SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934 For the Quarter Ended June 30, 1997 Commission File No. 0-26068 ACACIA RESEARCH CORPORATION --------------------------- (Exact name of registrant as specified in its charter) California 95-4405754 - ------------------------------------- ------------------------------------ (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation organization) 12 South Raymond Avenue, Pasadena CA 91105 - ------------------------------------- ------------------------------------ (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (818) 449-6431 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No . ------ ----------- At June 30, 1997, 2,381,372 shares of common stock, no par value, of the Registrant were outstanding.
ACACIA RESEARCH CORPORATION Table Of Contents PART I. FINANCIAL INFORMATION ITEM 1. CONSOLIDATED FINANCIAL STATEMENTS Consolidated Balance Sheet . . . . . . . . . . . . . . 3 Consolidated Statement of Operations . . . . . . . . . 4 Consolidated Statement of Cash Flows . . . . . . . . . 5 Notes to Consolidated Financial Statements . . . . . . 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. . . . . . . . . . 9 PART II. OTHER INFORMATION. . . . . . . . . . . . . . . . . . . . . . . .13 Signature. . . . . . . . . . . . . . . . . . . . . . . . . . . .15
ITEM 1. FINANCIAL STATEMENTS ACACIA RESEARCH CORPORATION CONSOLIDATED BALANCE SHEETS June 30, 1997 and December 31, 1996 <TABLE> <CAPTION> (Unaudited) June 30, 1997 December 31, 1996 ------------------ ------------------- <S> <C> <C> ASSETS Current Assets Cash and cash equivalents $ 1,808,614 $ 292,701 Distributions receivable 0 400,000 Notes receivable 799,500 820,500 Receivables from affiliates 0 52,592 Other receivables 192,277 295,546 Prepaid expenses 155,265 219,027 Deferred tax benefit 0 272 ------------------ ------------------- Total current assets 2,955,656 1,980,638 Equipment, furniture, and fixtures 206,839 202,049 Other assets Investments in unconsolidated subsidiaries, at equity 1,283,635 1,494,671 Investment in unconsolidated subsidary, at cost 1,233,000 1,233,000 Partnership interests, at equity 504,389 625,405 Deferred tax benefit 127,660 0 Organization costs, net of accumulated amortization 2,842 3,169 ------------------ ------------------- Total assets $ 6,314,021 $ 5,638,932 ------------------ ------------------- ------------------ ------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities Accounts payable and accrued expenses $ 113,708 $ 90,599 Income taxes payable 0 0 Legal settlement payable 435,000 0 Note payable 375,000 552,500 ------------------ ------------------- Total current liabilities 923,708 643,099 Deferred tax liability 150,996 193,503 ------------------ ------------------- Total liabilities 1,074,704 836,602 Commitments and contingencies Minority interest 401,360 380,329 Stockholders' equity Common stock, no par value, 10,000,000 shares authorized, 2,381,372 shares in 1997 and 1,970,672 shares in 1996 issued and outstanding 5,528,087 4,081,993 (Accumulated deficit) retained earnings (667,639) 428,760 Less stock subscription receivable (31,492) (88,752) ------------------ ------------------- Total stockholders' equity 4,828,956 4,422,001 ------------------ ------------------- Total liabilities and stockholders' equity $ 6,314,021 $ 5,638,932 ------------------ ------------------- ------------------ ------------------- </TABLE> SEE ACCOMPANYING NOTES 3
ACACIA RESEARCH CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS For the Six Months Ended and For the Three Months Ended June 30, 1997 and 1996 (Unaudited) <TABLE> <CAPTION> Six Months Ended Three Months Ended June 30, 1997 June 30, 1996 June 30, 1997 June 30, 1996 -------------------------------- --------------------------------- <S> <C> <C> <C> <C> Revenues Gains on sales of securities, net $50,000 $722,117 $0 $169,751 Unrealized gain attributable to issuance of common stock by affiliate 0 1,066,408 0 0 Equity (losses) in earnings of investees (98,993) (701) 15,694 (175,467) Management fees 340,547 1,421,612 308,345 1,415,387 Interest income 20,332 57,953 5,417 30,037 -------------------------------- --------------------------------- Total revenues, net of investment income 311,886 3,267,389 329,456 1,439,708 Legal settlement expense 460,000 0 0 0 Marketing, general, and administrative 1,229,678 993,251 517,156 565,966 -------------------------------- --------------------------------- (Loss) income before minority interest and taxes (1,377,792) 2,274,138 (187,700) 873,742 Minority interest in net loss of consolidated subsidiary (113,626) (51,002) (43,842) (44,377) -------------------------------- --------------------------------- (Loss) income before provision for income taxes (1,264,166) 2,325,140 (143,858) 918,119 (Benefit) provision for income taxes (167,767) 893,245 (127,660) 366,014 -------------------------------- --------------------------------- Net (loss) income ($1,096,399) $1,431,895 ($16,198) $552,105 -------------------------------- --------------------------------- -------------------------------- --------------------------------- (Loss) earnings per common share Primary ($0.53) $0.54 ($0.01) $0.20 Fully diluted ($0.53) $0.54 ($0.01) $0.20 Weighted average number of common and common equivalent shares for computation of (loss) income per share Primary 2,063,862 2,664,376 2,049,390 2,705,092 Fully diluted 2,063,862 2,664,376 2,049,390 2,705,092 </TABLE> SEE ACCOMPANYING NOTES 4
ACACIA RESEARCH CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS For the Six Months Ended June 30, 1997 and 1996 (Unaudited) <TABLE> <CAPTION> Six Months Ended Six Months Ended June 30, 1997 June 30, 1996 ----------------- ----------------- <S> <C> <C> Cash flows from operating activities: Net (loss) income $ (1,096,399) $ 1,431,895 Adjustments to reconcile net income to net cash (used in) provided by operating activities: Legal settlement expense 435,000 0 Depreciation and amortization 25,580 14,000 Deferred taxes (65,571) 315,367 Gain on sales of securities 50,000 (722,117) Undistributed (earnings) loss of affiliates (98,993) (701) Minority interest in net loss (113,626) (51,002) Unrealized gain attributable to issuance of common stock by affiliate 0 (1,066,408) Changes in assets and liabilities: (Increase) decrease in accounts receivable, prepaid expenses, and other assets 154,680 (222,026) Increase (decrease) in accounts payable, accrued expenses, and income taxes payable 23,109 286,556 ----------------- ----------------- Net cash (used in) provided by operating activities (686,220) (14,436) Cash flows from investing activities: Purchase of equity investments (50,000) (1,600,000) Payment received on advances to affiliates 57,180 414,247 Advances to affiliates (4,588) (267,317) Distributions receivable 400,000 0 Proceeds from sales of securities 300,000 1,039,117 Payments received on notes receivable 21,000 446,250 Capitalized expenditures (27,313) (102,057) ----------------- ----------------- Net cash used in (provided by) investing activities 696,279 (69,760) Cash flows from financing activities: Payments on notes payable (177,500) 0 Proceeds from sale of stock by subsidiary 180,000 511,820 Proceeds from sale of common stock 1,503,354 196,500 ----------------- ----------------- Net cash provided by financing activities 1,505,854 708,320 ----------------- ----------------- Increase in cash and cash equivalents 1,515,913 624,124 Cash and cash equivalents, beginning 292,701 788,611 ----------------- ----------------- Cash and cash equivalents, ending $ 1,808,614 $ 1,412,735 ----------------- ----------------- ----------------- ----------------- </TABLE> SEE ACCOMPANYING NOTES 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. The Company provides investment advisory services, and also provides management services to, and makes direct investments in, emerging corporations. The Company has significant economic interests in five companies that it has formed and takes an active role in each company's growth and advancement. These companies are: Whitewing Labs, Inc., MerkWerks Corporation, CombiMatrix Corporation, Soundview Technologies Incorporated, and Greenwich Information Technologies LLC. In addition, as a registered investment advisor, the Company is a general partner in two private investment partnerships, and is an investment advisor to two offshore investment corporations. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION - In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, which consist only of normal recurring adjustments necessary to present fairly the consolidated financial position of the Company and its subsidiaries at June 30, 1997 and the consolidated results of operations and cash flows for the three and six months ended June 30, 1997 and June 30, 1996. This interim financial information and notes thereto should be read in conjunction with the Company's Annual Report on Form 10-K/A for the year ended December 31, 1996. The Company's consolidated results of operations and cash flows for interim periods are not necessarily indicative of the results to be expected for any other interim period or the full year. (LOSS) INCOME PER COMMON SHARE - Income per common share for the three and six months ended June 30, 1996 has been computed based on the weighted average number of common shares outstanding plus the common shares that would be outstanding assuming conversion of common stock options and warrants, which are considered to be common stock equivalents, using the treasury stock method. Loss per common share for the three and six months ended June 30, 1997 has been computed based on the weighted average number of common shares outstanding, and excludes common stock equivalents because the effect of their inclusion on the loss per common share computation is anti-dilutive. NEW PRONOUNCEMENTS - In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 establishes new standards for computing and presenting earnings per share ("EPS") and supersedes APB Opinion No. 15, "Earnings Per Share." SFAS 128 replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures, and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. SFAS 128 becomes effective for the Company for the year ending December 31, 1997. Pro forma results for the second quarter of 1997 and 1996, assuming the application of SFAS 128, are as follows: For Three Months Ended ---------------------- June 30, 1997 June 30, 1996 ------------- ------------- Basic (loss) earnings per share ($0.01) $0.29 Diluted (loss) earnings per share ($0.01) $0.20 RESTATEMENT OF 1996 AND THE THREE MONTHS ENDED MARCH 31, 1997. The Company's consolidated financial statements for the year ended December 31, 1996, including the period ended June 30, 1996, and the three months ended March 31, 1997, have been restated to include the accounts of CombiMatrix Corporation on a consolidated basis. The Company's ownership interest in CombiMatrix exceeded 50% as of December 31, 1996, but was expected to decline below 50% based on planned offerings of common stock by CombiMatrix Corporation and, therefore, was previously reported under the equity method. However, the Securities and Exchange Commission has determined that the exception for temporary control is applicable only if control is likely to be lost in the near term as a result of the probable occurrence of events that lie outside of the Company's control. 6
ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 3. COMMITMENTS AND CONTINGENCIES LITIGATION SETTLEMENT - On May 7, 1997, the Company entered into a Settlement Agreement terminating a lawsuit brought by Ann P. Hodges, a former director of the Company, and her husband Christopher D. Hodges. The suit alleged that the Company breached a contract with Ann Hodges by improperly refusing to permit her to exercise an option to purchase 100,000 shares of common stock of the Company, and sought $950,000 in damages from the Company. Under the terms of the Settlement Agreement, the Hodges have received $25,000 in cash and options to purchase 120,600 shares of the Company's Common Stock at an exercise price equal to $4.25 per share. The underlying shares will vest over a period of 18 months, and remain exercisable to the extent the Hodges realize total profits of up to $475,000 (measured as the aggregate difference between the market value of the shares on the date of exercise and the exercise price). If, following the exercise or termination of the option, the Hodges have not realized profits of $475,000, the Company would be obligated to make a cash payment to the Hodges equal to the shortfall. For the purposes of these financial statements, the estimated fair value of this settlement is $460,000, less the $25,000 cash they have received. 4. NOTES RECEIVABLE As of June 30, 1997 and 1996, the Company held promissory notes from individuals related to the sale of common stock owned by the Company in Whitewing Labs, Inc. These notes generally bear interest at 5% per annum and are generally secured by the common stock sold. The following is a summary of notes receivable at June 30, 1997 and December 31, 1996: 1997 1996 ------- --------- Notes receivable due from stockholders, secured $ 560,000 $ 560,000 Notes receivable, secured 798,750 798,750 Notes receivable, unsecured - 21,000 ------- --------- 1,358,750 1,379,750 Less: allowance for losses (559,250) (559,250) ------- --------- Total notes receivable $ 799,500 $ 820,500 ------- --------- ------- --------- Interest receivable on these notes amounted to approximately $102,300, and $85,500, as of June 30, 1997 and December 31, 1996, respectively. The Company currently holds two promissory notes and one demand note, which are secured by Whitewing Labs, Inc. common stock. The makers of these notes have been delinquent in payments of principal of and interest on these notes. The Company recorded a write-down of $559,250 on two of these notes in December 1996 to reflect the then current market value of the Whitewing Labs, Inc. common stock held by the Company as collateral for the repayment of the notes. Although the Company continues to pursue the collection of amounts owing with respect to the three notes, should the Company not recover the amounts owing through routine collection procedures, the Company may consider foreclosing on the collateral or pursuing other available legal resources. 5. NOTE PAYABLE As of June 30, 1997, the Company has a note payable to Greenwich Information Technologies LLC in connection with the purchase of an equity interest in that entity. This note has a balance of $375,000 as of June 30, 1997 and bears interest at 6.5% per annum. The note calls for monthly principal payments of $25,000 to $50,000 per month, with the final payment due in December 1997. The Company has pledged a portion of its membership interest in Greenwich Information Technologies as security for this note. 7
ACACIA RESEARCH CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 6. COMMON STOCK SUBSCRIPTIONS Common stock subscriptions as of June 30, 1997 and December 31, 1996 consist of promissory notes due from individuals on the purchase of common stock and the exercise of stock options. These notes generally bear interest at 4% to 5% per annum. The notes are due in full in 1997. As of June 30, 1997 and December 31, 1996 the outstanding balances due on these notes were $31,492 and $88,752, respectively. Other receivables with respect to these notes include an interest receivable of $6,700 in 1997, and $5,700 in 1996. During July 1997, approximately $26,786 has been received toward the outstanding principal balance of $31,492. 7. RECEIVABLES FROM AFFILIATES Receivables from affiliates generally represent advances to the Company's affiliates. At December 31, 1996, receivables from affiliates include advances to Whitewing Labs, Inc. of approximately $27,000 and Soundview Technologies of approximately $20,000. As of June 30, 1997, Whitewing Labs, Inc. and Soundview Technologies have paid advances due to the Company in full. 8. GAIN ON ISSUANCE OF STOCK BY EQUITY INVESTEE In February 1996, Whitewing Labs, Inc. issued approximately, 1.1 million shares of common stock as part of a public offering of its common stock. The issuance of stock reduced the Company's ownership interest from approximately 38% to approximately 18%. This transaction resulted in a noncash pretax gain of approximately $1.1 million for the Company. 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion is based primarily on the consolidated balance sheet of the Company as of June 30, 1997, and on the operations of the Company for the period from January 1, 1997 to June 30, 1997. The following discussion compares the activities for the six and three months ended June 30, 1997 to the activities for the six and three months ended June 30, 1996. This information should be read in conjunction with the accompanying consolidated financial statements and notes thereto. RESULTS OF OPERATIONS REVENUES SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996 The Company reported revenues of $311,886 in the six months ended June 30, 1997 compared to revenues of $3,267,389 for the six months ended June 30, 1996. GAINS ON SALES OF SECURITIES, NET. Net gains on sales of securities decreased from $722,117 for the six months ended June 30, 1996 to $50,000 for the six months ended June 30, 1997. Such gain for the six months ended June 30, 1997 is comprised of gains on sales of interests in CombiMatrix Corporation. However, the Company continued to maintain a 51% ownership interest as of June 30, 1997. The year-earlier gain of $722,117 represents a gain primarily from sales of shares of CombiMatrix Corporation, and to a lesser extent of MerkWerks Corporation and Soundview Technologies Incorporated. During the six month period ended in 1997, the Company sold a smaller portion of its assets, focusing instead on the development of its various business interests. During the comparable period ended in 1996, the Company sold a larger portion of its holdings primarily to raise the capital necessary to acquire interests in new companies as well as provide working capital for ongoing operations. Until the Company generates sufficient revenue from operations of its various business concerns, the Company, from time to time, may sell a portion of its equity interests when that interest has appreciated to a value that management believes is prudent and market conditions are favorable. However, the Company intends to retain significant interests in its current and future holdings. UNREALIZED GAIN ATTRIBUTABLE ON ISSUANCE OF COMMON STOCK BY AFFILIATE. In February 1996, shares of Whitewing Labs, Inc. were sold in an initial public offering. This initial public offering of shares reduced the Company's ownership interest in Whitewing Labs from 38.3% to 18.4%. As a result of this offering, under generally accepted accounting principles, the Company reported an unrealized gain of $1,066,408, representing an increase in the book value of the shares of Whitewing Labs that the Company retained following the initial public offering. Management does not anticipate recognizing any similar gain in relation to shares of Whitewing Labs. However, the Company does anticipate future gains of this nature with respect to other subsidiaries if they become publicly offered entities. EQUITY (LOSSES) IN EARNINGS OF INVESTMENTS. The Company reported losses attributable to earnings of investments of $98,993 for the six months ended June 30, 1997, compared to losses of $701 for the year-earlier period. Such losses for the period ended June 30, 1997 are comprised of a gain of $96,992 on the Company's capital investments as a general partner in two private investment partnerships offset by a loss of $142,434 for the Company's investment in Whitewing Labs, and a loss of $53,551 for the Company's investment in Greenwich Information Technologies, as determined by the equity method of accounting. MANAGEMENT FEES. For the six months ended June 30, 1997, management fee income, which includes a performance fee income, was $340,547 over management fee income of $1,421,612 generated during the first six months in 1996. The Company derived management fees in the period ended June 30, 1997 primarily from four investment funds managed by the Company. Of the total of $1,421,612 in management fees earned for the six month period ended June 30, 1996, $1,400,000 was paid to the Company by Soundview Technologies through the issuance of 1,400,000 shares of Soundview Technologies' common stock to the Company for providing management and consulting services, including assisting Soundview Technologies in raising $1,000,000 through the sale of Soundview Technologies' common stock at $1.00 per share. 9
RESULTS OF OPERATIONS (CONTINUED) REVENUES (CONTINUED) SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996 (continued) The balance of approximately $22,000 of management fee income recorded during the six months ended June 30, 1996 was derived from four investment funds managed by the Company. Two of these funds had been managed by the Company during the full six month period in 1996. The third fund and fourth fund were formed in April 1996 and June 1996, respectively and, therefore, generated limited management fees during the six month period ended June 30, 1996. THREE MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996 The Company reported revenues of $329,456 in the three months ended June 30, 1997 compared to revenues of $1,439,708 for the three months ended June 30, 1996. GAINS ON SALES OF SECURITIES, NET. Net gains on sales of securities decreased from $169,751 for the three months ended June 30, 1996 to $0 for the comparable period ended June 30, 1997, as reported by the Company during the 1997 period. EQUITY (LOSSES) IN EARNINGS OF INVESTMENTS. The Company reported gains attributable to earnings of investments of $15,694 for the three months ended June 30, 1997, compared to losses of $175,467 for the year-earlier period. Such earnings for the three months ended June 30, 1997 are comprised of a gain of $58,897 on the Company's capital investments as a general partner in two private investment partnerships offset by a loss of $24,254 for the Company's investment in Whitewing Labs, and a loss of $18,949 for the Company's investment in Greenwich Information Technologies, as determined by the equity method of accounting. MANAGEMENT FEES. For the three months ended June 30, 1997, management fee income, which includes a performance fee income, was $308,345 over management fee income of $1,415,387 generated during the three months ended June 30, 1996. The Company derived management fees in the period ended June 30, 1997 primarily from four investment funds managed by the Company. Of the total of $1,415,387 in management fees earned for the three month period ended June 30, 1996, $1,400,000 was paid to the Company by Soundview Technologies through the issuance of 1,400,000 shares of Soundview Technologies' common stock to the Company for providing management and consulting services, including assisting Soundview Technologies in raising $1,000,000 through the sale of Soundview Technologies' common stock at $1.00 per share. The balance of approximately $15,000 of management fee income recorded during the three months ended June 30, 1996 was derived from four investment funds managed by the Company. EXPENSES SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996 Marketing, general and administrative expenses increased from $993,251 for the six months ended June 30, 1996 to $1,229,678 for the six months ended June 30, 1997. This increase is primarily due to legal, accounting, printing, and other costs associated with the Company's efforts in further developing its business enterprises and exploring new opportunities for the Company and its affiliates and, to some extent, costs incurred in the litigation and settlement of a lawsuit as well as expenses incurred by CombiMatrix Corporation for a full six month period in 1997 compared to approximately three months of the same period in 1996. 10
RESULTS OF OPERATIONS (CONTINUED) EXPENSES (CONTINUED) SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996 (continued) The Company also incurred a one-time charge of $460,000 relating to a legal settlement, which has been offset by a $25,000 cash payment. Management of the Company believes that settling this litigation on the agreed upon terms prevented unnecessary litigation costs as well as the unnecessary diversion of Company resources and was in the best interests of the Company. THREE MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996 Marketing, general and administrative expenses decreased from $565,966 for the three months ended June 30, 1996 to $517,156 for the three months ended June 30, 1997. This decrease is primarily due the absence of legal fees associated with the commencement of private investment funds as well as decreases in consulting fees. PROVISION FOR INCOME TAXES SIX MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996 For the six month period ended June 30, 1997, the Company recorded a benefit of $167,767 as compared to an income tax expense of $893,245 for the same period in fiscal 1996. In the current tax year, the Company has generated a net operating loss, which results in a tax benefit for the six months ended June 30, 1996 of $167,767. THREE MONTHS ENDED JUNE 30, 1997 AND JUNE 30, 1996 For the three month period ended June 30, 1997, the Company recorded a benefit of $127,660 as compared to an income tax expense of $366,014 for the same period in fiscal 1996. The difference is attributable to losses during the three months ended June 30, 1997 versus income generated during the three months ended June 30, 1996. INFLATION Inflation has not had a significant impact on the Company. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 1997, the Company had cash and cash equivalents of $1,808,614, working capital of $2,031,948, and a ratio of current assets to current liabilities of 3.2 to 1. During the period ended June 30, 1997, the Company issued a Promissory Note to Greenwich Information Technologies LLC in the principal amount of $525,000, whereby the Company will make payments to Greenwich Information Technologies of a minimum of $25,000 each month from February 1, 1997 through July 1, 1997; $50,000 each month from August 1, 1997 to December 1, 1997; and pay the outstanding principal plus any accrued and unpaid interest by December 31, 1997. The Note bears a simple interest rate of 6.5% per annum. The Company also executed a Pledge Agreement in connection with the Promissory Note whereby the Company pledged a portion of its membership interest in Greenwich Information Technologies, while retaining voting and distribution rights to such membership interest, in order to secure the Company's obligations under the Promissory Note. Should the Company default on the Promissory Note, the Company could lose a substantial portion of its membership interest. As of June 30, 1997, the Company has paid $150,000 towards the note and has a principal balance owing of $375,000. The Company anticipates that although revenues from operations, together with working capital reserves may provide necessary funds for its operating expenses in the foreseeable future, the Company may also seek additional financing to fund these expenses as well as new business opportunities. In addition, there can be no 11
assurance that the Company will not encounter unforeseen difficulties that may deplete its capital resources more rapidly than anticipated. Any efforts to seek additional funds could be made through equity, debt, or other external financing and there can be no assurance that additional funding, if necessary, will be available on favorable terms, if at all. Moreover, the development and expansion of the Company's business could place significant demands on the Company's infrastructure, and may require the Company to hire additional personnel, to implement additional operating and financial controls, install additional reporting and management information systems, and otherwise improve and expand the Company's business. The Company's future operating results will depend on management's ability to manage future growth, and there can be no assurance that efforts to manage future growth will be successful. NEW PRONOUNCEMENT In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 128, "Earnings Per Share" ("SFAS 128"). SFAS 128 establishes new standards for computing and presenting earnings per share ("EPS") and supersedes APB Opinion No. 15, "Earnings Per Share." SFAS 128 replaces the presentation of primary EPS with a presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures, and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. SFAS 128 becomes effective for the Company for the year ending December 31, 1997. Pro forma results for the second quarter of 1997 and 1996, assuming the application of SFAS 128, are as follows: For Three Months Ended ---------------------- June 30, 1997 June 30, 1996 ---------------------------- Basic (loss) earnings per share ($0.01) $0.29 Diluted (loss) earnings per share ($0.01) $0.20 FORWARD-LOOKING STATEMENTS This report contains forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Reference is made in particular to the description of the Company's plans and objectives for future operations, assumptions underlying such plans and objectives, and other forward-looking statements included in this report. Such statements may be identified by the use of forward-looking terminology such as "may," "will," "expect," "believe," "estimate," "anticipate," "intend," "continue," or similar terms, variations of such terms or the negative of such terms. Such statements are based on management's current expectations and are subject to a number of factors and uncertainties, which could cause actual results to differ materially from those described in the forward-looking statements. Such statements address future events and conditions concerning capital expenditures, earnings, litigation, regulatory matters, markets for products and services, liquidity and capital resources, and accounting matters. Actual results in each case could differ materially from those anticipated in such statements by reason of factors such as future economic conditions, changes in consumer demand, legislative, regulatory and competitive developments in markets in which the Company and its affiliates operate, and other circumstances affecting anticipated revenues and costs. The Company expressly disclaims any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in the Company's expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. Additional factors that could cause such results to differ materially from those described in the forward-looking statements are set forth in connection with the forward-looking statement. PART II - OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS None. 12
ITEM 2. CHANGES IN SECURITIES SALES OF UNREGISTERED SECURITIES In June 1997, the Company sold 290,200 units at a purchase price of $5.00 per unit, each unit representing one common stock purchase warrant and one share of the Company's common stock, to 37 accredited investors. Each common stock purchase warrant entitles its holder to purchase one share of the Company's common stock at an exercise price of $7.50 per share, subject to adjustment, and expires on June 8, 2000. Finders involved in this transaction received finders fees at a rate of $0.50 per unit placed and one finder warrant per ten units placed. Each finder warrant may be exercised prior to June 8, 2000 for one share of the Company's common stock at an exercise price of $5.50 per share, subject to adjustment. The Company's sale of these units was exempt from registration, as a private placement, under Section 3(b) of the Securities Act of 1933 and Regulation D promulgated thereunder. Additionally, in June 1997, the Company issued warrants representing the right to purchase 100,000 shares of the Company common stock, (subject to vesting) at an exercise price of $6.00 per share, to Cruttenden Roth Incorporated in connection with financial consulting services provided by that firm, and the Company granted an option to purchase 12,000 shares of the Company's common stock (subject to vesting) at an exercise price of $5.00 per share, in connection with services provided to the Company by a consultant. Each of these transactions was exempt from registration, as a private placement, under Section 4(2) of the Securities Act of 1933. ITEM 3. DEFAULTS UPON SENIOR SECURITIES None. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The annual meeting of shareholders was held on May 22, 1997. The business at the meeting was the ratification of a proposed amendment to the Company's Bylaws to change the number of directors from five, as specified therein, to a variable number which shall be not less than five nor more than nine, to be determined by resolution of the Board of Directors, and the election of directors. Each of the proposals was adopted. The number of votes for and withheld for the amendment to the Bylaws were as follows: For Against Abstaining ------------------------------------------------------ 1,095,235 9,920 4,800 The number of votes for and withheld for each director were as follows: Name For Withheld - ---- --- -------- R. Bruce Stewart 1,855,372 4,350 Brooke P. Anderson 1,855,372 4,350 Fred A. de Boom 1,855,372 4,350 Paul R. Ryan 1,855,372 4,350 Edward W. Frykman 1,855,372 4,350 ITEM 5. OTHER INFORMATION None. 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) EXHIBITS 3.2 Amended and Restated Bylaws 10.6 Legal Settlement between the Company and Ann P. Hodges and Christopher D. Hodges 10.7 Agreement between the Company and Cruttenden Roth Incorporated 27 Financial Data Schedule (b) REPORTS ON FORM 8-K Current report event date July 21, 1997 14
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. ACACIA RESEARCH CORPORATION By: /s/ R. BRUCE STEWART ------------------------------------------------- R. Bruce Stewart Chief Financial Officer (principal financial officer) Date: August 14, 1997 15