 included:
OWNERSHIP
SUBSIDIARY -------------------
SINCE 12/31/99 12/31/98
---------- -------- --------
EQUITY METHOD:
Whitewing Labs, Inc............................... 1993 23.7% 23.5%
Greenwich Information Technolgies LLC............. 1996 33.3% 33.3%
Signaturemail.com llc............................. 1998 25.0% 25.0%
Mediaconnex Commnications, Inc.................... 1999 31.0% --
In most cases, we have representation on the Board of Directors of the
above-listed companies, including those in which we hold non-voting securities.
In addition to our investments in voting and non-voting equity and debt
securities, we also periodically make advances to our subsidiaries in the form
of promissory notes.
RESULTS OF OPERATIONS
1999 1998 1997
----------- ----------- -----------
Revenues............................... $ 122,000 $ 382,000 $ 491,000
Operating expenses..................... (9,686,000) (6,224,000) (3,911,000)
Other expense, net..................... (842,000) (545,000) (100,000)
Minority interests..................... 2,229,000 198,000 411,000
(Provision) benefit for income taxes... (20,000) -- 250,000
----------- ----------- -----------
Net loss............................. (8,197,000) (6,189,000) (2,859,000)
=========== =========== ===========
1999 COMPARED TO 1998
NET REVENUE. Our reported net revenues decreased to $122,000 in 1999 from
$382,000 in 1998 primarily due to lower returns and the winding down of the
Acacia Capital Management division. Acacia Capital Management was a general
partner in two domestic private investment partnerships and was an investment
advisor to two offshore private investment corporations. The level of management
and performance fee revenue we received was dependent on the amount of money
invested in the funds managed by us. We closed this division because we intend
to aggressively focus our efforts on developing our affiliate companies and
incubating new companies. The closing of the funds also contributed to the
decrease in the equity income of partnerships with recognized losses of $1,000
in 1999 from income of $184,000 in 1998.
OPERATING EXPENSES. Total operating expenses increased to $9,686,000 in
1999 from $6,224,000 in 1998 primarily due to an increase in marketing, general
and administrative expenses. Our marketing, general and administrative costs
consist primarily of employee compensation, outside services such as legal,
accounting and consulting, rent, and travel-related costs. We expanded our
operations during 1999 to grow our infrastructure, including additions to
personnel and office space. During 1999, Soundbreak.com was incorporated and
launched its music lifestyle destination website. This quick progress from a
developmental stage enterprise to a full functioning interactive music website
required significant funding. We anticipate continued dedication of substantial
resources to enhance the website and that these costs may substantially increase
in future periods. Product development and commercialization requires additional
personnel in areas such as regulatory affairs, marketing and general operations.
To help meet these needs, during 1999 CombiMatrix increased its employee base
and made extensive use of consultants to assist in solving specialized issues or
providing particular services and expects to hire additional managerial and
clerical employees.
25
OTHER EXPENSE. Other expense increased to $842,000 in 1999 from $545,000 in
1998 due to the following: an increase of $219,000 in the equity in losses of
affiliates, an increase of $124,000 in interest expense, an increase of $87,000
in interest income, increase in other income of $144,000 and a decrease in the
equity in income of partnerships of $185,000. Equity in losses of affiliates
increased due primarily to additional losses recognized for Signature-mail.com
and Whitewing of $129,000 and $128,000, respectively. These losses are due to
Signature-mail.com further seeking proprietary software in order to excel in a
highly competitive software industry and a decrease in net revenue for Whitewing
due to an intensely competitive market with short product life cycles and rapid
price declines. Interest expense increased compared to revenuesthe prior year due
primarily to additional amortization of $491,000the discount associated with the
CombiMatrix note. Interest income increased due to an increase in the average
cash balance of the company. The increase in other income is due to grants
received by CombiMatrix for further development of the year ended December
31, 1997 ("1997").
CAPITAL MANAGEMENT FEES. During 1998, capital management fee income,biochip from the
Department of Defense and the Department of Energy. Lastly, the closing of the
investment funds, in which includes performance fee income, was $382,000 as comparedwe participated in, contributed to capital
management feethe decrease in
the equity income of partnerships with recognized losses of $1,000 in 1999 from
income of $184,000 in 1998.
MINORITY INTERESTS. Minority interests increased to $2,229,000 in 1999 from
$198,000 in 1998, primarily reflecting minority interest in net losses of two
subsidiaries that obtained outside equity financing during 1999, including
CombiMatrix and Soundbreak.com.
1998 COMPARED TO 1997
NET REVENUE. The reported net revenues decreased to $382,000 in 1998 from
$491,000 generated during 1997. Thein 1997 due to a decrease in capital management fee income derived from
the four investment funds managed
bythat we managed. During 1998, the Company during 1998 was primarily a result offunds generated
lower returns, generated
by the funds' investment activities which resulted in lower performance fees.
The Company may share capital 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 capital management fees, but will share performance fees
earned in those funds managed by the Company to which the group provides its
services.
MANAGEMENT FEE INCOME. Although the Company provides management services to
its affiliates and others, the Company did not charge or receive management
fees during 1998 or 1997.
OPERATING EXPENSESEXPENSES. Total operating expenses increased to $6,224,000 during
1998 from $3,911,000 during 1997 primarily due to the amortization of patents
and goodwill arising from the purchase of a majority ownership interest in
Soundview Technologies and the acquisition of additional equity interests in
CombiMatrix, MerkWerks and Soundview Technologies as well as the inclusion of expenses incurred by Soundview
Technologies on a consolidated basis,Technologies. We recorded amortization
expenses relating to an increasepatents and goodwill of $1,568,000 in the
Company's head count and higher wages, and expenses relating to the expansion of
CombiMatrix's and MerkWerks' research and development efforts.
RESEARCH AND DEVELOPMENT EXPENSES. The Company incurred research and
development expenses of $1,880,000 for 1998 compared to
expenses of
$888,000 during$459,000 in 1997. Such expenses for 1998 are comprised of expenses
incurred by CombiMatrix of $1,513,000, expenses incurred by MerkWerks of
$228,000, and expenses incurred by Soundview Technologies of $139,000. Research and development 17
expenses for the 1997 are comprised of expenses incurred by CombiMatrix of
$621,000, expenses incurred by MerkWerks of $118,000, and expenses incurred
by Soundview Technologies of $149,000. Research and development expenses
during 1998 include consolidation with Soundview Technologies for the full
twelve month period, while expenses during 1997 include only the six month
period ended December 31, 1997.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. For 1998, marketing,
general and administrative expenses increased to $2,776,000 as compared to
$2,104,000 for 1997. Expenses incurred during 1998 include a write-down of
$101,000 relating to two promissory notes held by the Company, which are
secured by Whitewing Labs stock. Expenses incurred in 1997 include a
write-down of $272,000 relating to three promissory notes held by the
Company, two of which are secured by Whitewing Labs stock and one of which
was secured by the Company's Common Stock as well as Whitewing Labs stock.
The portion of note secured by the Company's Common Stock was repaid in
1998. The remaining notes, which are currently past due, have been written
downcosts further contributed to the
market value priceincrease due to the continued efforts of the collateral held by the Company.CombiMatrix's industrial design,
development and marketing of its products. Marketing, general and administrative
expenses incurred bycontributed to the Company in
1998, excluding the write-down and expenses related to Soundview
Technologies, were $2,426,000 compared to marketing, general and
administrative expenses incurred by the Company in 1997, excluding the
write-down, which were $1,675,000. During 1998, the Company's expenses
increasedincrease due to the general expansion of the Company,our
company, including an increase in the number of personnel as the Companywe added marketing
and general office staff as well as higher wages and payroll expenses.
Marketing, general and administrative expenses during 1998 includeincluded the
consolidation withof Soundview Technologies for the full twelve-month period, while
expenses during 1997 includeincluded only the six-month period ended December 31, 1997.
Soundview
Technologies' marketing, general and administrative expenses were $249,000
in 1998 and $157,000 for the 1997 period. In December 1998, the Company
moved into larger facilities and as a result, expects higher general and
administrative expenses in the future. Marketing, general and administrative
expenses include 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 $227,000 in 1998 and $179,000 in 1997.
AMORTIZATION OF PATENTS AND GOODWILL. The Company reported amortization
expenses relating to patents and goodwill of $1,568,000 in 1998 as compared
to $459,000 during 1997. This increase relates to the Company's purchase of
a majority interest in Soundview Technologies in July 1997 as well as the
purchase of additional equity interests in MerkWerks, CombiMatrix and
Soundview Technologies in January 1998. As a result of the acquisitions, the
Company is incurring amortization expenses each quarter for periods ranging
from three to five years relating to the intangible assets acquired and
amortization expenses at or above the 1998 level are expected to continue
for the foreseeable future.
LEGAL SETTLEMENT EXPENSE. The CompanyLastly, we incurred a charge of $460,000 relating to a legal settlement during
the year ended December 31, 1997. Management of the Company believesWe believe that settling this litigation on
the agreed upon terms prevented unnecessary litigation costs as well as
the
unnecessary diversion of Companyour resources and was in theour best interests of
the Company.interest.
OTHER INCOME (EXPENSE)
The CompanyEXPENSE. We reported an increase in other expense of $545,000 for 1998 compared$445,000 in
1998. This increase is primarily due to other
expensean increase in our equity in the losses
of $100,000 for 1997.
INTEREST INCOME. During 1998,affiliates, and is partially offset by an increase in net interest income was $302,000 as compared to
interest income during 1997,income.
The increase in the equity in the losses of $52,000. The increaseaffiliates is due to the Company
having higher cash balancesrecognition
of the losses attributable to our investment made in 1998 in Signature-mail.com
as no earnings or losses were recognized in 1997. We also maintained a higher
level of cash during 1998 compared to 1997.
18
INTEREST EXPENSE. Interest1997, which accounts for the increase in
interest income. This increase was offset by an increase in interest expense in 1998 was $130,000 as compared to
$41,000 in 1997.of
$89,000. The expense incurred during 1998 is primarily attributable to CombiMatrix and relates to three-year 6%CombiMatrix's
outstanding unsecured subordinated
promissory notesSubordinated Note 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, theThe proceeds from the privatethis placement were
allocated between the warrants issued and the notes resulting in a discount on
the notes. SuchThis discount iswas being amortized over the termsterm 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.
GAINS ON SALES OF INVESTMENTS. Gains on sales of investments were $50,000
in 1997 as compared to no such gain in 1998. The gain in 1997 is comprised
of gains on sales of interests in CombiMatrix. In earlier periods, the
Company sold portions of its holdings primarily to raise the capital
necessary to acquire interests in new companies as well as provide working
capital for ongoing operations. Until the Company generates sufficient
revenue from operations of its various business concerns, the Company, from
time to time, may sell a portion of its equity interests when that interest
has appreciated to a value that management believes is prudent and market
conditions are favorable. However, the Company intends to retain significant
interests in its current and future holdings.
EQUITY IN26
INCOME OF PARTNERSHIPS. The Company reported equity in income of
partnerships of $184,000 for 1998, compared to $129,000 for 1997. The
increase is primarily due to additional contributions totalling $1,000,000
made in July 1998 by the Company as a general partner in two private
investment partnerships managed by the Company.
EQUITY IN LOSSES OF AFFILIATES. The Company reported equity in losses of
affiliates of $901,000 in 1998, compared to equity in losses of affiliates
of $290,000 in 1997. Losses during 1998 are comprised of a loss of $85,000
for the Company's investment in Whitewing Labs, a loss of $301,000 for the
Company's investment in Greenwich Information Technologies, and a loss of
$515,000 for the Company's investment in Signature-mail.com, as determined
by the equity method of accounting. Losses for 1997 are comprised of a loss
of $174,000 for the Company's investment in Whitewing Labs, and a loss of
$116,000 for the Company's investment in Greenwich Information Technologies,
as determined by the equity method of accounting. No earnings or losses are
attributable to Signature-mail.com during 1997 as the Company made this
investment in 1998.
PROVISION FOR INCOME TAXES
For 1997, the Company recordedTAXES. We did not record a benefit of $250,000 primarily as a result
of net operating loss carryback while no tax benefit or expense was recorded for 1998 primarilyincome taxes due to the
non-recognition of benefit ofbenefits or net operating loss carryforwards. (See Note 8carryforward compared to the Consolidated Financial Statements.)a
benefit of $250,000 recorded in 1997.
MINORITY INTERESTSINTERESTS. Minority interests in losses of consolidated
subsidiaries decreased to $198,000 in 1998, compared to $411,000 in 1997. The
decrease is primarily attributable to higher allocations of our subsidiaries
losses to the Company in 1998 than in 1997.
1997 COMPARED TO 1996
REVENUES
The Company reported revenues of $491,000 for 1997 compared to revenues of
$1,458,000 for the year ended December 31, 1996 ("1996").
19
CAPITAL MANAGEMENT FEES. During 1997, capital management fee income, which
includes performance fee income, was $491,000 as compared to capital
management fee income of $58,000 generated during 1996.
In 1997, capital management fee income was related to management of the four
investment funds. The increase in capital management fee income derived from
the four investment funds during 1997 of $491,000 as compared to 1996 was
primarily a result of performance fees realized from one of the investment
funds and, to some extent, an increase of assets under management.
The Company may share capital 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 1996. As part of this agreement, the Company will retain all
capital management fees, but will share performance fees earned on those
funds managed by the Company to which the group provides its services.
MANAGEMENT FEE INCOME. During 1996, management fee income was $1,400,000
compared to no such income in 1997. Management fee income earned for 1996
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. No such fees were paid by
Soundview Technologies or any other Affiliate in 1997.
OPERATING EXPENSES
Total operating expenses increased to $3,911,000 in 1997 from $2,640,000 in
1996 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.
RESEARCH AND DEVELOPMENT EXPENSES. The Company incurred research and
development expenses of $888,000 for 1997, compared to expenses of $505,000
during 1996. Such expenses incurred in 1997 are comprised of expenses
incurred by CombiMatrix of $621,000, expenses incurred by MerkWerks of
$118,000, and expenses incurred by Soundview Technologies for the six-month
period beginning July 1, 1997 of $149,000. Research and development expenses
for 1996 are comprised of expenses incurred by CombiMatrix of $421,000 and
expenses incurred by MerkWerks of $84,000. 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.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. For 1997, marketing,
general and administrative expenses decreased to $2,104,000 as compared to
$2,135,000 for 1996. Expenses incurred during 1997 include a write-down of
$272,000 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 $559,000 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 those of Soundview Technologies beginning July 7, 1997.
Soundview Technologies expenses totalled $157,000 for this period.
Marketing, general and administrative expenses incurred by the Company in
1997, excluding the write-down and expenses related to Soundview
Technologies, were $1,675,000 compared to marketing, general and
administrative expenses incurred by the Company in 1996, excluding the
write-down, of
20
$1,576,000. 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 for 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.)
AMORTIZATION OF PATENTS AND GOODWILL. The Company reported amortization
expenses relating to patents and goodwill of $459,000 during 1997 as
compared to no such expense during 1996. This relates to the Company's July
1997 purchase of a majority interest in Soundview Technologies.
LEGAL SETTLEMENT EXPENSE. The Company incurred a one-time charge of
$460,000 relating to a legal settlement during 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.
OTHER INCOME (EXPENSE)
The Company reported other expense of $100,000 for 1997 compared to other
income of $1,604,000 for 1996.
INTEREST INCOME. During 1997, interest income was $52,000 as compared to
interest income during 1996, of $113,000. The decrease is due to the Company
having lower average cash balances in 1997 as compared to 1996.
INTEREST EXPENSE. Interest expense for 1997 was $41,000 as compared to no
such expense in 1996.
GAINS ON SALES OF INVESTMENTS. Net gains on sales of investments decreased
from $877,000 for 1996 to $50,000 for 1997. Such gain for 1997 is comprised
of gains on sales of interests in CombiMatrix. The year-earlier gain of
$877,000 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 $1,066,000, representing an increase in the carrying
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 PARTNERSHIPS. The Company reported equity in
income of partnerships of $129,000 for 1997, compared to $183,000 for 1996.
The decrease is primarily due to withdrawals totalling $250,000 in May 1997
made by the Company as a general partner in two private investment
partnerships managed by the Company.
21
EQUITY IN (LOSSES) EARNINGS OF AFFILIATES. The Company reported equity in
losses of affiliates of $290,000 for 1997, compared to losses of $635,000
for 1996. Such losses for 1997 are comprised of a loss of $174,000 for the
Company's investment in Whitewing Labs, and a loss of $116,000 for the
Company's investment in Greenwich Information Technologies, as determined by
the equity method of accounting. Losses for 1996 are comprised of a loss of
$313,000 for the Company's investment in Whitewing Labs, a loss of $276,000
for the Company's investment in Soundview Technologies, and a loss of
$46,000 for the Company's investment in Greenwich Information Technologies,
as determined by the equity method of accounting.
PROVISION FOR INCOME TAXES
For 1997, the Company recorded a benefit of $250,000, as compared to an
income tax expense of $606,000 for the same period in fiscal 1996. In 1997, 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
$411,000 in 1997, compared to $201,000 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.
INFLATION
Inflation has not had a significant impact on the Company.company.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1998, the Company1999, we had cash and cash equivalents of $7,508,000 and working capital of $7,614,000$37.6 million on a
consolidated basis. In May
1998,basis, of which the Companyparent company had $28.6 million and our
subsidiaries had $9.0 million. Working capital was $39.9 million on a
consolidated basis at December 31, 1999. Highlights of the financing and
commitment activities for the year-ended December 31, 1999 include:
THIRD QUARTER:
- $2.1 million of proceeds received from the exercise of common stock
purchase warrants to purchase 420,264 shares of common stock, relating to
a private placement of securities completed in December 1997.
- $4 million of private equity financing completed for CombiMatrix, in which
we contributed $2.3 million.
FOURTH QUARTER:
- Entered into a 24-month lease commitment for additional office space,
which increased our monthly lease payment from approximately $12,000 to
approximately $22,000.
- Soundbreak.com entered into a 60-month lease commitment for new office
space to
increase and replace its existing office space. This lease commitment provides
for minimumThe monthly lease payments are approximately $36,000.
- $7.5 million gross, private equity financing completed for Soundbreak.com,
in which we contributed $2 million.
- $10.7 million of $12,000 forgross proceeds received from the exercise of common stock
purchase warrants.
- $21 million of gross proceeds from a period of 60 months which
began December 1998 as compared to the Company's prior monthly lease payment of
approximately $3,000. The Company moved into the new office space in December
1998. To meet the Company's increased needs, the Company incurred expenses to
upgrade its computer and telephone systems in conjunction with the move as well
as expenses incurred specific to the move. Additional expenses relating to
furniture, fixtures, and equipment will be incurred in 1999. The Company has no
other material commitments for capital expenditures at the present time.
Warrants issued by the Company in private placements completed in November
1997, March 1998, and April 1998 contain call and redemption provisions should
the closing bidequity financing, consisting
of the Company's Common Stock exceed $7.50, $10.00, and $12.50,
respectively for twenty or more consecutive trading days. The exercise price for
the Common Stock underlying the warrants are $5.75, $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 bidsale of 974,441 units at an offering price of $21.50 per unit, each
unit consisting of one share of common stock and one-half of a common
stock purchase warrant.
- Conversion of promissory notes to equity in CombiMatrix, which eliminated
all long-term debt previously carried by CombiMatrix and us.
SUBSEQUENT TO DECEMBER 31, 1999:
- $14.8 million of proceeds received from the Company's Common Stock will exceed all such
thresholds or that, if so,exercise of common stock
purchase warrants issued in the Company will decide to call the warrants.
The Company hasDecember 1999 private placement.
- $17.5 million of proceeds from a private equity financing completed for
CombiMatrix, in which we contributed $10 million.
- $19 million of proceeds from a private equity financing completed for
Soundbreak.com, in which we contributed $9 million.
27
Our minimum rental commitments on operating leases total $3.9 million
through December 2004. We have no committed lines of credit or other committed
funding. However, the Company anticipateswe anticipate that existing working capital reserves will
provide sufficient funds for itsour operating expenses for at least the next twelve
months in the absence of making any major new investments. The Company intendsWe intend to seek
additional financing to fund new or existing businesses. There can be no
assuranceassurances that the Companywe will not encounter unforeseen difficulties that may deplete
itsour capital resources more rapidly than anticipated. Any efforts to seek
additional fundsfunding could be made through equity, debt, or other
22
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
ManyThe "Year 2000 Issue" refers to the problem of many computer programs using
the world's computer systems (including those in non-information
technology equipment and systems) currently record years inlast two digits to represent a two-digit format,year rather than four to define the applicable year. Computer systemsdigits (i.e., "99" for
1999). Some computer programs may have date-sensitive software 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 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 associatednot
operate properly when dealing 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 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 Company has been reviewing its systems and programs to identify those
subject to the Year 2000 Issue, and is in the process of upgrading and/or
modifying 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 reviewing, 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, and Soundview Technologies ("Subsidiaries"), progress changes
daily. With the exception of the financial figures, which are provided as of
December 31, 1998, the information contained in this disclosure is made as of
March 26,years past 1999, which is the latest practical date for providing such
information. The Company is monitoring and assisting minority-owned affiliates,
Signature-mail.com and Greenwich Information Technologies, in addressingwhen "00" will
represent the Year 2000 Issue as it applies to their businesses. The Company's other minority-
owned affiliate, Whitewing Labs,2000. To the extent that this situation exists, there is a
publicly traded company. Information
pertainingpotential for computer system failure or miscalculations, which could cause a
disruption of operation of that program. The problem is not limited to computer
software, since some equipment may have date-sensitive processors that may not
be able to properly use dates after the year 1999.
We have not suffered any significant Year 2000 Issue as it applies to Whitewing Labs is available
in its reports filedproblems with the Securitiesour internal
systems or with our third-party vendors and Exchange Commission.
Although the Company relies on computerlicensors of material software and
services. We completed our assessment and system tests of all current versions
of hardware and software products and technology to conduct businessinformation systems that we use
and has the potential to be affected by thebelieve that they are Year 2000 Issue, the Company believes
that most of the Company's internal systems will not be affected.compliant. However, duewe continue 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 themonitor
our Year 2000 Issue depending on whether it, its
Subsidiaries,implications. We have not incurred any material costs in
identifying or other entities not affiliated with the Company address this
issue successfully.
The Company'sevaluating 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 currently
plans to complete a final Assessment of its and its Subsidiaries' important
internal systems by April 30, 1999.
23
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 are currently in the Remediation phase. However, the Company's
Subsidiaries have not yet begun the Remediation phase. The Company currently
plans to complete Remediation of its important components by May 30, 1999 and
expects that the Subsidiaries' Remediation of their important components will be
completed by June 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, manage 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 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. An industry-wide
simulation is scheduled to begin in March 1999, which should provide the Company
with more information to assess potential risks in this area.
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 operation,
or financial condition.
24
The Company is beginning to develop a contingency plan, which it expects to
complete by July 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 costs 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-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.issues.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The Company isWe were not a party to derivative financial instruments at or during the
year ended December 31, 1998. The Company's financial instruments, other
than instruments carried on the equity basis, are its fixed rate notes payable
of $1,222,000 which are discussed in Note 1 to the December 31, 1998
Consolidated Financial Statements.1999.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY INFORMATION
The financial statements and related financial information required to be
filed hereunder are indexed under Item 14 of this report and are incorporated
herein by reference.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
28
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,Directors-Nominees,"
"Executive Officers," and "Section 16(a) Beneficial Ownership Reporting
Compliance" in the Company'sour definitive proxy statement to be filed with the CommissionSEC not later
than April 30, 1999.
25
2000.
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'sour
definitive proxy statement to be filed with the CommissionSEC not later than April 30,
1999.2000.
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 "Security Ownership of Certain Beneficial
Owners and Management" in the Company'sour definitive proxy statement to be filed with the
CommissionSEC not later than April 30, 1999.2000.
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"transactions with Management and Others"
in the Company'sour definitive proxy statement to be filed with the CommissionSEC not later than
April 30, 1999.2000.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.8-K
(a) (1) Financial Statements
PAGE
------------
Report of Independent Accountants...............................................Accountants........................... F-1
Independent Auditor's Report.................................................... F-2
Consolidated Balance Sheets as of December 31, 19981999 and
1997.................... F-31998...................................................... F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 1997, and 1996................................................................ F-41997.......................... F-3
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1999, 1998 1997, and 1996.......................................................... F-51997.............. F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 1997, and 1996................................................................ F-61997.......................... F-5
Notes to Consolidated Financial Statements...................................... F-7Statements.................. F-6
(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:
2.1 AmendedAgreement and Restated Operating AgreementPlan of Signature-mail.com (formerly Internet Software LLC)
dated April 2, 1998 by and between H. Lee Browne, Michael Lloyd, Nicholas E.K. Heckett,Merger of Acacia Research Corporation,
a California corporation, and Acacia Research Corporation, (certain portions omitted and filed separately with the Securities
and Exchange Commission pursuant to an applicationa
Delaware corporation, dated as of confidential treatment)(9)
2.1 FormDecember 23, 1999(1)
3.1 Certificate of Purchase Agreement(8)
3.1 Articles of Incorporation, as amended(6)Incorporation(8)
3.2 Amended and Restated Bylaws(2)
4.1 Form of Common Stock Warrant Agreement(7)Bylaws(9)
4.2 Form of CombiMatrix Note (to be provided upon request to the Securities and Exchange Commission)Specimen Certificate of Company's Common Stock(3)
10.1 Lease of Company's Executive Offices at 55 South Lake
Avenue, Pasadena, California 91101(6)91101(4)
10.2 Lease Agreement dated November 11, 1999 between
Soundbreak.com Incorporated and 8730 Sunset Towers and
related Guaranty(11)
2629
10.2 Company's10.3 1993 Stock Option Plan(1)
10.3Plan(5)
10.4 Form of Stock Option Agreement(1)
10.4 Company'sAgreement for 1993 Stock Option Plan(5)
10.5 1996 Stock Option Plan(3)
10.5Plan(10)
10.6 Form of Option Agreement constituting the 1996 Executive
Stock Bonus Plan(2)
10.7 Agreement between Acacia Research and Paul Ryan(7)
10.8 Letter Agreement between the Company and Greenwich
Information Technologies regarding attached Promissory Note
and Pledge Agreement(4)
10.6 Legal Settlement between the Company and Ann P. Hodges and Christopher D. Hodges(2)
10.7 Agreement between the Company and Cruttenden Roth Incorporated(2)
10.8 Agreement between Acacia Research and Paul Ryan(10)Agreement(6)
10.9 1996 Executive Stock Bonus Plan(5)
10.10 Greenwich Information Technologies Exclusive Marketing and
Licensing Agreement(10)Agreement(7)
21 List of Subsidiariessubsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
23.2 Consent of Finocchiaro & Co.
27 Financial Data Schedule
27.1 Financial Data Schedule
27.2 Financial Data Schedule
- --------------------------------------------------
(1) Incorporated by reference from the Company's Report on Form 8-K filed on
December 30, 1999 (SEC File No. 000-26068).
(2) Incorporated by reference from the Company's Definitive Proxy Statement for
the 1996 annual shareholder meeting.
(3) Incorporated by reference from Amendment No. 2 on Form 8-A/A filed on
December 30, 1999 (SEC File No. 000-26068).
(4) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
filed on August 14, 1998.
(5) 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.
(2) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
filed on August 14, 1997.
(3) Incorporated by reference from the Company's Registration Statement on Form
S-8 filed on February 21, 1997.
(4)(6) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
(5) Incorporated by reference from the Company's definitive proxy statement for
the 1996 annual shareholder meeting.
(6) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
filed on August 14, 1998.
(7) Incorporated by reference from the Company's Quarterly Report on Form 10-Q
filed on May 15, 1998.
(8) Incorporated by reference from the Company's Report on Form 8-K filed on
February 11, 1998.
(9) Incorporated by reference from the Company's Report on Form 8-K filed on
April 17, 1998.
(10) IncorporatedIncorporate by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1997.
(8) Incorporated by reference as Appendix A to the Definitive Proxy Statement
on Schedule 14A filed on November 2, 1999 (SEC File No. 000-26068).
(9) Incorporated by reference as Appendix B to the Definitive Proxy Statement
on Schedule 14A filed on November 2, 1999 (SEC File No. 000-26068).
(10) Incorporated by reference as Appendix D to the Definitive Proxy Statement
on Schedule 14A filed on November 2, 1999 (SEC File No. 000-26068).
(11) Incorporated by reference from the Company's Quarterly Report on
Form 10-Q filed November 15, 1999.
(b) Reports on Form 8-K.
None.
27On December 30, 1999, the Company filed a Current Report on Form 8-K dated
December 28, 1999 to report under Item 5 (Other Events) to change our state of
incorporation from California to Delaware by means of a merger into a
wholly-owned Delaware subsidiary. This change in its state of incorporation was
approved by the holders of a majority of the Registrant's outstanding shares of
Common Stock at the Registrant's Special Meeting of Shareholders on December 9,
1999. No financial statements were required to be filed with such report.
30
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 30, 1999
ACACIA RESEARCH CORPORATION
/s/ PAUL R. RYAN
------------------------------------------
Paul R. Ryan
CHIEF EXECUTIVE OFFICER AND PRESIDENT
DATED: March 21, 2000
ACACIA RESEARCH CORPORATION
/s/ Peter Frank
-------------------------------------------
Peter Frank
CHIEF FINANCIAL OFFICER
(PRINCIPAL FINANCIAL OFFICER)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE
- ------------------------------ -------------------------- ---------------------------- ----- ----
/s/ R. Bruce Stewart
------------------------------------------- Chairman of the Board of
/s/ R. BRUCE STEWART Directors, Chief
- ------------------------------ Financial Officer March 30, 199921, 2000
R. Bruce Stewart (Principal Financial and
Accounting Officer)of Directors
Chief Executive Officer /s/ PAUL R. RYAN and
President (Principal
- ------------------------------ Executive Officer) and March 30, 1999/s/ Paul R. Ryan President and Director
/s/ THOMAS B AKIN
- ------------------------------ Director------------------------------------------- (Principal March 30, 199921, 2000
Paul R. Ryan Executive Officer)
/s/ Thomas B. Akin
/s/ FRED A. DE BOOM
- ------------------------------------------------------------------------- March 21, 2000
Thomas B. Akin Director
March 30, 1999/s/ Fred A. de Boom
------------------------------------------- March 21, 2000
Fred A. de Boom Director
/s/ EDWARDEdward W. FRYKMAN
- ------------------------------Frykman
------------------------------------------- March 21, 2000
Edward W. Frykman Director
Vice President, Finance and
/s/ Mary Rose Colonna Controller
------------------------------------------- (Principal Accounting March 30, 1999
Edward W. Frykman21, 2000
Mary Rose Colonna Officer)
2931
REPORT OF INDEPENDENT ACCOUNTANTS
PRICEWATERHOUSECOOPERS LLP
To the Board of Directors and
Stockholders of Acacia Research Corporation
In our opinion, the consolidated balance sheets at December 31, 1998 and
1997 and the related consolidatedfinancial statements of operations, of stockholders'
equity and of cash flows for each of the two years in the period ended December
31, 1998, as listed in the index
appearing under Item 14(a)(1) and (2) on page 26,29 present fairly, in all material
respects, the financial position of Acacia Research Corporation and its
subsidiaries at December 31, 19981999 and 1997,December 31, 1998, and the results of
their operations and their cash flows for each of the twothree years in the period
ended December 31, 1998,1999, in conformity with accounting principles generally
accepted accounting principles.in the United States. 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 of these
statements in accordance with auditing standards generally accepted auditing standardsin the
United States, 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
audits provide 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/ PRICEWATERHOUSECOOPERSPricewaterhouseCoopers LLP
Los Angeles, California
March 26, 1999
F-1
INDEPENDENT AUDITORS' REPORT
FINOCCHIARO & CO.
Certified Public Accountant
150 East Colorado Boulevard, Suite 201
Pasadena, California 91105
Telephone (626) 449-6300 * Telecopier (626) 449-6299
To the Board of Directors and
Stockholders of Acacia Research Corporation
We have audited the consolidated statements of operations, of stockholders'
equity and of cash flowsFebruary 25, 2000, except for the year ended December 31, 1996, as listed in the
accompanying index, prior to the reinstatement 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 require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatements. 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
the 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
year ended December 31, 1996, 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, except10,
as to which the penultimate paragraph in Note 2,
whichdate is as of March 25, 1998
F-220, 2000
F-1
ACACIA RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND 1997PER SHARE INFORMATION)
DECEMBER 31,1999 1998
DECEMBER 31, 1997
----------------- ------------------------- --------
ASSETS
Current assets
Cash and cash equivalents................................................equivalents................................. $ 7,508,00037,631 $ 1,367,0007,508
Management fees and other receivables.................................... 239,000 235,000receivables..................... 60 239
Receivables from affiliates.............................................. 27,000 0affiliates............................... 318 27
Deposit on investment..................................... 3,000 --
Prepaid expenses......................................................... 96,000 84,000expenses.......................................... 208 96
Income tax receivable.................................................... 110,000 110,000
----------------- -----------------receivable..................................... -- 110
-------- -------
Total current assets................................................... 7,980,000 1,796,000
Equipment, furniture,assets.................................... 41,217 7,980
Property and fixtures, net.................................... 530,000 242,000
Notes receivable, net...................................................... 38,000 376,000equipment, net................................. 1,154 530
Investment in affiliates, at equity........................................ 3,481,000 1,205,000equity......................... 4,636 3,481
Partnership interests, at equity........................................... 1,832,000 586,000equity............................ -- 1,832
Patents, net of accumulated amortization................................... 4,610,000 3,877,000amortization.................... 3,534 4,610
Goodwill, net of accumulated amortization.................................. 1,158,000 758,000amortization................... 1,012 1,158
Other assets, net of accumulated amortization.............................. 140,000 14,000
----------------- -----------------assets................................................ 238 178
-------- -------
$ 19,769,000 $ 8,854,000
----------------- -----------------
----------------- -----------------51,791 $19,769
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses....................................expenses..................... $ 366,0001,293 $ 170,000
Accrued compensation..................................................... 0 51,000
Legal settlement payable................................................. 0 226,000
----------------- -----------------366
-------- -------
Total current liabilities.............................................. 366,000 447,000liabilities............................... 1,293 366
Other liabilities.......................................................... 240,000 0liabilities........................................... 340 240
Notes payable, net of discount............................................. 1,222,000 0
----------------- -----------------discount.............................. -- 1,222
-------- -------
Total liabilities...................................................... 1,828,000 447,000
----------------- -----------------liabilities....................................... 1,633 1,828
-------- -------
Minority interests......................................................... 0 227,000
----------------- -----------------interests.......................................... 4,896 --
-------- -------
Stockholders' equity
Common stock, no par value; 30,000,000value $.001 per share;
60,000,000 shares authorized; 13,607,193 shares in 1999
and 10,190,815 shares in 1998 and 6,286,148 shares in 1997 issued and outstanding..... 26,737,000 10,713,000outstanding.... 14 10
Additional paid-in capital................................ 62,283 26,727
Warrants to purchase common stock........................................ 100,000 371,000stock......................... 58 100
Accumulated deficit...................................................... (8,896,000) (2,707,000)
Note receivable secured by common stock.................................. 0 (197,000)
----------------- -----------------deficit....................................... (17,093) (8,896)
-------- -------
Total stockholders' equity............................................. 17,941,000 8,180,000
----------------- -----------------equity.............................. 45,262 17,941
-------- -------
$ 19,769,000 $ 8,854,000
----------------- -----------------
----------------- -----------------51,791 $19,769
======== =======
Commitments and contingencies (Note 12)8)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-2
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
1999 1998 1997
---------- --------- ---------
Revenues:
Capital management fee income............................ $ 122 $ 382 $ 491
---------- --------- ---------
Total revenues........................................... 122 382 491
---------- --------- ---------
Operating expenses:
Research and development expenses........................ 1,806 1,880 888
Marketing, general, and administrative expenses.......... 6,258 2,776 2,104
Amortization of patents and goodwill..................... 1,622 1,568 459
Legal settlement......................................... -- -- 460
---------- --------- ---------
Total operating expenses................................. 9,686 6,224 3,911
---------- --------- ---------
Operating loss........................................... (9,564) (5,842) (3,420)
---------- --------- ---------
Other income (expense):
Interest income.......................................... 389 302 52
Interest expense......................................... (254) (130) (41)
Gain on sale of investments.............................. -- -- 50
Equity in (losses) income of partnerships................ (1) 184 129
Equity in losses of affiliates........................... (1,120) (901) (290)
Other income............................................. 144 -- --
---------- --------- ---------
Total other expense...................................... (842) (545) (100)
---------- --------- ---------
Loss before income taxes and minority interests............ (10,406) (6,387) (3,520)
(Provision) benefit for income taxes....................... (20) -- 250
---------- --------- ---------
Loss before minority interests............................. (10,426) (6,387) (3,270)
Minority interests......................................... 2,229 198 411
---------- --------- ---------
Net loss................................................... $ (8,197) $ (6,189) $ (2,859)
========== ========= =========
Loss per common share
Basic.................................................... $ (0.75) $ (0.69) $ (0.58)
Diluted.................................................. $ (0.75) $ (0.69) $ (0.58)
Weighted average number of common and potential common
shares outstanding used in computation of loss per share
Basic.................................................... 10,871,423 8,971,272 4,962,286
Diluted.................................................. 10,871,423 8,971,272 4,962,286
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-3
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONSSTOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
AND 1996(IN THOUSANDS, EXCEPT SHARE INFORMATION)
(RESTATED)
1998 1997 1996WARRANTS (ACCUMULATED
ADDITIONAL TO PURCHASE DEFICIT) STOCK
COMMON COMMON PAID-IN COMMON RETAINED SUBSCRIPTIONS
SHARES STOCK CAPITAL STOCK EARNINGS RECEIVABLE
---------- -------- ---------- ----------- ------------ ------------- ------------- ------------
Revenues:
Capital management fee income.......................................
1997
Balance at December 31, 1996.............. 3,941,344 $ 382,0004 $ 491,0004,068 $ 58,000
Management fee income............................................... -- -- 1,400,000
------------- ------------- ------------
Total Revenues...................................................... 382,000 491,000 1,458,000
------------- ------------- ------------
Operating Expenses:
Research and development expenses................................... 1,880,000 888,000 505,000
Marketing, general, and administrative expenses..................... 2,776,000 2,104,000 2,135,000
Amortization of patents and goodwill................................ 1,568,000 459,000 --
Legal settlement expense............................................ -- 460,000 --
------------- ------------- ------------
Total Operating Expenses............................................ 6,224,000 3,911,000 2,640,000
------------- ------------- ------------
Operating Loss...................................................... (5,842,000) (3,420,000) (1,182,000)
------------- ------------- ------------
Other income (expense):
Interest income..................................................... 302,000 52,000 113,000
Interest expense.................................................... (130,000) (41,000) --
Gain on sale of investments......................................... -- 50,000 877,000
Gain on10 $ 152 $(89)
Net loss.................................. (2,859)
Units issued in private placement, net.... 1,832,404 2 5,391 214
Stock options exercised................... 512,400 1 805
Increase in capital due to issuance of
stock by affiliate..............................subsidiaries................... 359
Compensation expense relating to stock
options/warrants........................ 33 147
Cash received for stock subscriptions..... 89
Adjustment in carrying value of note
secured by common stock.................
Tax benefit from nonqualified stock
options................................. 50
---------- --- ------- ----- -------- ----
Balance at December 31, 1997.............. 6,286,148 6 10,707 371 (2,707) --
1998
Net loss.................................. (6,189)
Units issued in private placements, net... 1,434,786 1 8,475 38
Shares issued to purchase equity
investments............................. 806,826 1 3,033
Stock options exercised................... 874,400 1 1,200
Warrants exercised........................ 788,655 1 3,137 (406)
Increase in capital due to issuance of
stock by subsidiaries................... 45
Compensation expense relating to stock
options/warrants........................ 130 97
Payment received on note secured by common
stock...................................
---------- --- ------- ----- -------- ----
Balance at December 31, 1998.............. 10,190,815 10 26,727 100 (8,896) --
1,066,000
Equity1999
Net loss.................................. (8,197)
Units issued in incomeprivate placements, net... 974,771 1 19,014 58
Shares issued to purchase equity
investments............................. 60,107 288
Stock options exercised................... 326,450 1 757
Warrants exercised........................ 2,055,050 2 14,542 (100)
Increase in capital due to issuance of
partnerships.................................... 184,000 129,000 183,000
Equitystock by subsidiaries................... 928
Compensation expense relating to stock
options/warrants........................ 27
---------- --- ------- ----- -------- ----
Balance at December 31, 1999.............. 13,607,193 $14 $62,283 $ 58 $(17,093) $ --
========== === ======= ===== ======== ====
NOTE
RECEIVABLE
SECURED BY
COMMON
STOCK TOTAL
---------- --------
1997
Balance at December 31, 1996.............. $(188) $ 3,957
Net loss.................................. (2,859)
Units issued in lossesprivate placement, net.... 5,607
Stock options exercised................... 806
Increase in capital due to issuance of
affiliates...................................... (901,000) (290,000) (635,000)
------------- ------------- ------------
Total other income (expense)........................................ (545,000) (100,000) 1,604,000
(Loss) income before income taxes and minority interests.............. (6,387,000) (3,520,000) 422,000
Benefit (provision)stock by subsidiaries................... 359
Compensation expense relating to stock
options/warrants........................ 180
Cash received for income taxes..................................stock subscriptions..... 89
Adjustment in carrying value of note
secured by common stock................. (9) (9)
Tax benefit from nonqualified stock
options................................. 50
----- -------
Balance at December 31, 1997.............. (197) 8,180
1998
Net loss.................................. (6,189)
Units issued in private placements, net... 8,514
Shares issued to purchase equity
investments............................. 3,034
Stock options exercised................... 1,201
Warrants exercised........................ 2,732
Increase in capital due to issuance of
stock by subsidiaries................... 45
Compensation expense relating to stock
options/warrants........................ 227
Payment received on note secured by common
stock................................... 197 197
----- -------
Balance at December 31, 1998.............. -- 250,000 (606,000)
------------- ------------- ------------
Loss before minority interests........................................ (6,387,000) (3,270,000) (184,000)
Minority interests.................................................... 198,000 411,000 201,000
------------- ------------- ------------17,941
1999
Net (loss) income.....................................................loss.................................. (8,197)
Units issued in private placements, net... 19,073
Shares issued to purchase equity
investments............................. 288
Stock options exercised................... 758
Warrants exercised........................ 14,444
Increase in capital due to issuance of
stock by subsidiaries................... 928
Compensation expense relating to stock
options/warrants........................ 27
----- -------
Balance at December 31, 1999.............. $ (6,189,000) $ (2,859,000) $ 17,000
------------- ------------- ------------
------------- ------------- ------------
Loss per common share
Basic............................................................... $(0.69) $(0.58) $0.00
Diluted............................................................. $(0.69) $(0.58) $0.00
Weighted average number of common and potential common shares
outstanding used in computation of loss per share
Basic............................................................... 8,971,272 4,962,286 3,826,014
Diluted............................................................. 8,971,272 4,962,286 4,976,434-- $45,262
===== =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1998, 1997, AND 1996
(ACCUMULATED
WARRANTS TO DEFICIT) STOCK NOTE RECEIVABLE
COMMON COMMON PURCHASE RETAINED SUBSCRIPTIONS SECURED BY
STOCK STOCK COMMON STOCK EARNINGS RECEIVABLE COMMON STOCK TOTAL
---------- ----------- ------------ ------------ ------------- --------------- ----------
1996
Balance at December
31, 1995, as
adjusted for
two-for-one common
stock split....... 3,725,344 $ 3,537,000 $ 10,000 $ 135,000 $(208,000) $ -- 3,474,000
Net income, as
restated.......... 17,000 17,000
Stock options
exercised......... 216,000 216,000 216,000
Cash received for
stock
subscriptions..... 119,000 119,000
Issuance of note
secured by common
stock............. (188,000) (188,000)
Tax benefit from
nonqualified stock
options........... 319,000 319,000
---------- ----------- ------------ ------------ ------------- --------------- ----------
Balance at December
31, 1996.......... 3,941,344 4,072,000 10,000 152,000 (89,000) (188,000) 3,957,000
1997
Net loss............ (2,859,000) (2,859,000)
Units issued in
private
placement......... 1,832,404 5,694,000 26,000 5,720,000
Stock issuance
costs............. (301,000) 188,000 (113,000)
Stock options
exercised......... 512,400 806,000 806,000
Increase in capital
due to issuance of
common stock by
affiliate......... 359,000 359,000
Compensation expense
relating to stock
options/warrants... 33,000 147,000 180,000
Cash received for
stock
subscriptions..... 89,000 89,000
Adjustment in
carrying value of
note secured by
common stock...... (9,000) (9,000)
Tax benefit from
nonqualified stock
options........... 50,000 50,000
---------- ----------- ------------ ------------ ------------- --------------- ----------
Balance at December
31, 1997.......... 6,286,148 10,713,000 371,000 (2,707,000) 0 (197,000) 8,180,000
1998
Net loss............ (6,189,000) (6,189,000)
Units issued in
private
placements........ 1,434,786 9,214,000 38,000 9,252,000
Share issued to
purchase equity
investments....... 806,826 3,035,000 3,035,000
Stock issuance
costs............. (738,000) (738,000)
Stock options
exercised......... 874,400 1,201,000 1,201,000
Warrants
exercised......... 788,655 3,137,000 (406,000) 2,731,000
Increase in capital
due to subsidiary
stock options..... 45,000 45,000
Compensation expense
relating to stock
options/warrants... 130,000 97,000 227,000
Note secured by
common stock...... 197,000 197,000
---------- ----------- ------------ ------------ ------------- --------------- ----------
Balance at December
31, 1998.......... 10,190,815 $26,737,000 $ 100,000 $(8,896,000) $ 0 $ 0 17,941,000
---------- ----------- ------------ ------------ ------------- --------------- ----------
---------- ----------- ------------ ------------ ------------- --------------- ----------
F-5
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
AND 1996(IN THOUSANDS)
(RESTATED)1999 1998 1997
1996
----------- ----------- ------------------- -------- --------
Cash flows from operating activities:CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income.......................................................... $(6,189,000) $(2,859,000) $ 17,000loss.................................................... $(8,197) $(6,189) $(2,859)
Adjustments to reconcile net (loss) incomeloss to net cash used in
operating activities:
Legal settlement expense................................................. -- 435,000 --
Depreciation and amortization............................................ 1,709,000 529,000 31,000
Amortization of discount on notes payable................................ 60,000 --
Deferred income tax benefit.............................................. -- (193,000) 245,000
Gain on sales of investments............................................. -- -- (877,000)amortization............................. 1,823 1,709 529
Equity in lossesloss of affiliates and partnerships.......................... 717,000 161,000 452,000partnerships............. 1,120 717 161
Minority interestinterests in net loss............................................ (198,000) (411,000) (201,000)
Gain on issuance of stock by affiliate................................... -- -- (1,066,000)loss............................ (2,229) (198) (411)
Compensation expense relating to stock options/warrants.................. 227,000 360,000 --
Provision for write-down of notes and interest receivable................ 101,000 272,000 559,000warrants... 146 227 360
Other..................................................... 252 161 514
Changes in assets and liabilities, net of effects of
acquisitions:
Management fees and other receivables, prepaid expenses
patents and other assets........................................................... (132,000) (113,000) (316,000)assets........................................ 23 (132) (113)
Accounts payable, accrued expenses accrued compensation, and other
liabilities............................................................ 146,000 110,000 (156,000)
----------- ----------- -----------liabilities............................................. 927 146 110
------- ------- -------
Net cash used in operating activities.................................... (3,559,000) (1,709,000) (1,312,000)
----------- ----------- -----------
Cash flows from investing activities:activities..................... (6,135) (3,559) (1,709)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equity investments, net of cash acquired..................... (2,552,000) (132,000) (3,000,000)
Payments receivedacquired...... (2,387) (2,552) (132)
Deposit on advances to affiliates..............................investment..................................... (3,000) -- 53,000 414,000
Advances to affiliates................................................... (27,000) -- (370,000)
Withdrawals from partnerships............................................partnerships............................. 1,710 -- 568,000 (400,000)
Proceeds from sales568
Purchase of investments.......................................partnership interest.......................... -- -- 2,049,000
Payment for acquisition of patent........................................ -- -- (53,000)
Payments received on notes receivable.................................... -- 68,000 466,000
Proceeds from note receivable secured by common stock.................... 194,000 --(1,062) --
Purchase of partnership interest......................................... (1,062,000) -- --
Capitalized expenditures................................................. (374,000) (92,000) (155,000)
----------- ----------- -----------property and equipment........................ (890) (374) (92)
Other..................................................... (84) 167 121
------- ------- -------
Net cash (used in) provided by investing activities...................... (3,821,000) 465,000 (1,049,000)
----------- ----------- -----------
Cash flows from financing activities:
Payments on notes payable................................................ -- (1,453,000) (248,000)activities....... (4,651) (3,821) 465
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on) notes payable.............................................. 1,400,000payable................. -- 800,000
Payments of debt issuance costs.......................................... (144,000) -- --1,400 (1,453)
Proceeds from exercise of stock options and warrants..................... 3,706,000 806,000 --
Tax benefit from nonqualified stock options.............................. -- 50,000 319,000
Collection of subscription receivable.................................... -- 89,000 --
Captialwarrants...... 15,202 3,706 806
Capital contributions from minority shareholders of
subsidiaries......... 45,000 434,000 694,000subsidiaries............................................ 6,634 45 434
Proceeds from sale of common stock, net of issuance
costs................ 8,514,000 2,392,000 300,000
----------- ----------- -----------costs................................................... 19,073 8,514 2,392
Other..................................................... -- (144) 139
------- ------- -------
Net cash provided by financing activities................................ 13,521,000 2,318,000 1,865,000
----------- ----------- -----------activities................. 40,909 13,521 2,318
------- ------- -------
Increase in cash and cash equivalents...................................... 6,141,000 1,074,000 (496,000)equivalents..................... 30,123 6,141 1,074
Cash and cash equivalents, beginning....................................... 1,367,000 293,000 789,000
----------- ----------- -----------beginning...................... 7,508 1,367 293
------- ------- -------
Cash and cash equivalents, ending..........................................ending......................... $37,631 $ 7,508,0007,508 $ 1,367,0001,367
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid for interest.................................... $ 293,000
----------- ----------- -----------
----------- ----------- -----------78 $ 2 $ 39
Cash paid for income taxes................................ $ 7 $ 2 $ 2
Supplemental schedule of non-cash investing and financing
activities:
Issuance of common stock for additional equity in
consolidated subsidiaries and affiliates............................................affiliates................ $ 3,035,000288 $ 2,825,0003,035 $ 02,825
Increase in equity investment due to receipt of affiliate
stock as payment on note receivable.............................................receivable..................... $ 240,000-- $ 0240 $ 0
Issuance--
Increase of common stock to satisfy legal settlement
payable.............payable................................................. $ 226,000-- $ 0226 $ 0--
Discount on notes payable from issuance of subsidiary's
warrants.........warrants................................................ $ 238,000-- $ 0238 $ 0--
Increase in minority interest due to conversion of
subsidiary notes payable................................ $ 1,400 $ -- $ --
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-6F-5
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. On December 28, 1999, the
Company changed its state of incorporation from California to Delaware. As a
result, all shares of the Company's common stock were converted into shares of
the Delaware corporation. The stockholders also approved an increase in the
number of the Company's authorized shares of common stock from 30 million to
60 million and authorized the issuance of up to 20 million shares of preferred
stock, whose rights, privileges, preferences, and powers would be determined at
a later date. The Company is a diversified
company that makes direct investments in and provides management services to
emerging businessescorporations 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 December 31, 1998,1999, the Company had significant economic interests in seven enterprisesnine
companies and takes an active role in each enterprise'scompany's growth and advancement.
These companies are: Acacia Launchpad LLC ("Launchpad"), MerkWerks Corporation
("MerkWerks"), Soundbreak.com Incorporated ("Soundbreak.com"), Soundview
Technologies Incorporated ("Soundview Technologies"), CombiMatrix Corporation
("CombiMatrix"), Signature-mail.com llc ("Signature-mail.com"), Mediaconnex
Communications, Inc. ("Mediaconnex"), Greenwich Information Technologies LLC
("Greenwich Information Technologies"), MerkWerks Corporation ("MerkWerks"), Signature-mail.com llc
("Signature-mail.com"), Soundview Technologies Incorporated ("Soundview
Technologies"),and Whitewing Labs, Inc. ("Whitewing
Labs").
In the fourth quarter of 1999, the Company completed a private placement
consisting of the sale of units, each composed of one share of the Company's
common stock and Acacia Capital
Management.one-half of a common stock purchase warrant. The Company doing business as Acacia Capital Management isissued
974,771 units at an offering price of $21.50 per unit. Approximately
$21 million was raised from this financing.
In the first quarter of 1998, the Company completed a general
partner in two private investment partnershipsplacement
raising gross proceeds of $3.65 million through the sale of 634,786 units, each
unit consisting of one share of the Company's common stock and is an investment advisorone three-year
callable common stock purchase warrant. Each common stock purchase warrant
entitled the holder to two offshorepurchase one share of the Company's common stock at a
price of $7.50 per share and was callable by the Company once the closing bid
price of the Company's common stock averages $10.00 or above for 20 consecutive
trading days on the Nasdaq National Market System. During the fourth quarter of
1999, the Company gave a redemption notice for these warrants. As a result, all
of these warrants were exercised prior to the redemption date with the Company
receiving proceeds of approximately $4.8 million.
In the second quarter of 1998, the Company completed a private investment corporations.
On July 6,placement
raising gross proceeds of $5.6 million through the sale of 800,000 units, each
unit consisting of one share of the Company's common stock and one three-year
callable common stock purchase warrant. Each common stock purchase warrant
entitled the holder to purchase one share of the Company's common stock at a
price of $9.25 per share and was callable by the Company once the closing bid
price of the Company's common stock averages $12.50 or above for 20 consecutive
trading days on the Nasdaq National Market System. In the fourth quarter of
1999, the Company gave a redemption notice for these warrants. As a result, all
of these warrants were exercised prior to the redemption date with the Company
receiving proceeds of $7.6 million.
In the second quarter of 1997, the Company purchased from two individualssold 290,200 units at a total of
2,625,000 shares of common stock of Soundview Technologies (the "Soundview
Shares") for a total purchase
price of $4,225,000, consisting$5.00 per unit in a private placement. Each unit consisted of 800,000 shares
ofone
common stock purchase warrant and one share of the Company, $500,000 in cash, and the issuance of non-
recourse promissory notesCompany's common stock. Each
common stock purchase warrant entitled its holder to eachpurchase one share 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 outstandingCompany's common stock of Soundview Technologies. The acquisition
was accounted for under the purchase method. The excess of the purchase price
over the book value of the net assets acquired was assigned to patents 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.
The following unaudited pro forma information presents a summary of
consolidated results of operations of the Company and Soundview Technologies as
if the acquisition occurred as of the beginning of each year presented, with
adjustments to give effect to amortization of patents and goodwill and
intercompany transactions:
DECEMBER 31, 1997 DECEMBER 31, 1996
----------------- -----------------
Revenues............................................... $ 491,000 $ 58,000
Net Loss............................................... $ (3,488,000) $ (1,348,000)
Loss Per Share, Basic and Diluted...................... $ (0.71) $ (0.35)
In January 1998, the Company purchased a total of 401,359 shares of common
stock of MerkWerks for a total purchaseat an exercise price of $646,000 consisting$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 171,950
shares of common stock of the Company. As a result of the transaction, the
Company increased its equity ownership in MerkWerks from 69.5% to 89.6%. 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 $646,000, which is being amortized over its estimated
useful life of 3 years.
In January 1998, the Company purchased a total of 100,000 shares of common
stock of CombiMatrix for a total purchase price of $161,000 consisting of 44,170
shares of common stock of the Company. As a
F-7$0.50 per unit placed
F-6
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF BUSINESS (CONTINUED)
resultand one finder warrant per ten units placed. Each finder warrant may be execised
prior to June 8, 2000 for one share of the transaction,Company's common stock at an exercise
price of $5.50 per share, subject to adjustment. The Company had the right to
redeem all of the warrants issued on 30 days prior written notice at a
redemption price of $0.01 per warrant if the closing bid price of the Company's
common stock averaged $10.00 or above for 20 consecutive trading days after the
common stock reached a closing bid price of at least $10.00 on the Nasdaq
National Market System. During the third quarter of 1999, the Company increased itsgave a
redemption notice for these warrants. 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.
COMBIMATRIX
During the third quarter of 1999, CombiMatrix completed a private equity
ownershipfinancing raising gross proceeds of $4 million through the sale of 2 million
shares of CombiMatrix common stock. The Company invested $2.3 million in CombiMatrix from 51.4% to 52.7%.this
private placement and acquired 1.15 million shares. The acquisition was
accounted for under the purchase method. The excessDuring the fourth quarter, CombiMatrix
offered holders of the purchase price over the fair value of the net
assets acquired was assigned to goodwill of approximately $157,000, which is
being amortized over its estimated useful life of 5 years.
In Januarythree-year 6% unsecured subordinated promissory notes issued
in a private offering completed in March 1998 the Company purchased a totalopportunity to convert their
outstanding principal balance into CombiMatrix Common Stock. All noteholders
converted as of 1,144,000 shares of common
stock of Soundview Technologies for a total purchase price of $1,842,000
consisting of 488,672 shares of common stock of the Company.December 1999. As a result of these activities, the transaction, the Company increased itsCompany's
equity ownership in Soundview
Technologies from 51.4% to 66.7%. The acquisition was accounted for underis 50% as of December 31, 1999.
In the purchase method. The excessfirst quarter of the purchase price over the book value of the net
assets acquired was assigned to patents of approximately $1,816,000, which is
being amortized over its estimated remaining useful life of approximately 5
years.
In January 1998, the Company purchased an additional 3.31% interest in
Greenwich Information Technologies for a total purchase price of $386,000
consisting of 102,034 shares of common stock of the Company. As a result of the
transaction, the Company increased its ownership of Greenwich Information
Technologies from 30.02% to 33.33%. The Company accounts for its investment
using the equity method. The excess of the purchase price over the book value of
the net assets acquired of approximately $368,000 is being amortized over a
five-year period.
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 15th15(th) of each year until the Subordinated Notes are paid in full.
Principal shall be due and payable in full on the third anniversary of each
Subordinated Note. Each common stock purchase warrant entitlesentitled 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
attributedwhich was converted as
described above. The amount attributable to the warrants and included in each
unit resulting in debt discount.discount totaled $850 per unit. The Company invested
$50,000 in this private placement.
If, prior toAlso during the maturity
datefirst quarter of 1998, the Company purchased a total of
100,000 shares of common stock of CombiMatrix for a total purchase price of
$161,000 consisting of 44,170 shares of common stock 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
holdersCompany. As a result
of the Subordinated Notes shall be offeredtransaction, the opportunityCompany increased its equity ownership in CombiMatrix
from 51.4% to acquire52.7%. The excess of the purchase price over the fair value of the
net assets acquired was assigned to goodwill of approximately $157,000, which is
being amortized over its estimated useful life of 5 years.
SOUNDBREAK.COM
At the end of the third quarter of 1999, the Company purchased 10,000 shares
of CombiMatrix common stock in exchangeSeries A "voting" Convertible Preferred Stock of Soundbreak.com for
the then outstanding
principal amount$1 million, which represented 100% of the Subordinated Notes. Holders will be entitled to only one
opportunity to exchange Subordinated Notes into CombiMatrixoutstanding Series A Preferred Stock.
The Company also owns 98.8% of the 5 million outstanding shares of
Soundbreak.com's common stock. In March 1998, the Companyfourth quarter, Soundbreak.com completed a
private equity financing raising gross proceeds of $3.65$6.5 million through the sale of 634,786 units, each unit
consisting65,505 shares
of oneSeries B "non-voting" Convertible
F-7
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF BUSINESS (CONTINUED)
Preferred Stock. The Company purchased 10,000 shares of this preferred stock for
$1 million. Each share of the Company'sSeries B Preferred Stock is convertible into 40
shares of Soundbreak.com's common stock.
MERKWERKS
In the second quarter of 1999, the Company purchased a total of 205,800
shares of common stock and one three-year
callableof 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 excess of the purchase warrant. Eachprice 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.
In the first quarter of 1998, the Company purchased a total of 401,359
shares of common stock of MerkWerks for a total purchase warrant
entitles the holder to purchase one shareprice of $646,000
consisting of 171,950 shares of common stock of the Company'sCompany. As a result of the
transaction, the Company increased its equity ownership in MerkWerks from 69.5%
to 89.6%. The excess of the purchase price over the fair value of the net assets
acquired was assigned to goodwill of approximately $646,000, which is being
amortized over its estimated useful life of 3 years.
OTHER
In the fourth quarter of 1999, the Company purchased 1,636,364 shares of
Mediaconnex's Series A "voting" Convertible Preferred Stock for $2,250,000,
which represents 74% of the outstanding Series A Preferred Stock and 31% of all
outstanding common stock aton an as-converted basis.
Also during the fourth quarter of 1999, the Company announced the formation
of Launchpad. Its mission is to incubate and accelerate the development of new
Internet businesses. The Company also closed its Acacia Capital Management
division. Acacia Capital Management was a general partner in two private
investment partnerships and was an investment advisor to two offshore private
investment corporations.
In the first quarter of 1998, the Company purchased a total of 1,144,000
shares of common stock of Soundview Technologies for a total purchase price of
$7.50 per share and is callable by$1,842,000 consisting of 488,672 shares of common stock of the Company. As a
result of the transaction, the Company onceincreased its equity ownership in
Soundview from 51.4% to 66.7%. The excess of the closing bidpurchase price over the book
value of the net assets acquired was assigned to patents of approximately
$1,816,000.
Also in the first quarter of 1998, the Company purchased an additional 3.31%
interest in Greenwich Information Technologies for a total purchase price of
$386,000 consisting of 102,034 shares of common stock of the Company. As a
result of the transaction, the Company increased its ownership of Greenwich from
30.02% to 33.33%. The excess of the purchase price of the Company's common stock averages $10.00 or above for 20 consecutive
trading days onbook value of the Nasdaq National Market System.
On April 2,net
assets acquired of approximately $368,000 is being amortized over a five-year
period.
In the second quarter of 1998, the Company acquired a 25% membership
interest in Signature-mail.com. The purchase price for the 25% interest
in
Signature-mail.com consisted of $2.5 million in cash. The Company
F-8
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF BUSINESS (CONTINUED)
accounts for its investment using the equity method. The excess of the investment over the
Company's share in the underlying net assets of Signature-mail.com is being
amortized over a seven-year period. In April 1998,Also in the Company completed a private equity financing raising
gross proceeds of $5.6 million through the sale of 800,000 units, each unit
consisting of one share of the Company's common stock and one three-year
callable common stock purchase warrant. Each common stock purchase warrant
entitles the holder to purchase one share of the Company's common stock at a
price of $9.25 per share and is callable by the Company once the closing bid
price of the Company's common stock averages $12.50 or above for 20 consecutive
trading days on the Nasdaq National Market System.
On June 30, 1998second quarter, the Company
increased its ownership in Whitewing
F-8
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF BUSINESS (CONTINUED)
Labs from 18% to 23.5% as a result of accepting 159,750 shares of Whitewing Labs
stock as payment on a note receivable with a carrying value of $240,000 (See Note 4).$240,000.
In the third quarter of 1997, the Company purchased from two individuals a
total of 2,625,000 shares of common stock of Soundview Technologies (the
"Soundview Shares") for a total purchase price of $4,225,000, consisting of
800,000 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
excess of the purchase price over the book value of the net assets acquired was
assigned to patents 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 acquisition.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial
statements include the accounts of the Company and its wholly owned and
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. Investments in limited partnership investment funds are accounted for
under the equity method and the net assets of the limited partnerships investment funds
are stated at fair market value.method.
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.
CAPITAL MANAGEMENT FEE INCOME AND MANAGEMENT FEES--Capital management fees include asset-based and
performance-based fees earned from two domestic private investment partnerships
in which the Company iswas a general partner and two offshore investment
corporations for which the Company servesserved as an investment advisor. These
capital management fees arewere recognized when earned in accordance with the
respective partnership and management agreements. Capital management fee income
earned in 1998, 1997, and 1996 were $382,000, $491,000 and $58,000,
respectively. Management fees also include
income from other consulting and management services provided by the Company to its Affiliates and
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.
PATENTS AND GOODWILL--Patents, once issued, and goodwill are amortized on
the straight-line method over their estimated remaining useful lives.lives, ranging
from three to five years. Amortization charged to operations relating to
goodwill amounted to $465,000, $403,000 and $78,000 forin 1999, 1998, and 1997
respectively. Amortization charged to operations relating to patents amounted to
$1,157,000, $1,165,000, and $381,000 forin 1999, 1998, and 1997 respectively.
FAIR VALUE OF FINANCIAL INSTRUMENTS--The carrying value of cash and cash
equivalents, management fees and other receivables, accounts payable and accrued
expenses approximates fair value due to their short termshort-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 determinable
due to their related F-9
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
party nature. The fair market value of notes payable is not known because there
is no readily determinable market value for such debt.
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
F-9
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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--ResearchEXPENSES--Expenditures related to the development
of new products and development costsprocesses, including significant improvements and
refinements to existing products, are charged to expenseexpensed 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, FURNITUREPROPERTY AND FIXTURES--Equipment, furniture,EQUIPMENT--Property and fixturesequipment are recorded at cost. Major
additions and improvements are capitalized. When equipment, furniture and fixturesthese assets 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 accounted for in accordance with
Statements of Positions No. 98-5, "Reporting on the Costs of Start-Up
Activities" (SoP 98-5), which the Company adopted in 1998. Per SoP 98-5, costsCOSTS--Costs of start-up activities, including organization
costs, are expensed as incurred.
SEGMENT REPORTING--In 1998,REPORTING--The Company uses the Company adopted Statement of Financial
Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and
Related Information" ("SFAS 131"). SFAS 131 superseded SFAS 14, "Financial
Reporting for Segments of a Business Enterprise" replacing the "industry
segment"management approach, with the "management" approach. The management approachwhich
designates the internal organization that is used by management for making
operating decisions and assessing performance as the sourcebasis of the Company's
reportable segments. SFAS 131 also requires disclosures about products and
services, geographic areas, and major customers. The adoption of SFAS 131 did
not affect the Company's consolidated results of operations or financial
position (See Note 13).
(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 has been restated, as appropriate, to
reflect the Company's adoption of SFAS
F-10
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
128 and the restatement of 1996 consolidated financial statements as a result of
the Soundview Shares acquisition. (See Note 1 and "Restatement" below.)
Reconciliation of the denominators used in the computation of (loss) earnings
per share as required by SFAS 128 are as follows.
1998 1997 1996
---------- ---------- ----------
Weighted Average Number of Common Shares Outstanding used in Computation of
Basic EPS................................................................ 8,971,272 4,962,286 3,826,014
Dilutive Effect of Outstanding Stock Options and Warrants(a)............... -- -- 1,150,420
---------- ---------- ----------
Weighted Average Number of Common and Potential Common Shares Outstanding
Used in Computation of Diluted EPS....................................... 8,971,272 4,962,286 4,976,434
---------- ---------- ----------
---------- ---------- ----------
- ------------------------
(a) Potential common shares in 1998 and 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.
RESTATEMENT--AsLOSS PER SHARE--Loss per share is presented on both a resultbasic and diluted
basis. A reconciliation of the Soundview Shares acquisition (see Note 1),denominator of the Company's operating resultsbasic EPS computation to the
denominator of the diluted EPS computation is as follows:
1999 1998 1997
---------- --------- ---------
Weighted Average Number of Common Shares Outstanding
Computation of Basic EPS................................. 10,871,423 8,971,272 4,962,286
Dilutive Effect of Outstanding Stock Options and
Warrants(a).............................................. -- -- --
Weighted Average Number of Common and Potential Common
Shares Outstanding Used in Computation of Diluted EPS.... 10,871,423 8,971,272 4,962,286
- ------------------------
(a) Potential common shares in 1999, 1998 and cash flows for the year ended December 31,
19961997 have been restated to account forexcluded from the
Company's 16.4% ownership interest in
Soundview Technologies onper share calculation because 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 $276,000 and decrease net income by a
corresponding amount in the consolidated statements of operations.their inclusion would be
anti-dilutive.
F-10
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECLASSIFICATIONS--Certain reclassifications of prior years' amounts have
been made to conform to the 19981999 presentation.
F-11
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. PROPERTY AND EQUIPMENT
FURNITURE AND FIXTURES
Equipment, furnitureProperty and fixtures,equipment consist of the following at December 31, 19981999 and
December 31, 1997:1998:
1999 1998
1997
----------- --------------------- ---------
Computer Equipment..................................................Equipment and Software....................... $ 652,000 $ 275,000
$ 142,000
Furniture and Fixtures..............................................Fixtures................................ 425,000 189,000
119,000
Laboratory Equipment................................................Equipment.................................. 287,000 143,000
73,000
Leasehold Improvements..............................................Improvements................................ 167,000 106,000
13,000
----------- --------------------- ---------
1,531,000 713,000 347,000
Less:
Accumulated Depreciation and Amortization...........................Amortization........... (377,000) (183,000)
(105,000)
----------- --------------------- ---------
$1,154,000 $ 530,000
$ 242,000
----------- -----------
----------- -----------========== =========
4. NOTES RECEIVABLE
As of December 31, 1998 and 1997, 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
December 31, 1998 and 1997, two promissory notes secured by the common stock of
Whitewing Labs were valued at the market value of the collateral held by the
Company. Write-downs of $101,000 in 1998 and $272,000 in 1997 (including related
accrued interest of $92,000) were charged to marketing, general and
administrative expenses in the consolidated statements of operations.
On June 30, 1998, the Company entered into a settlement agreement pertaining
to a promissory note with a carrying value of $240,000 secured by the common
stock of Whitewing Labs held by the Company. Per the settlement agreement, the
Company accepted as payment the Whitewing Labs stock being held as collateral.
As of December 31, 1997 the note was written down to the collateral value and no
additional loss was recorded in 1998.
Notes receivable consist of the following at December 31, 1998 and 1997:
1998 1997
----------- ------------
Notes Receivable................................................... $ 319,000 $ 1,115,000
Less: Reserve for Write-down....................................... (281,000) (739,000)
----------- ------------
$ 38,000 $ 376,000
----------- ------------
----------- ------------
Interest receivable on these notes amounted to approximately $10,000, as of
December 31, 1998 and 1997, and is included in management fees and other
receivables in the consolidated balance sheets.
F-12
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. INVESTMENTS AND PARTNERSHIP INTERESTS
Investments and partnership interests carried at equity and the Company's
ownership in each consist of the following at December 31, 19981999 and 1997:1998:
1999 1998
1997
---- ------------ --------
Signature-mail.com llc...................................... 25.0% 25.0%
Mediaconnex Communications, Inc............................. 31.0% --
Greenwich Information Technologies LLC...................... 33.3% 33.3%
Whitewing Labs, Inc...............................Inc......................................... 23.7% 23.5% 18%
Acacia Capital Partners, L.P......................L.P................................ -- 75.5% 31%
Acacia Growth Fund, L.P...........................L.P..................................... -- 18.6% 16%
Greenwich Information Technologies LLC............ 33.3% 30%
Signature-mail.com llc............................ 25% --
The investment in Whitewing LabsSignature-mail.com amounted to $621,000$1,408,000 and $2,027,000
at December 31, 1999 and 1998, and $466,000 at December 31, 1997. The market value of the Company's investment
in Whitewing Labs was approximately $606,000 and $431,000 at December 31, 1998
and 1997, respectively. Whitewing LabsSignature-mail.com had total assets
of $1,952,000$444,000 and $2,215,000$1,339,000 at December 31, 19981999 and 1997,1998, respectively, and
total liabilitiesreported net losses of $36,000$1,474,000 and $30,000$1,357,000 in 1999 and 1998, respectively.
The investment in Mediaconnex amounted to $2,250,000 at December 31, 1999.
Mediaconnex had total assets of $3,050,000 at December 31, 1999, and reported no
income or loss in 1999. Mediconnex was incorporated in November 1999.
On December 31, 1999, the Company closed the Acacia Capital Management
division. Acacia Capital Management was a general partner in Acacia Capital
Partners and Acacia Growth Fund and was an investment advisor to two offshore
private investment corporations. The investment in Acacia Capital Partners and
Acacia Growth Fund amounted to $907,000 and $925,000 as of December 31, 1998,
respectively. Costs associated with exiting this business were not material.
F-11
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS AND PARTNERSHIP INTERESTS (CONTINUED)
Other investments amount to $978,000 and 1997,$1,454,000 at December 31, 1999 and
1998, respectively. Whitewing LabsThese investees had total assets of $1,470,000 and
$2,124,000 at December 31, 1999 and 1998, respectively, and reported net losses
attributable to common shareholders of $274,000, $944,000$934,000, $607,000 and $2,428,000,$1,189,000 in 1999, 1998 and net sales of $3,935,000, $3,582,000 and $3,537,000 in 1998,
1997, and 1996 respectively.
Officers of the Company continue to have significant representation on the Board
of Directors of Whitewing Labs.
F-13
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)one of these entities.
5. INVESTMENTS AND PARTNERSHIP INTERESTS (CONTINUED)
The investment in Acacia Capital Partners, L.P. amounted to $907,000 and
$285,000 as of December 31, 1998 and 1997, respectively. The investment in
Acacia Growth Fund, L.P. amounted to $925,000 and $301,000 as of December 31,
1998 and 1997, respectively.
The investment in Greenwich Information Technologies amounted to $833,000 at
December 31, 1998 and $738,000 at December 31, 1997. Greenwich Information
Technologies had total assets of $172,000 and $527,000 at December 31, 1998 and
1997, respectively, and reported net losses of $333,000, $245,000 and $106,000
in 1998, 1997 and 1996, respectively.
The investment in Signature-mail.com amounted to $2,027,000 at December 31,
1998. Signature-mail.com had total assets of $1,339,000 and $49,000 at December
31, 1998 and 1997, respectively, and reported net losses of $1,357,000 in 1998
and $174,000 in 1997.
6. RELATED PARTY TRANSACTIONS
At December 31, 1998, the Company had $27,000 receivables from affiliates.
These receivables arose from non-interest bearing advances to the affiliates. At
December 31, 1997, the Company had no receivables from affiliates.
The revenues reported in 1996 included sales of investments to Dr. Robert
Ching, a stockholder, in the amount of $600,000.
7. 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 or about 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.
8.6. PROVISION FOR INCOME TAXES
Provision (benefit) for income taxes consists of the following:
FEDERAL STATE TOTAL
----------- ---------- -----------1999 1998 1997
-------- -------- ---------
1998
Current................................................. $ -- $ -- $ --
Deferred................................................ -- -- --
1997
Current................................................. $ (60,000)Current:
U.S. Federal tax................................ $12,000 $ -- $ (60,000)
Deferred................................................State taxes..................................... 8,000 -- --
------- ---- ---------
20,000 -- (60,000)
------- ---- ---------
Deferred:
U.S. Federal tax................................ -- -- (149,000)
State taxes..................................... -- -- (41,000)
------- ---- ---------
-- -- (190,000)
1996
Current.................................................------- ---- ---------
$20,000 $ 278,000 $ 83,000 $ 361,000
Deferred................................................ 196,000 49,000 245,000-- $(250,000)
======= ==== =========
F-13
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. PROVISION FOR INCOME TAXES (CONTINUED)
A reconciliation of the federal statutory income tax rate and the effective
income tax rate is as follows:
1999 1998 1997
------ -------------- -------- --------
Statutory federal tax rateFederal Tax Rate......................... (34.0)% (34.0)% (34.0)%
State income taxes, netIncome Taxes, Net of federal benefit...Federal Benefit......... (3.0)% (3.0)% --
Amortization of intangible assets............Intangible Assets.................. 5.3% 2.2% 4.6%
Unrealized benefitBenefit of deferred items.........Deferred Items............... 31.7% 34.8% 22.3%
------ ----------- ----- -----
0.0% 0.0% (7.1)%
------ ------
------ ------===== ===== =====
At December 31, 19981999 the Company had federal and California state income tax
net operating loss carryforwards ("NOLs") of approximately $3,932,000$7,904,000 and
$2,778,000,$4,706,000, respectively, expiring between 2002 and 2018,2019, excluding NOLs of
MerkWerks,at
CombiMatrix and Soundview Technologies. NOL carryforward benefits
amounting toNOLs in the amount of $694,000 will be
recorded to additional paid-in-capital when realized. In addition, at December 31, 1998, the Company
has tax credit carryforwards of approximately $22,000.$56,000.
F-12
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. PROVISION FOR INCOME TAXES (CONTINUED)
In 1998, MerkWerks joined the Company's affiliated group for federal tax
purposes. However, no determination has yet been made as to whether MerkWerks
will joinpurposes and files a consolidated federal income tax return with the Company in filing a federal consolidated return.Company.
The aggregate tax NOLs of MerkWerks,NOL's at CombiMatrix, and Soundview Technologies, amount
to $5,735,000 and
$5,486,000Soundbreak.com are $9,666,000 and $5,296,000 for federal and state income taxpurposes,
respectively, expiring between 2000 and 2018. Merkwerks,2019. CombiMatrix and Soundview
Technologies also have tax credit carryforwards of approximately $41,000.$250,000.
However, the use of these NOLs and tax credits are limited to the separate
earnings of the respective subsidiaries. In addition, ownership changes may also
restrict the use of NOLs and tax credits.
The Company has established a full valuation allowance against its net
deferred tax assets at December 31, 1999 and 1998, as their utilization 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, 19981999 and 1997:1998:
1999 1998
1997
------------- ------------------------ -----------
Reserves for notes receivable...................................Notes Receivable...................... $ 152,000 $ 160,000
$ 366,000
Basis of investmentsInvestments in affiliates..............................Affiliates................. 486,000 1,504,000 566,000
Depreciation and amortization...................................Amortization...................... 2,000 (8,000)
(9,000)
Accrued liabilities.............................................Liabilities................................ 126,000 63,000
177,000
Net operating loss carryforwardsOperating Loss Carryforwards and Credits....................Credits....... 6,865,000 3,976,000
2,017,000
------------- ------------------------ -----------
7,631,000 5,695,000
3,117,000
Valuation allowance.............................................Allowance................................ (7,631,000) (5,695,000)
(3,117,000)
------------- ------------------------ -----------
$ -- $ --
------------- -------------
------------- -------------=========== ===========
9.7. STOCK OPTIONS AND WARRANTS
In 1993, theThe Company adopted ahas three stock option planplans currently in effect: the 1993 Stock
Option Plan (the "1993 Plan") which
authorized, the1996 Executive Stock Bonus Plan (the "Bonus
Plan") and the 1996 Stock Option Plan (the "1996 Plan").
Options under the 1993 plan authorize 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 Stock Options") to officers, directors, employees,
consultants, and others expected to provide significant F-14
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
services to the Company
or its subsidiaries. The 1993 plan, whichPlan covers an aggregate of 2,000,000 shares of
common stock, was approved by the Board of
Directors in October 1993.stock. The Company has reserved 2,000,000 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,
1999 and 1998, all of the shares under the 1993 Plan have been awarded.
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 grantedprovided for a one-time grant of options to purchase an
aggregate of 720,000 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
F-13
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
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 1996. In May 1998, shareholders approved amendments to the 1996 Stock Option Plan whichCompany increased the authorized number of shares of common
stock subject to the amended plan by 500,000 shares. The Company has reserved 1,000,000During 1999, the maximum
number of the Company's common shares of common
stock for issuanceavailable under the 1996 plan.Plan was
increased from 1,000,000 shares to 3,000,000 shares. 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 20,000
shares of Nonqualified Stock Options to non-employee directors upon initial
election to the Board of Directors and 2,000 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,
1999 and 1998, 540,0001,877,499 and 558,500 shares were available for grant.
In 1996, the Company also granted to two employees of a subsidiary of the
Company options to purchase 40,000 shares of the Company's common stock at an
exercise price of $2.69 per share. Such options were granted outside the 1993
and 1996 plans and vest over four years and expire in March 2001.grant,
respectively.
In 1997, the Company granted to three consultants options to purchase
110,000 shares of the Company's common stock, 24,000 at an exercise price of
$2.50, 30,000 at an exercise price of $3.69 and 56,000 at an exercise price of
$3.50. Such options were granted outside the 1993 and 1996 plans and vest over
periods ranging from six months to sixteen months.
In 1998, the Company granted to a consultant options to purchase 12,000
shares of the Company's common stock at an exercise price of $4.69. Such options
were granted outside the 1993 and 1996 plans and vest over a twelve-month
period.
F-15In 1999, the Company granted options to purchase 16,000 shares of the
Company's common stock at an exercise price of $15.41 and $23.75 to the
Company's Advisors. Such options vest over a twelve month period.
F-14
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9.7. STOCK OPTIONS AND WARRANTS (CONTINUED)
The following is a summary of common stock option activities:
WEIGHTED
EXERCISE AVERAGEWEIGHTED
SHARES PRICES AVERAGE PRICE
------------------- ------------ ------------- -----------
1996
Balance at December 31, 1995........................... 1,781,450 $ 0.75-$2.63 $ 1.33
Options Granted........................................ 853,550 $ 2.69-$5.25 $ 3.14
Options Exercised...................................... (218,000) $ 0.75-$2.63 $ 1.01
Options Forfeited...................................... (18,000) $2.50 $ 2.50
---------- ------------- -----
1997
Balance at December 31, 1996...........................1996............ 2,399,000 $ 0.75-$0.75-$5.25 $ 1.99
Options Granted........................................Granted......................... 660,200 $ 2.13-$2.13-$3.89 $ 3.10
Options Exercised......................................Exercised....................... (512,400) $ 0.75-$0.75-$2.63 $ 1.67
---------- ------------- -----
1998
Balance at December 31, 1997...........................1997............ 2,546,800 $ 0.75-$0.75-$5.25 $ 2.34
Options Granted........................................Granted......................... 86,000 $ 3.61-$3.61-$8.63 $ 4.77
Options Exercised......................................Exercised....................... (874,400) $ 0.75-$0.75-$2.63 $ 0.86
Options Cancelled......................................Cancelled....................... (95,400) $ 2.13-$2.13-$3.89 $ 2.50
---------- ------------- -----
Balance at December 31, 1998...........................1998............ 1,663,000 $ 1.00-$1.00-$8.63 $ 3.24
---------- ------------- -----
---------- ------------- -----Options Granted......................... 726,001 $4.28-$23.75 $13.44
Options Exercised....................... (326,450) $1.00-$4.66 $ 2.32
Options Cancelled....................... (46,500) $3.61-$7.88 $ 5.19
Balance at December 31, 1999............ 2,016,051 $1.00-$23.75 $ 7.02
Exercisable at December 31, 1996....................... 1,430,000 $ 0.75-$2.75 $ 1.25
Exercisable at December 31, 1997.......................1997........ 1,307,300 $ 0.75-$0.75-$5.25 $ 1.55
Exercisable at December 31, 1998.......................1998........ 893,000 $ 1.00-$1.00-$5.25 $ 2.79
Exercisable at December 31, 1999........ 1,016,675 $1.00-$19.31 $ 4.07
Options outstanding at December 31, 19981999 are summarized as follows:
WEIGHTED AVERAGE OUTSTANDING EXERCISABLE
NUMBER OF REMAININGAVERAGE WEIGHTED WEIGHTED
RANGE OF OUTSTANDING CONTRACTUALREMAINING AVERAGE NUMBER AVERAGE
RANGE OF EXERCISE PRICES OPTIONS CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------------------------------- ----------- --------------- --------------- ----------- ------------------------------- -------------- ----------- --------------
$1.00-$2.99............................ 416,000 1.6265 yrs2.99.......... 178,550 .95 $ 2.08 336,0002.47 140,550 $ 1.912.43
$3.00-$5.99............................ 1,227,000 2.3445 yrs5.99.......... 1,257,500 1.73 $ 3.41 557,0003.54 613,499 $ 3.323.37
$6.00-$9.99............................ 20,000 4.3808 yrs9.99.......... 197,001 4.40 $ 8.63 07.70 251,484 $ 0.00
----------- -----------
1,663,000 893,000
----------- -----------
----------- -----------6.11
$13.00-$15.99........ 31,000 6.51 $14.69 1,417 $14.39
$16.00-$18.99........ 145,000 5.19 $16.62 7,500 $16.47
$19.00-$20.99........ 40,000 3.83 $19.31 2,222 $19.31
$23.00-$24.99........ 167,000 8.81 $23.75 -- --
--------- ---------
2,016,051 1,016,672
========= =========
The Company has issuedAt December 1999, the total number of warrants to purchase 2,881,030outstanding was 578,237
shares of the Company's common stock as of December 31, 1998. Of this total, warrants to
purchase 200,000 shares withat a per share exercise price of $1.00 were issued to
an individual who later became an officer and director of the Company. In 1998,
warrants to purchase 1,434,786 were issued in conjunction with two privately
placed equity financings with per share exercise prices ranging from $7.50 to
$9.25. The total number of warrants to purchase stock exercisable at December
31, 1998 is 2,055,050, with a weighted average exercise price of $7.03, and a
weighted average remaining contractual life of 2.1 years.$26.00.
The Company has adopted only the disclosure requirements of SFAS No. 123
with respect to options issued to employees.
F-16
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCK OPTIONS AND WARRANTS (CONTINUED)
The weighted average fair value of options granted during 1999, 1998 1997 and
19961997 for which the exercise price equals the fair market price on the grant date
was $13.33, $3.37 $2.28 and $2.08,$2.28, respectively.
The weighted average fair value of options granted during 19971999 and 19961997 for
which the exercise price is less than the fair market pricevalue on grant date was $16.70
and $1.40, and $2.12.respectively. There were no options
F-15
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
granted during 1998 that werewith exercise price less than the fair market price.value. The weighted
average fair value of options granted during 1997 for which the exercise price
exceeds the
fair market pricevalue on grant date was $1.42. There were no options granted
during 1999 and 1998 and 1996 that exceededwith the exercise price exceeding fair market price.value.
Soundbreak.com had granted options for 420,000 shares issued pursuant to the
Soundbreak Plan and options for 616,250 shares, net of cancellations, issued
outside the plan, none of which have been exercised and 32,751 of which were
exercisable as of December 31, 1999. The weighted average fair value of the
options granted during 1999 was $1.00. The exercise price of the options ranged
from $.45 to $2.00.
CombiMatrix had granted options and warrants for 649,250 shares, of which
25,000 shares have been exercised and 287,442 are exercisable as of
December 31, 1999. The weighted average fair value of the options granted during
1999 was $2.00. The exercise price of the options ranged from $1.00 to $2.00.
Had compensation expense related to stock options issued to employees 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:
1999 1998 1997
1996
------------- ------------------------ ----------- -----------
Net Income (Loss),Loss, as Reported..................... $ (6,189,000) $ (2,859,000) $ 17,000Reported.................. $(8,197,000) $(6,189,000) $(2,859,000)
Net Loss, Pro Forma................................ $ (6,831,000) $ (3,371,000) $ (259,000)Forma.................... $(9,268,000) $(6,831,000) $(3,371,000)
Basic Loss Per Share, as Reported..................Reported...... $ (0.75) $ (0.69) $ (0.58) $ 0.00
Basic Loss Per Share, Pro Forma....................Forma........ $ (0.85) $ (0.76) $ (0.68) $ (0.07)
Diluted Loss Per Share, as Reported................Reported.... $ (0.75) $ (0.69) $ (0.58) $ 0.00
Diluted Loss Per Share, Pro Forma..................Forma...... $ (0.85) $ (0.76) $ (0.68) $ (0.07)
The fair value of the options was determined using the Black-Scholes
option-pricing model, assuming weighted average risk free annual interest of
5.18%5.79%, 5.18% and 6.14% in 1999, 1998 and 6.02% in 1998, 1997, and 1996, respectively, volatility of
approximately 75%, with expected lives of threetwo to five years, and no expected
dividends.
10. NOTE RECEIVABLE SECURED BY COMMON STOCK
Note receivable secured by common stock of $197,000 at December 31, 1997
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. At December 31, 1998, all amounts secured by shares of
the Company's common stock have been paid.
11. GAIN IN ISSUANCE OF STOCK BY AFFILIATE
In February 1996, Whitewing Labs 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.
12.8. COMMITMENTS AND CONTINGENCIES
In May 1998, the Company entered into aMinimum annual rental commitments on operating leases having initial or
remaining noncancellable lease commitment for 5,449
square-feetterms in excess of newone year are as follows:
2000........................................................ $ 985,000
2001........................................................ 1,027,000
2002........................................................ 765,000
2003........................................................ 594,000
2004........................................................ 542,000
----------
Total minimum lease payments................................ $3,913,000
==========
Operating leases relate primarily to office space. This lease commitment provides for minimum
rental payments for 60 months, excluding renewal options. The monthly payments
will approximate $12,000 over the lease term, which began December 1998. This
office space replaced the Company's existing principal executive offices. One of
the Company's majority-owned subsidiaries leasedfurniture and equipment and
laboratory and office space
under an operating lease through April 1999.space.
Rent expense in 1999, 1998 and 1997 approximated $480,000, $263,000 and
1996
was approximately $263,000, $123,000, respectively.
The Company is subject to legal proceedings and $67,000 respectively.
F-17claims, which arise in the
ordinary course of its business. In the opinion of management, the amount of
ultimate liability with respect to these actions will not materially affect the
financial position or results of operations of the Company.
F-16
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. COMMITMENTS AND CONTINGENCIES (CONTINUED)
At December 31, 1998, future minimum lease payments for operating leases are
as follows:
1999.............................................................. $ 202,000
2000.............................................................. 144,000
2001.............................................................. 144,000
2002.............................................................. 144,000
2003.............................................................. 144,000
13. 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 200,000 shares of common stock of the Company, and sought
$950,000 in damages from the Company. Under terms of the Settlement Agreement,
the Hodges received $25,000 in cash and options to purchase 241,200 shares of
the Company's common stock at an exercise price equal to $2.125 per share. The
underlying shares 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). As of May 1998, all liabilities were satisfied.
In July 1998, PG Distribution, Inc. of Omaha, Nebraska filed a complaint in
the United States District Court, District of Delaware, against Soundview
Technologies Incorporated, seeking a declaratory judgement that United States
Patent No. 4,554,584 (relating to a video and audio blanking system) is invalid.
In October 1998, PG Distribution Inc. and Parental Guide Company, LLC filed a
notice of dismissal of the litigation against Soundview Technologies and agreed
to pay royalties to Soundview Technologies under a non-exclusive,
non-transferable license to make, use and sell, or lease products under the
claims of Soundview Technologies' patent.
14. SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid for interest in 1998, 1997 and 1996 was $2,000, $39,000 and
$2,000, respectively. The Company paid cash for income taxes in the amount of
$2,000, $2,000 and $252,000 in 1998, 1997 and 1996, respectively.
15.9. SEGMENT INFORMATION
The Company has twothree reportable segments: Investment Activities, including
investment advisory servicesCorporate Portfolio, CombiMatrix
and investments in development stage companies, and
CombiMatrix.Soundbreak.com.
The Company provides investment advisory services, and also provides
management services to, andCorporate Portfolio segment 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. F-18
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SEGMENT INFORMATION (CONTINUED)It
is developing a proprietary biochip array processor system that integrates
semiconductor technology with new developments in biotechnology and chemistry.
Soundbreak.com has developed a dynamic website that fuses the live
entertainment value of radio with the power of the Internet. Initially targeting
lovers of alternative music, Soundbreak.com offers a robust web experience with
live, 24-hour global webcasts hosted by professional digital jocks, state of the
art graphics, and extensive communication and user feedback tools.
The Company evaluates segment performances based on feesrevenue 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 years ended December 31, 1999, 1998 and 1997.
Segment information for the year
ended December 31, 1996 has not been presented as comparative data was
impracticable to obtain.
INVESTING
1998 ACTIVITIESCORPORATE
1999 PORTFOLIO COMBIMATRIX SOUNDBREAK.COM OTHER TOTAL
- ------------------------------------------------------ ----------- ----------- -------------- ---------- ----------- ------- ----------
Revenues..........................................
Revenue....................... $ 122,000 $ -- $ -- $ -- $ 122,000
Amortization of patents and
goodwill.................... 1,608,000 -- -- 14,000 1,622,000
Other income.................. -- 144,000 -- -- 144,000
Interest income............... 291,000 40,000 56,000 2,000 389,000
Interest expense.............. 1,000 253,000 -- -- 254,000
Equity in losses of
affiliates.................. 1,120,000 -- -- -- 1,120,000
Equity in losses of
partnerships................ 1,000 -- -- -- 1,000
Loss before minority interests
and income taxes............ 5,739,000 2,507,000 1,784,000 376,000 10,406,000
Segment assets................ 41,389,000 1,908,000 6,337,000 2,157,000 51,791,000
Investments in affiliates, at
equity...................... 4,636,000 -- -- -- 4,636,000
Purchase of property and
equipment................... 156,000 85,000 649,000 -- 890,000
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ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. SEGMENT INFORMATION (CONTINUED)
CORPORATE
1998 PORTFOLIO COMBIMATRIX OTHER TOTAL
- ---- ----------- ----------- -------- -----------
Revenue...................................... $ 382,000 $ -- $ -- $ 382,000
Amortization of patents and goodwill..............goodwill......... 1,547,000 -- 21,000 1,568,000
Interest income...................................income.............................. 216,000 83,000 3,000 302,000
Interest expense..................................expense............................. 1,000 129,000 -- 130,000
Equity in losses of affiliates....................affiliates............... 901,000 -- -- 901,000
Equity in income of partnerships..................partnerships............. 184,000 -- -- 184,000
Loss before minority interests and income
taxes...taxes...................................... 4,080,000 1,644,000 663,000 6,387,000
Segment assets....................................assets............................... 16,052,000 3,522,000 195,000 19,769,000
Investments in affiliates, at equity..............equity......... 3,481,000 -- -- 3,481,000
Partnerships interests,interest, at equity.................equity............. 1,832,000 -- -- 1,832,000
Capital expenditures..............................Purchase of property and equipment........... 281,000 88,000 5,000 374,000
INVESTINGCORPORATE
1997 ACTIVITIESPORTFOLIO COMBIMATRIX OTHER TOTAL
- ------------------------------------------------------ ---------- ----------- --------------- ----------
Revenues..........................................Revenue........................................ $ 491,000 $ -- $ -- $ 491,000
Gains on sales of investments.....................investments.................. 50,000 -- -- 50,000
Amortization of patents and goodwill..............goodwill........... 459,000 -- -- 459,000
Interest income...................................income................................ 36,000 9,000 7,000 52,000
Interest expense..................................expense............................... 41,000 -- -- 41,000
Equity in losses of affiliates....................affiliates................. 290,000 -- -- 290,000
Equity in income of partnerships..................partnerships............... 129,000 -- -- 129,000
Legal settlement expense..........................expense....................... 460,000 -- -- 460,000
Loss before minority interests and income
taxes...taxes........................................ 2,491,000 612,000 417,000 3,520,000
Segment assets....................................assets................................. 8,267,000 357,000 230,000 8,854,000
Investments in affiliates, at equity..............equity........... 1,205,000 -- -- 1,205,000
Partnerships interest, at equity..................equity............... 586,000 -- -- 586,000
Capital expenditures..............................Purchase of property and equipment............. 34,000 50,000 8,000 92,000
10. SUBSEQUENT EVENTS
In January 2000, the Company acquired a 7.6% interest in The EC Company for
$3 million in a $17.3 million "non-voting" Series B Preferred Stock private
placement. The EC Company is a leader in business-to-business Internet exchange
transactions for mid-market suppliers.
In February 2000, the Company issued a redemption notice for common stock
purchase warrants issued in the December 1999 private placement. Holders of
these warrants had 30 days to redeem the notice at an exercise price of $26.00
per share. As a result, all of these warrants were exercised prior to the
redemption date with the Company receiving proceeds of approximately
$14.8 million for the issuance of 578,238 shares of common stock.
In March 2000, CombiMatrix completed a private equity financing raising
gross proceeds of $17.5 million through the sale of 3.5 million shares of
CombiMatrix common stock. The Company invested $10 million in this private
placement and acquired 2 million shares. As a result of the transaction, the
Company increased its equity ownership in CombiMatrix from 50.0% to 51.8%.
CombiMatrix issued
F-18
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. SUBSEQUENT EVENTS (CONTINUED)
warrants in conjunction with the private placement for finders fees. A total of
28,227 warrants to purchase CombiMatrix common stock at a per share price of
$5.50 were issued.
Also in March 2000, Soundbreak.com completed a Series C "non-voting"
Convertible Preferred private equity financing raising gross proceeds of
$19 million through the sale of 188,437 Series C Preferred shares. The Company
invested $9 million in this private placement and acquired 90,000 Preferred
shares. As a result of the transaction, the Company decreased its equity
ownership in Soundbreak.com from 73.6% to 66.9%. Each share of the Series C
Preferred Stock is convertible into 15 shares of Soundbreak.com's common stock.
Soundbreak.com issued warrants in conjunction with the private placement for
finders fees. A total of 40,838 warrants to purchase Soundbreak.com's common
stock at a per share exercise price of $6.66 were issued.
F-19