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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
COMMISSION FILE NUMBER 0-26068
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ACACIA RESEARCH CORPORATION
(Exact Name of Registrant as Specified in 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, $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 17, 2000 was approximately $635,358,000. (All officers
and directors of the registrant are considered affiliates.)
At March 17, 2000 the registrant had 14,235,431 shares of Common Stock,
$0.001 par value, issued and outstanding.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of our definitive proxy statement for our Annual Meeting of
Shareholders to be filed with the Commission within 120 days after the close of
our 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
Acacia Research Corporation, a Delaware corporation, 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
- ------------ --------------------------------------- -------------------------
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
- ------------ --------------------------------------- -------------------------
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 an 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 have 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 acquiring new companies in this area. We also recruited
additional personnel at the parent level to support 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 our present operations and other business opportunities, as well as the
acquisition of additional business ventures or increased ownership positions in
our existing holdings.
SUBSIDIARIES
As our portfolio reflects, we generally invest in start-up ventures with no
operating histories, unproven technologies and/or products and, in some cases,
ventures in need of experienced management. Because of the uncertainties and
risks associated with such start-up ventures, our investors 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, we face potential losses of business opportunities and
possible deterioration of the terms of available financings and equity
investments in start-up ventures. Furthermore, we may lack sufficient financial
resources to fully fund additional ventures in
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which we 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.
ACACIA 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 investors 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 evaluated for viability and readiness for further investment.
The Launchpad process improves the likelihood of a start-up's success, and
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 earliest stages of
business development, while reducing risk and 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 the
development of a proprietary universal biochip with applications in the
genomics, proteomics and combinatorial chemistry markets. CombiMatrix has
developed a unique method to synthesize DNA, peptides and chemical libraries on
a semiconductor chip with electrochemically generated reagents. CombiMatrix's
first generation prototype chip contains 1,024 individually addressable
electrodes the diameter of a human hair where chemicals are 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 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 biochip for the analysis of
DNA. CombiMatrix believes that this technology may be applied to the fields of
genetic analysis and disease management. CombiMatrix also intends to develop the
genomic chip in the field of drug discovery, where 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 the analysis of 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,
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no assurances can be given that CombiMatrix, even if successful in developing
its technologies, would be 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 Energy to develop microarrays of
affinity probes for the analysis of gene product, which may be used to 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 the use of its biochip technology to develop nanode array sensor microchips
in 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. However, in June 1999, CombiMatrix received a Notice of Allowance
from the U.S. Patent and Trademark Office for the core patent on its novel
biochip technology.
In April 1996, we entered into a shareholder agreement with CombiMatrix's
Vice President of Research and Development pertaining to certain matters
relating to CombiMatrix. This agreement 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 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"). 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, for which it has received a
Notice of Allowance. Foreign rights include patents issued in Japan, Mexico, and
the Republic of China and a patent from the European 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.
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.
MEDIACONNEX COMMUNICATIONS, INC.
Mediaconnex was incorporated in December 1999 under the laws of the State 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 connectivity of the Internet, Mediaconnex plans to work with
broadcasters and media buyers to improve the media sales process. By partnering
with Mediaconnex, broadcasters will be able to sell greater amounts of
commercial inventory, expand their base of media buyers, increase revenues and
decrease costs.
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Mediaconnex plans to generate revenues through transactional commissions for
all media being purchased through the Mediaconnex marketplace.
MERKWERKS CORPORATION
MerkWerks was incorporated in September 1995 under the laws of the State of
California and is a software development company, developing software for use
with CD-recordable disk drives for Macintosh platforms. The product is called CD
WonderWriter-TM- or WonderWriter-TM-. MerkWerks is in the developmental stage
and, to date, has not completed the development of its product or generated any
revenues and no assurances can be given that MerkWerks will ever be able to
successfully market this product. During 1999, MerkWerks had to rewrite a large
portion of its code to remedy technological problems that arose in 1998 that
delayed the release of this product. During this period, however, MerkWerks was
able to better 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 licensing opportunities with
hardware and software 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 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 24 hours a
day, 7 days a week--producing customized software within seconds of receiving
customers' orders. Signature-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,
since 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, 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. Signature-mail.com will sell through electronic and conventional
media and deliver its products directly to customers online. Signature-mail.com
has several patent applications pending for unique features as well as methods
used for the automated mass customization of the production and delivery of
Signature-mail.com. Signature-mail.com is also developing additional proprietary
technologies for other platforms and products. To date, no patents have been
issued and there can be no 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.
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 site was launched on
February 15, 2000.
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Soundbreak.com expects its music programming to attract an audience in the
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 expected 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 sights 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 artists
and user-submitted music in regular rotations. Soundbreak.com wants users to
play a part in developing the look and feel of 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 sponsorship of special music events. Second,
Soundbreak.com will offer two types of e-commerce. Users will be able to
purchase 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
originate 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 come from marketing the current site and then
replicating the Soundbreak.com model for fans of different music genres.
Soundbreak.com's marketing plans for the current site include a combination of
grass roots marketing, traditional off-line marketing and online 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 expand to include the top 30 international markets.
SOUNDVIEW TECHNOLOGIES INC.
Soundview Technologies was incorporated in March 1996 under the laws of the
state of Delaware 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 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.
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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 are "deaf" to V-chip
signals; however, Soundview Technologies has no plans to market this device in
the foreseeable future.
ACACIA CAPITAL MANAGEMENT
On December 31, 1999, we closed our 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. Costs associated with exiting this business were not material.
COMPETITION
We 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 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 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 this market are name recognition, performance, ease of
use, variety of value-added services, functionality and features, and quality of
support. Competitors include a wide variety of companies and organizations,
including Internet software, content, service and technology companies,
telecommunication companies, cable companies and equipment/technology suppliers.
Some of our existing competitors, as well as a number 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 those 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 established
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 other website operators as well as traditional off-line
media such as print and television 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 adverse effect on our business, results of operations and financial
condition.
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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. We believe that our anticipated principal activities will
not subject us 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, we may become subject to certain restrictions relating to our
activities, including restrictions on the nature of our 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, 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 our activities from time to time with a view toward
reducing the likelihood that we 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
We and our consolidated subsidiaries have 93 full-time employees. We and our
subsidiaries also rely on a number of key consultants and advisors. We believe
that our future success will depend in large part on our ability to retain our
key personnel and on our ability to attract, retain, train, and motivate
additional highly skilled and dedicated employees. Neither we nor any of our
subsidiaries are a party to any collective bargaining agreement. We have never
experienced a work stoppage and believe that our relations with our employees
are excellent. From time to time, we may retain independent third parties to
provide services on an "as needed" basis.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements within the meaning of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Reference is made in particular to the description of our 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-
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looking statements. Such statements address future events and conditions
concerning product development, 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 we and our
subsidiaries operate, and other circumstances affecting anticipated revenues and
costs. We expressly disclaim any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statements contained herein to
reflect any change in our 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.
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ITEM 2. PROPERTY
We lease a 5,449 square foot and a 3,480 square foot office in Pasadena,
California. These lease agreements terminate in April 2003 and December 2001,
respectively. MerkWerks and Launchpad are currently located at our facilities.
Our other consolidated subsidiaries, CombiMatrix, Soundbreak.com, and Soundview
Technologies, lease facilities in the San Francisco, California, West Hollywood,
California and Greenwich, Connecticut areas, respectively. We are presently
seeking other facilities to accommodate our growing business, including other
wholly owned divisions or subsidiary companies.
ITEM 3. LEGAL PROCEEDINGS
None.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On December 9, 1999, we held a special meeting of stockholders. At the
meeting, the following matters were considered and approved:
1. A proposal to change 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 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
Our common stock began trading under the symbol ACRI on the Nasdaq National
Market System on July 8, 1996. Prior to our listing on the Nasdaq National
Market System and subsequent to June 15, 1995 when our Registration Statement on
Form SB-2 became effective under the Securities Act of 1933, as amended (the
"Securities Act"), our common stock traded under the same symbol in the
over-the-counter market. Preceding June 15, 1995, there had been no public
market for our common stock.
The markets for securities, such as our 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 our industry and the investment markets generally, as well as
economic conditions and quarterly variations in our results of operations, may
adversely affect the market price of our common stock.
On March 16, 1998, our Board of Directors declared a two-for-one split of
our common stock in the form of a 100% stock dividend. We 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 share information presented herein is adjusted for
the stock split.
The high and low bid prices for our common stock as reported by the Nasdaq
Stock Market for the periods indicated are as follows as adjusted for the stock
split. Such prices are interdealer prices without retail markups, markdowns or
commissions, and may not necessarily represent actual transactions.
HIGH LOW
------------- -----------
FISCAL YEAR 1999
First Quarter............................................... $ 4 15/16 $ 3 1/8
Second Quarter.............................................. $ 9 $ 3 1/2
Third Quarter............................................... $16 3/4 $ 6 5/8
Fourth Quarter.............................................. $32 7/8 $14 1/8
FISCAL YEAR 1998
First Quarter............................................... $ 9 1/2 $ 2 3/4
Second Quarter.............................................. $ 9 7/8 $ 6 5/8
Third Quarter............................................... $ 8 7/8 $ 2 7/8
Fourth Quarter.............................................. $ 6 25/32 $ 3 5/8
On March 17, 2000, the closing bid and asked quotations for our common stock
were $47.00 and $47.69, respectively, per share.
On March 17, 2000, there were approximately 257 owners of record of our
common stock. The majority of the outstanding shares of the common stock are
held by a nominee holder on behalf of an indeterminable number of ultimate
beneficial owners.
DIVIDEND POLICY
To date, we have not declared or paid any cash dividends with respect to our
capital stock and the current policy of the Board of Directors is to retain
earnings, if any, to provide for the growth of the company. Consequently, no
cash dividends are expected to be paid in the foreseeable future. Further, there
can be no assurance that our proposed operations will generate revenues and cash
flow needed to declare a cash dividend or that we will have legally available
funds to pay dividends.
20
DESCRIPTION OF SECURITIES
We are authorized to issue up to 60,000,000 shares of common stock, $0.001
par value, of which 14,235,431 shares of common stock have been issued and are
outstanding as of March 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
stock are entitled to one vote per share on all matters to be voted on by the
shareholders, and to cumulate votes in the election of directors. Holders of
common stock are entitled to receive ratably such dividends, if any, as may be
declared by the Board of Directors out of funds legally available therefore.
Upon the liquidation, dissolution, or winding up of the company, the holders of
common stock are entitled to share ratably in all assets of the company which
are legally available for distribution, after payment of all debts and other
liabilities. Holders of common stock have no preemptive, subscription,
redemption, or conversion rights.
TRANSFER AGENT AND REGISTRAR
U.S. Stock Transfer Corporation, 1745 Gardena Avenue, Glendale, California
91204-2991, is the Transfer Agent and Registrar for our common stock.
21
ITEM 6. SELECTED FINANCIAL DATA
The selected financial data set forth below as of December 31, 1999 and
December 31, 1998 and for the years ended December 31, 1999, 1998, and 1997 have
been derived from our 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, and 1995 and for the years ended December 31, 1996 and
1995 have been derived from audited consolidated financial statements not
included herein, but which were previously filed with the Securities and
Exchange Commission (the "SEC").
1999 1998 1997(3) 1996 1995
------------ ----------- ----------- ----------- -----------
Revenues
Capital management fee income..... $ 122,000 $ 382,000 $ 491,000 $ 58,000 $ 3,000
Management fee income............. -- -- -- 1,400,000 --
------------ ----------- ----------- ----------- -----------
Total Revenues.................... 122,000 382,000 491,000 1,458,000 3,000
Operating Expenses(1)............... 9,686,000 6,224,000 3,911,000 2,640,000 1,399,000
------------ ----------- ----------- ----------- -----------
Operating Loss...................... (9,564,000) (5,842,000) (3,420,000) (1,182,000) (1,396,000)
Other income (expense).............. (842,000) (545,000) (100,000) 1,604,000 3,515,000
------------ ----------- ----------- ----------- -----------
(Loss) income before income taxes
and minority interest............. (10,406,000) (6,387,000) (3,520,000) 422,000 2,119,000
(Provision) benefit for income
taxes............................. (20,000) -- 250,000 (606,000) (288,000)
------------ ----------- ----------- ----------- -----------
(Loss) income before minority
interests......................... (10,426,000) (6,387,000) (3,270,000) (184,000) 1,831,000
Minority interests.................. 2,229,000 198,000 411,000 201,000 --
------------ ----------- ----------- ----------- -----------
Net (loss) income................... $ (8,197,000) $(6,189,000) $(2,859,000) $ 17,000 $ 1,831,000
============ =========== =========== =========== ===========
(Loss) earnings per common share
Basic............................. $ (0.75) $ (0.69) $ (0.58) $ 0.00 $ 0.54
Diluted........................... $ (0.75) $ (0.69) $ (0.58) $ 0.00 $ 0.39
Weighted average number of common
and potential common shares for
computation of (loss) earnings per
share(2)
Basic............................. 10,871,423 8,971,272 4,962,286 3,826,014 3,401,584
Diluted........................... 10,871,423 8,971,272 4,962,286 4,976,434 4,733,212
CONSOLIDATED BALANCE SHEET DATA:
1999 1998 1997(3) 1996(3) 1995
------------ ----------- ----------- ----------- -----------
Total assets........................ $ 51,791,000 $19,769,000 $ 8,854,000 $ 5,175,000 $ 3,844,000
Long-term indebtedness.............. $ -- $ 1,222,000 $ -- $ -- $ --
Total liabilities................... $ 1,633,000 $ 1,828,000 $ 447,000 $ 837,000 $ 358,000
Minority interests.................. $ 4,896,000 $ -- $ 227,000 $ 380,000 $ 11,000
Stockholders' equity................ $ 45,262,000 $17,941,000 $ 8,180,000 $ 3,959,000 $ 3,475,000
- --------------------------
(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 company which are secured by the stock of Whitewing Labs, Inc. and
the company.
(2) Potential common shares in 1999, 1998, and 1997 have been excluded from per
share calculation because the effect of their inclusion would be
anti-dilutive.
(3) In 1997, the company acquired a controlling interest in Soundview
Technologies. The 1996 amounts have been restated for the effects of the
company's increased interest in Soundview Technologies. Prior to this
restatement, the company reported losses of $161,000 in equity in earnings
of affiliates and net income of $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 venture capital business is marked by a high degree of risk due to
inherent uncertainties. There are uncertainties associated with identifying and
developing new business opportunities, selecting ventures with acceptable
likelihood of success and future profitability, and in the competitive nature of
the venture capital business. Identifying and developing each new business
opportunity requires us to dedicate significant amounts of financial 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 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. 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 strategy, unknown customer
acceptance, difficulties in obtaining financing, the ability to obtain
intellectual property rights, competition, and the impact of applicable laws and
regulations.
In the following discussion and analysis, the period-to-period comparisons
must be viewed in light of the impact that the acquisition and disposition of
securities of various business interests has had on the financial condition and
results of operations. In 1999, the financial condition and results of
operations were highlighted primarily by the investment 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 an increase in headcount. In 1997, the 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 SEC relating to the Soundview Technologies
acquisition and the registration of shares of our common stock.
As a result of the impact of each of these activities that we have
undertaken and will continue to undertake, as well as the start-up nature of
most of our subsidiaries, the results of operations are volatile and do not fall
into repeatable patterns. Consequently, past performance is not necessarily
indicative of future performance.
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
Liquidity and Capital Resources section that follows. Highlights of the
acquisition and operating activities 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, 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 the prior year due
primarily to additional amortization of the 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 biochip from the
Department of Defense and the Department of Energy. Lastly, the closing of the
investment funds, in which we participated in, 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.
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 in 1997 due to a decrease in capital management fee income derived from
the four investment funds that we managed. During 1998, the funds generated
lower returns, which resulted in lower performance fees.
OPERATING EXPENSES. 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. We recorded amortization
expenses relating to patents and goodwill of $1,568,000 in 1998 compared to
$459,000 in 1997. Research and development costs further contributed to the
increase due to the continued efforts of CombiMatrix's industrial design,
development and marketing of its products. Marketing, general and administrative
expenses contributed to the increase due to the general expansion of our
company, including an increase in the number of personnel as we added marketing
and general office staff as well as higher wages and payroll expenses.
Marketing, general and administrative expenses during 1998 included the
consolidation of Soundview Technologies for the full twelve-month period, while
expenses during 1997 included only the six-month period ended December 31, 1997.
Lastly, we incurred a charge of $460,000 relating to a legal settlement during
the year ended December 31, 1997. We believe that settling this litigation on
the agreed upon terms prevented unnecessary litigation costs as well as
unnecessary diversion of our resources and was in our best interest.
OTHER EXPENSE. We reported an increase in other expense of $445,000 in
1998. This increase is primarily due to an increase in our equity in the losses
of affiliates, and is partially offset by an increase in net interest income.
The increase in the equity in the losses of affiliates is due to the recognition
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, which accounts for the increase in
interest income. This increase was offset by an increase in interest expense of
$89,000. The expense incurred during 1998 is attributable to CombiMatrix's
outstanding unsecured Subordinated Note issued by CombiMatrix in a private
offering completed in March 1998. The proceeds from this placement were
allocated between the warrants issued and the notes resulting in a discount on
the notes. This discount was being amortized over the term of the notes and
treated as additional interest expense.
26
INCOME TAXES. We did not record a benefit for income taxes due to the
non-recognition of benefits or net operating loss carryforward compared to a
benefit of $250,000 recorded in 1997.
MINORITY INTERESTS. 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 in 1998 than in 1997.
INFLATION
Inflation has not had a significant impact on the company.
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 1999, we had cash and cash equivalents of $37.6 million on a
consolidated basis, of which the parent 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. The 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 gross proceeds received from the exercise of common stock
purchase warrants.
- $21 million of gross proceeds from a private equity financing, consisting
of the sale 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 exercise of common stock
purchase warrants issued in the December 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, we anticipate that existing working capital reserves will
provide sufficient funds for our operating expenses for at least the next twelve
months in the absence of making any major new investments. We intend to seek
additional financing to fund new or existing businesses. There can be no
assurances that we will not encounter unforeseen difficulties that may deplete
our capital resources more rapidly than anticipated. Any efforts to seek
additional funding could be made through equity, debt, or other external
financing and there can be no assurance that additional funding will be
available on favorable terms, if at all. Such financing transactions may be
dilutive to existing investors.
YEAR 2000 ISSUES
The "Year 2000 Issue" refers to the problem of many computer programs using
the last two digits to represent a year rather than four digits (i.e., "99" for
1999). Some computer programs may have date-sensitive software that may not
operate properly when dealing with years past 1999, which is when "00" will
represent the Year 2000. To the extent that this situation exists, there is a
potential 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 problems with our internal
systems or with our third-party vendors and licensors of material software and
services. We completed our assessment and system tests of all current versions
of hardware and software products and technology information systems that we use
and believe that they are Year 2000 compliant. However, we continue to monitor
our Year 2000 implications. We have not incurred any material costs in
identifying or evaluating Year 2000 compliance issues.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We were not a party to derivative financial instruments at or during the
year ended December 31, 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,"
"Executive Officers," and "Section 16(a) Beneficial Ownership Reporting
Compliance" in our definitive proxy statement to be filed with the SEC not later
than April 30, 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 our
definitive proxy statement to be filed with the SEC not later than April 30,
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 our definitive proxy statement to be filed with the
SEC not later than April 30, 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 with Management and Others"
in our definitive proxy statement to be filed with the SEC not later than
April 30, 2000.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(a) (1) Financial Statements
PAGE
--------
Report of Independent Accountants........................... F-1
Consolidated Balance Sheets as of December 31, 1999 and
1998...................................................... F-2
Consolidated Statements of Operations for the Years Ended
December 31, 1999, 1998 and 1997.......................... F-3
Consolidated Statements of Stockholders' Equity for the
Years Ended December 31, 1999, 1998 and 1997.............. F-4
Consolidated Statements of Cash Flows for the Years Ended
December 31, 1999, 1998 and 1997.......................... F-5
Notes to Consolidated Financial Statements.................. 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 Agreement and Plan of Merger of Acacia Research Corporation,
a California corporation, and Acacia Research Corporation, a
Delaware corporation, dated as of December 23, 1999(1)
3.1 Certificate of Incorporation(8)
3.2 Bylaws(9)
4.2 Form of Specimen Certificate of Company's Common Stock(3)
10.1 Lease of Company's Executive Offices at 55 South Lake
Avenue, Pasadena, California 91101(4)
10.2 Lease Agreement dated November 11, 1999 between
Soundbreak.com Incorporated and 8730 Sunset Towers and
related Guaranty(11)
29
10.3 1993 Stock Option Plan(5)
10.4 Form of Stock Option Agreement for 1993 Stock Option Plan(5)
10.5 1996 Stock Option Plan(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(6)
10.9 Greenwich Information Technologies Exclusive Marketing and
Licensing Agreement(7)
21 List of subsidiaries
23.1 Consent of PricewaterhouseCoopers LLP
27 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.
(6) Incorporated by reference from the Company's Annual Report on Form 10-K for
the year ended December 31, 1996.
(7) Incorporate 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.
On 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 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 March 21, 2000
R. Bruce Stewart of Directors
Chief Executive Officer and
/s/ Paul R. Ryan President and Director
------------------------------------------- (Principal March 21, 2000
Paul R. Ryan Executive Officer)
/s/ Thomas B. Akin
------------------------------------------- March 21, 2000
Thomas B. Akin Director
/s/ Fred A. de Boom
------------------------------------------- March 21, 2000
Fred A. de Boom Director
/s/ Edward W. Frykman
------------------------------------------- March 21, 2000
Edward W. Frykman Director
Vice President, Finance and
/s/ Mary Rose Colonna Controller
------------------------------------------- (Principal Accounting March 21, 2000
Mary Rose Colonna Officer)
31
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Stockholders of Acacia Research Corporation
In our opinion, the consolidated financial statements listed in the index
appearing under Item 14(a)(1) on page 29 present fairly, in all material
respects, the financial position of Acacia Research Corporation and its
subsidiaries at December 31, 1999 and December 31, 1998, and the results of
their operations and their cash flows for each of the three years in the period
ended December 31, 1999, in conformity with accounting principles generally
accepted 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 in 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.
/s/ PricewaterhouseCoopers LLP
Los Angeles, California
February 25, 2000, except for Note 10,
as to which the date is March 20, 2000
F-1
ACACIA RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
DECEMBER 31, 1999 AND 1998
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
1999 1998
-------- --------
ASSETS
Current assets
Cash and cash equivalents................................. $ 37,631 $ 7,508
Management fees and other receivables..................... 60 239
Receivables from affiliates............................... 318 27
Deposit on investment..................................... 3,000 --
Prepaid expenses.......................................... 208 96
Income tax receivable..................................... -- 110
-------- -------
Total current assets.................................... 41,217 7,980
Property and equipment, net................................. 1,154 530
Investment in affiliates, at equity......................... 4,636 3,481
Partnership interests, at equity............................ -- 1,832
Patents, net of accumulated amortization.................... 3,534 4,610
Goodwill, net of accumulated amortization................... 1,012 1,158
Other assets................................................ 238 178
-------- -------
$ 51,791 $19,769
======== =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses..................... $ 1,293 $ 366
-------- -------
Total current liabilities............................... 1,293 366
Other liabilities........................................... 340 240
Notes payable, net of discount.............................. -- 1,222
-------- -------
Total liabilities....................................... 1,633 1,828
-------- -------
Minority interests.......................................... 4,896 --
-------- -------
Stockholders' equity
Common stock, par value $.001 per share;
60,000,000 shares authorized; 13,607,193 shares in 1999
and 10,190,815 shares in 1998 issued and outstanding.... 14 10
Additional paid-in capital................................ 62,283 26,727
Warrants to purchase common stock......................... 58 100
Accumulated deficit....................................... (17,093) (8,896)
-------- -------
Total stockholders' equity.............................. 45,262 17,941
-------- -------
$ 51,791 $19,769
======== =======
Commitments and contingencies (Note 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 STOCKHOLDERS' EQUITY
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS, EXCEPT SHARE INFORMATION)
WARRANTS (ACCUMULATED
ADDITIONAL TO PURCHASE DEFICIT) STOCK
COMMON COMMON PAID-IN COMMON RETAINED SUBSCRIPTIONS
SHARES STOCK CAPITAL STOCK EARNINGS RECEIVABLE
---------- -------- ---------- ----------- ------------ -------------
1997
Balance at December 31, 1996.............. 3,941,344 $ 4 $ 4,068 $ 10 $ 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 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) --
1999
Net loss.................................. (8,197)
Units issued in private 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
stock 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 private placement, net.... 5,607
Stock options exercised................... 806
Increase in capital due to issuance of
stock by subsidiaries................... 359
Compensation expense relating to stock
options/warrants........................ 180
Cash received for 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.............. -- 17,941
1999
Net 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.............. $ -- $45,262
===== =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL
STATEMENTS.
F-4
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(IN THOUSANDS)
1999 1998 1997
-------- -------- --------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss.................................................... $(8,197) $(6,189) $(2,859)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................. 1,823 1,709 529
Equity in loss of affiliates and partnerships............. 1,120 717 161
Minority interests in net loss............................ (2,229) (198) (411)
Compensation expense relating to stock options/warrants... 146 227 360
Other..................................................... 252 161 514
Changes in assets and liabilities, net of effects of
acquisitions:
Management fees and other receivables, prepaid expenses
and other assets........................................ 23 (132) (113)
Accounts payable, accrued expenses and other
liabilities............................................. 927 146 110
------- ------- -------
Net cash used in operating activities..................... (6,135) (3,559) (1,709)
------- ------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of equity investments, net of cash acquired...... (2,387) (2,552) (132)
Deposit on investment..................................... (3,000) -- --
Withdrawals from partnerships............................. 1,710 -- 568
Purchase of partnership interest.......................... -- (1,062) --
Purchase of property and equipment........................ (890) (374) (92)
Other..................................................... (84) 167 121
------- ------- -------
Net cash (used in) provided by investing activities....... (4,651) (3,821) 465
------- ------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from (payments on) notes payable................. -- 1,400 (1,453)
Proceeds from exercise of stock options and warrants...... 15,202 3,706 806
Capital contributions from minority shareholders of
subsidiaries............................................ 6,634 45 434
Proceeds from sale of common stock, net of issuance
costs................................................... 19,073 8,514 2,392
Other..................................................... -- (144) 139
------- ------- -------
Net cash provided by financing activities................. 40,909 13,521 2,318
------- ------- -------
Increase in cash and cash equivalents..................... 30,123 6,141 1,074
Cash and cash equivalents, beginning...................... 7,508 1,367 293
------- ------- -------
Cash and cash equivalents, ending......................... $37,631 $ 7,508 $ 1,367
======= ======= =======
Supplemental disclosures of cash flow information:
Cash paid for interest.................................... $ 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................ $ 288 $ 3,035 $ 2,825
Increase in equity investment due to receipt of affiliate
stock as payment on note receivable..................... $ -- $ 240 $ --
Increase of common stock to satisfy legal settlement
payable................................................. $ -- $ 226 $ --
Discount on notes payable from issuance of subsidiary's
warrants................................................ $ -- $ 238 $ --
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-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 makes direct investments in emerging corporations with
intellectual property rights, most of which are involved in developing new or
unproven technologies. There is no assurance that any or all such technologies
will be successful, and even if successful, that the development of such
technologies can be commercialized.
At December 31, 1999, the Company had significant economic interests in nine
companies and takes an active role in each company'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"), 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 one-half of a common stock purchase warrant. The Company issued
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 private placement
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 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 $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 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 sold 290,200 units at a purchase
price of $5.00 per unit in a private placement. Each unit consisted of one
common stock purchase warrant and one share of the Company's common stock. Each
common stock purchase warrant entitled its holder to purchase one share of the
Company's common stock at an exercise price of $7.50 per share, subject to
adjustment, and expires on June 8, 2000. Finders involved in this transaction
received finders fees at a rate of $0.50 per unit placed
F-6
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. DESCRIPTION OF BUSINESS (CONTINUED)
and one finder warrant per ten units placed. Each finder warrant may be execised
prior to June 8, 2000 for one share of the Company's common stock at an exercise
price of $5.50 per share, subject to adjustment. The Company 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 gave 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
financing raising gross proceeds of $4 million through the sale of 2 million
shares of CombiMatrix common stock. The Company invested $2.3 million in this
private placement and acquired 1.15 million shares. The acquisition was
accounted for under the purchase method. During the fourth quarter, CombiMatrix
offered holders of three-year 6% unsecured subordinated promissory notes issued
in a private offering completed in March 1998 the opportunity to convert their
outstanding principal balance into CombiMatrix Common Stock. All noteholders
converted as of December 1999. As a result of these activities, the Company's
equity ownership is 50% as of December 31, 1999.
In the first quarter of 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 15(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 entitled 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, which was converted as
described above. The amount attributable to the warrants and included in each
unit resulting in debt discount totaled $850 per unit. The Company invested
$50,000 in this private placement.
Also during the first 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 Company. As a result
of the transaction, the Company increased its equity ownership in CombiMatrix
from 51.4% to 52.7%. 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 Series A "voting" Convertible Preferred Stock of Soundbreak.com for
$1 million, which represented 100% of the outstanding Series A Preferred Stock.
The Company also owns 98.8% of the 5 million outstanding shares of
Soundbreak.com's common stock. In the fourth quarter, Soundbreak.com completed a
private equity financing raising $6.5 million through the sale of 65,505 shares
of Series 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 Series 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 of MerkWerks for a total purchase price of $319,000
consisting of 60,107 shares of common stock of the Company and $31,000 in cash.
As a result of the transaction, the Company increased its equity ownership in
MerkWerks from 89.6% to 99.9%. The excess of the purchase price over fair value
of the net assets acquired was assigned to goodwill of approximately $317,000,
which is being amortized over its estimated useful life of 3 years.
In the first quarter of 1998, the Company purchased a total of 401,359
shares of common stock of MerkWerks for a total purchase price of $646,000
consisting 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 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 on 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
$1,842,000 consisting of 488,672 shares of common stock of the Company. As a
result of the transaction, the Company increased its equity ownership in
Soundview from 51.4% to 66.7%. The excess of the purchase 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 book value of the 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
consisted of $2.5 million in cash. 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. Also in the second 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.
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.
CASH AND CASH EQUIVALENTS--The Company considers all highly liquid,
short-term investments with original maturities of three months or less when
purchased to be cash equivalents.
MANAGEMENT FEES--Capital management fees include asset-based and
performance-based fees earned from two domestic private investment partnerships
in which the Company was a general partner and two offshore investment
corporations for which the Company served as an investment advisor. These
capital management fees were recognized when earned in accordance with the
respective partnership and management agreements. Management fees also include
income from other consulting and management services provided by the Company to
other parties. These fees are recognized when the related services are provided.
PATENTS AND GOODWILL--Patents, once issued, and goodwill are amortized on
the straight-line method over their estimated remaining useful lives, ranging
from three to five years. Amortization charged to operations relating to
goodwill amounted to $465,000, $403,000 and $78,000 in 1999, 1998, and 1997
respectively. Amortization charged to operations relating to patents amounted to
$1,157,000, $1,165,000, and $381,000 in 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-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 party nature.
STOCK-BASED COMPENSATION--Compensation cost of stock options issued to
employees is accounted for in accordance with APB Opinion No. 25, "Accounting
for Stock Issued to Employees," and related
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--Expenditures related to the development
of new products and processes, including significant improvements and
refinements to existing products, are expensed 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.
PROPERTY AND EQUIPMENT--Property and equipment are recorded at cost. Major
additions and improvements are capitalized. When these assets are sold or
otherwise disposed of, the asset and related depreciation 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--Costs of start-up activities, including organization
costs, are expensed as incurred.
SEGMENT REPORTING--The Company uses the management approach, which
designates the internal organization that is used by management for making
operating decisions and assessing performance as the basis of the Company's
reportable segments.
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.
LOSS PER SHARE--Loss per share is presented on both a basic and diluted
basis. A reconciliation of the denominator of the basic 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 1997 have been excluded from the
per share calculation because the effect of 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 1999 presentation.
3. PROPERTY AND EQUIPMENT
Property and equipment consist of the following at December 31, 1999 and
1998:
1999 1998
---------- ---------
Computer Equipment and Software....................... $ 652,000 $ 275,000
Furniture and Fixtures................................ 425,000 189,000
Laboratory Equipment.................................. 287,000 143,000
Leasehold Improvements................................ 167,000 106,000
---------- ---------
1,531,000 713,000
Less:
Accumulated Depreciation and Amortization........... (377,000) (183,000)
---------- ---------
$1,154,000 $ 530,000
========== =========
4. 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, 1999 and 1998:
1999 1998
-------- --------
Signature-mail.com llc...................................... 25.0% 25.0%
Mediaconnex Communications, Inc............................. 31.0% --
Greenwich Information Technologies LLC...................... 33.3% 33.3%
Whitewing Labs, Inc......................................... 23.7% 23.5%
Acacia Capital Partners, L.P................................ -- 75.5%
Acacia Growth Fund, L.P..................................... -- 18.6%
The investment in Signature-mail.com amounted to $1,408,000 and $2,027,000
at December 31, 1999 and 1998, respectively. Signature-mail.com had total assets
of $444,000 and $1,339,000 at December 31, 1999 and 1998, respectively, and
reported net losses of $1,474,000 and $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 $1,454,000 at December 31, 1999 and
1998, respectively. These investees had total assets of $1,470,000 and
$2,124,000 at December 31, 1999 and 1998, respectively, and reported net losses
of $934,000, $607,000 and $1,189,000 in 1999, 1998 and 1997, respectively.
Officers of the Company continue to have significant representation on the Board
of Directors of one of these entities.
5. COMMON STOCK SPLIT
On March 17, 1998, the Company announced that its Board of Directors
declared a two-for-one split of the Company's common stock in the form of a
stock dividend of one share of common stock for each share outstanding. The
Company distributed the stock dividend on June 12, 1998, for each share held of
record at the close of business on May 29, 1998. All references to number of
common shares and per share information in the consolidated financial statements
and related footnotes have been adjusted as appropriate to reflect the stock
split for all periods presented.
6. PROVISION FOR INCOME TAXES
Provision (benefit) for income taxes consists of the following:
1999 1998 1997
-------- -------- ---------
Current:
U.S. Federal tax................................ $12,000 $ -- $ (60,000)
State taxes..................................... 8,000 -- --
------- ---- ---------
20,000 -- (60,000)
------- ---- ---------
Deferred:
U.S. Federal tax................................ -- -- (149,000)
State taxes..................................... -- -- (41,000)
------- ---- ---------
-- -- (190,000)
------- ---- ---------
$20,000 $ -- $(250,000)
======= ==== =========
A reconciliation of the federal statutory income tax rate and the effective
income tax rate is as follows:
1999 1998 1997
-------- -------- --------
Statutory Federal Tax Rate......................... (34.0)% (34.0)% (34.0)%
State Income Taxes, Net of Federal Benefit......... (3.0)% (3.0)% --
Amortization of Intangible Assets.................. 5.3% 2.2% 4.6%
Unrealized Benefit of Deferred Items............... 31.7% 34.8% 22.3%
----- ----- -----
0.0% 0.0% (7.1)%
===== ===== =====
At December 31, 1999 the Company had federal and California state income tax
net operating loss carryforwards ("NOLs") of approximately $7,904,000 and
$4,706,000, respectively, expiring between 2002 and 2019, excluding NOLs at
CombiMatrix and Soundview Technologies. NOLs in the amount of $694,000 will be
recorded to additional paid-in-capital when realized. In addition, the Company
has tax credit carryforwards of approximately $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 and files a consolidated federal income tax return with the Company.
The aggregate tax NOL's at CombiMatrix, Soundview Technologies, and
Soundbreak.com are $9,666,000 and $5,296,000 for federal and state purposes,
respectively, expiring between 2000 and 2019. CombiMatrix and Soundview
Technologies also have tax credit carryforwards of approximately $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, 1999 and 1998:
1999 1998
----------- -----------
Reserves for Notes Receivable...................... $ 152,000 $ 160,000
Basis of Investments in Affiliates................. 486,000 1,504,000
Depreciation and Amortization...................... 2,000 (8,000)
Accrued Liabilities................................ 126,000 63,000
Net Operating Loss Carryforwards and Credits....... 6,865,000 3,976,000
----------- -----------
7,631,000 5,695,000
Valuation Allowance................................ (7,631,000) (5,695,000)
----------- -----------
$ -- $ --
=========== ===========
7. STOCK OPTIONS AND WARRANTS
The Company has three stock option plans currently in effect: the 1993 Stock
Option Plan (the "1993 Plan"), 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 services to the Company
or its subsidiaries. The 1993 Plan covers an aggregate of 2,000,000 shares of
common 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.
The Bonus Plan provided 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 May 1998, the Company increased the authorized number of shares of common
stock subject to the amended plan by 500,000 shares. During 1999, the maximum
number of the Company's common shares available under the 1996 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, 1,877,499 and 558,500 shares were available for 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.
In 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)
7. STOCK OPTIONS AND WARRANTS (CONTINUED)
The following is a summary of common stock option activities:
EXERCISE WEIGHTED
SHARES PRICES AVERAGE PRICE
--------- ------------ -------------
Balance at December 31, 1996............ 2,399,000 $0.75-$5.25 $ 1.99
Options Granted......................... 660,200 $2.13-$3.89 $ 3.10
Options Exercised....................... (512,400) $0.75-$2.63 $ 1.67
Balance at December 31, 1997............ 2,546,800 $0.75-$5.25 $ 2.34
Options Granted......................... 86,000 $3.61-$8.63 $ 4.77
Options Exercised....................... (874,400) $0.75-$2.63 $ 0.86
Options Cancelled....................... (95,400) $2.13-$3.89 $ 2.50
Balance at December 31, 1998............ 1,663,000 $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, 1997........ 1,307,300 $0.75-$5.25 $ 1.55
Exercisable at December 31, 1998........ 893,000 $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, 1999 are summarized as follows:
WEIGHTED OUTSTANDING EXERCISABLE
NUMBER OF AVERAGE WEIGHTED WEIGHTED
RANGE OF OUTSTANDING REMAINING AVERAGE NUMBER AVERAGE
EXERCISE PRICES OPTIONS CONTRACTUAL LIFE EXERCISE PRICE EXERCISABLE EXERCISE PRICE
- --------------- ----------- ---------------- -------------- ----------- --------------
$1.00-$2.99.......... 178,550 .95 $ 2.47 140,550 $ 2.43
$3.00-$5.99.......... 1,257,500 1.73 $ 3.54 613,499 $ 3.37
$6.00-$9.99.......... 197,001 4.40 $ 7.70 251,484 $ 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
========= =========
At December 1999, the total number of warrants outstanding was 578,237
shares of the Company's common stock at a per share exercise price of $26.00.
The Company has adopted only the disclosure requirements of SFAS No. 123
with respect to options issued to employees.
The weighted average fair value of options granted during 1999, 1998 and
1997 for which the exercise price equals the fair market price on the grant date
was $13.33, $3.37 and $2.28, respectively.
The weighted average fair value of options granted during 1999 and 1997 for
which the exercise price is less than fair market value on grant date was $16.70
and $1.40, 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 with exercise price less than the market value. The weighted
average fair value of options granted during 1997 for which the exercise price
exceeds fair market value on grant date was $1.42. There were no options granted
during 1999 and 1998 with the exercise price exceeding fair market 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
----------- ----------- -----------
Net Loss, as Reported.................. $(8,197,000) $(6,189,000) $(2,859,000)
Net Loss, Pro Forma.................... $(9,268,000) $(6,831,000) $(3,371,000)
Basic Loss Per Share, as Reported...... $ (0.75) $ (0.69) $ (0.58)
Basic Loss Per Share, Pro Forma........ $ (0.85) $ (0.76) $ (0.68)
Diluted Loss Per Share, as Reported.... $ (0.75) $ (0.69) $ (0.58)
Diluted Loss Per Share, Pro Forma...... $ (0.85) $ (0.76) $ (0.68)
The fair value of the options was determined using the Black-Scholes
option-pricing model, assuming weighted average risk free annual interest of
5.79%, 5.18% and 6.14% in 1999, 1998 and 1997, respectively, volatility of
approximately 75%, with expected lives of two to five years, and no expected
dividends.
8. COMMITMENTS AND CONTINGENCIES
Minimum annual rental commitments on operating leases having initial or
remaining noncancellable lease terms in excess of one 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 furniture and equipment and
laboratory and office space.
Rent expense in 1999, 1998 and 1997 approximated $480,000, $263,000 and
$123,000, respectively.
The Company is subject to legal proceedings and claims, 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)
9. SEGMENT INFORMATION
The Company has three reportable segments: Corporate Portfolio, CombiMatrix
and Soundbreak.com.
The Corporate 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. 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 revenue 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.
CORPORATE
1999 PORTFOLIO COMBIMATRIX SOUNDBREAK.COM OTHER TOTAL
- ---- ----------- ----------- -------------- ---------- -----------
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
F-17
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......... 1,547,000 -- 21,000 1,568,000
Interest income.............................. 216,000 83,000 3,000 302,000
Interest expense............................. 1,000 129,000 -- 130,000
Equity in losses of affiliates............... 901,000 -- -- 901,000
Equity in income of partnerships............. 184,000 -- -- 184,000
Loss before minority interests and income
taxes...................................... 4,080,000 1,644,000 663,000 6,387,000
Segment assets............................... 16,052,000 3,522,000 195,000 19,769,000
Investments in affiliates, at equity......... 3,481,000 -- -- 3,481,000
Partnerships interest, at equity............. 1,832,000 -- -- 1,832,000
Purchase of property and equipment........... 281,000 88,000 5,000 374,000
CORPORATE
1997 PORTFOLIO COMBIMATRIX OTHER TOTAL
- ---- ---------- ----------- -------- ----------
Revenue........................................ $ 491,000 $ -- $ -- $ 491,000
Gains on sales of investments.................. 50,000 -- -- 50,000
Amortization of patents and goodwill........... 459,000 -- -- 459,000
Interest income................................ 36,000 9,000 7,000 52,000
Interest expense............................... 41,000 -- -- 41,000
Equity in losses of affiliates................. 290,000 -- -- 290,000
Equity in income of partnerships............... 129,000 -- -- 129,000
Legal settlement expense....................... 460,000 -- -- 460,000
Loss before minority interests and income
taxes........................................ 2,491,000 612,000 417,000 3,520,000
Segment assets................................. 8,267,000 357,000 230,000 8,854,000
Investments in affiliates, at equity........... 1,205,000 -- -- 1,205,000
Partnerships interest, at equity............... 586,000 -- -- 586,000
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