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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the Quarter Ended June 30, 2000
Commission File No. 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 (I.R.S. Employer
of 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
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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
such filing requirements for the past 90 days. YES [X] NO [_]
At August 9, 2000 the registrant had 15,987,887 shares of Common Stock,
$0.001 par value, issued and outstanding.
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ACACIA RESEARCH CORPORATION
Table Of Contents
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets............................................................ 3
Consolidated Statements of Operations.................................................. 4
Consolidated Statements of Cash Flows.................................................. 5
Notes to Consolidated Financial Statements............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 11
Item 3. Quantitative and Qualitative Disclosures About Market Risk............................. 15
Part II. Other Information
Item 1. Legal Proceedings...................................................................... 16
Item 2. Changes in Securities.................................................................. 16
Item 3. Defaults Upon Senior Securities........................................................ 16
Item 4. Submission of Matters to a Vote of Security Holders.................................... 16
Item 5. Other Information...................................................................... 17
Item 6. Exhibits and Reports on Form 8-K....................................................... 17
Signature...................................................................................... 18
2
ACACIA RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share information)
June 30, December 31,
2000 1999
----------- ------------
(Unaudited)
ASSETS
------
Current assets
Cash and cash equivalents........................... $ 54,674 $ 37,631
Accounts receivable................................. 40 --
Management fees and other receivables............... 22 60
Receivables from affiliates......................... 20 318
Deposit on investment............................... -- 3,000
Prepaid expenses.................................... 1,012 208
Other assets........................................ 18 --
-------- --------
Total current assets.............................. 55,786 41,217
Property and equipment, net........................... 2,060 1,154
Investment in affiliates, at equity................... 3,845 4,636
Investment in affiliates, at cost..................... 3,000 --
Patents, net of accumulated amortization.............. 3,074 3,534
Goodwill, net of accumulated amortization............. 1,689 1,012
Other assets.......................................... 449 238
-------- --------
$ 69,903 $ 51,791
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities
Accounts payable and accrued expenses............... $ 1,168 $ 1,293
-------- --------
Total current liabilities......................... 1,168 1,293
Other liabilities..................................... 340 340
-------- --------
Total liabilities................................. 1,508 1,633
-------- --------
Minority interests.................................... 16,143 4,896
-------- --------
Stockholders' equity
Common stock, par value $.001 per share; 60,000,000
shares authorized; 14,614,481 and 13,607,193 shares
issued and outstanding as of June 30, 2000 and
December 31, 1999, respectively.................... 15 14
Additional paid-in capital.......................... 79,129 62,283
Warrants to purchase common stock................... -- 58
Accumulated deficit................................. (26,892) (17,093)
-------- --------
Total stockholders' equity........................ 52,252 45,262
-------- --------
$ 69,903 $ 51,791
======== ========
The accompanying notes are an integral part of these consolidated financial
statements.
3
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except share and per share information)
Six Months Ended Three Months Ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
Revenues:
Grant income................ $ 17 $ -- $ -- $ --
Advertising................. 22 -- 22 --
Capital management fee
income..................... -- 91 -- 30
---------- ---------- ---------- ----------
Total revenues............ 39 91 22 30
========== ========== ========== ==========
Operating expenses:
Research and development
expenses................... 1,630 1,039 896 570
Marketing, general, and
administrative expenses.... 14,308 1,775 9,722 945
Amortization of patents and
goodwill................... 863 789 446 399
---------- ---------- ---------- ----------
Total operating expenses.. 16,801 3,603 11,064 1,914
---------- ---------- ---------- ----------
Operating loss.............. (16,762) (3,512) (11,042) (1,884)
---------- ---------- ---------- ----------
Other income (expense):
Interest income............. 1,209 145 782 73
Interest expense............ (1) (83) -- (42)
Equity in income of
partnerships............... -- 50 -- 7
Equity in losses of
affiliates................. (824) (620) (538) (187)
Other income................ 24 -- 4 --
---------- ---------- ---------- ----------
Total other income
(expense)................ 408 (508) 248 (149)
---------- ---------- ---------- ----------
Loss before income taxes and
minority interests........... (16,354) (4,020) (10,794) (2,033)
Provision for income taxes.... (9) (20) (2) (3)
---------- ---------- ---------- ----------
Loss before minority
interests.................... (16,363) (4,040) (10,796) (2,036)
Minority interests............ 6,564 -- 4,559 --
---------- ---------- ---------- ----------
Net loss...................... $ (9,799) $ (4,040) $ (6,237) $ (2,036)
========== ========== ========== ==========
Loss per common share
Basic....................... $ (0.67) $ (0.39) $ (0.43) $ (0.20)
Diluted..................... $ (0.67) $ (0.39) $ (0.43) $ (0.20)
Weighted average number of
common and potential common
shares outstanding used in
computation of loss per share
Basic and Diluted........... 14,521,311 10,278,458 14,515,149 10,346,238
The accompanying notes are an integral part of these consolidated financial
statements.
4
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Six Months Ended
---------------------------
June 30, 2000 June 30, 1999
------------- -------------
(Unaudited)
Cash flows from operating activities:
Net loss........................................... $ (9,799) $(4,040)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 1,138 889
Amortization of discount on notes payable........ -- 40
Equity in loss of affiliates and partnerships.... 824 570
Minority interest in net loss.................... (6,564) --
Compensation expense relating to stock
options/warrants................................ 520 50
Other............................................ -- 9
Changes in assets and liabilities, net of effects
of acquisitions:
Management fees and other receivables, prepaid
expenses, and other assets...................... (737) 227
Accounts payable, accrued expenses and other
liabilities..................................... (125) (52)
-------- -------
Net cash used in operating activities............ (14,743) (2,307)
-------- -------
Cash flows from investing activities:
Advances to affiliates........................... -- (3)
Payments received on advances to affiliates...... -- 2
Capital contribution to equity investments....... (33) (25)
Purchase of additional equity in consolidated
subsidiary...................................... -- (31)
Withdrawls from partnerships..................... -- 500
Purchase of partnership interest................. -- (49)
Purchase of property and equipment............... (1,300) (101)
-------- -------
Net cash (used in) provided by investing
activities...................................... (1,333) 293
-------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options and
warrants........................................ 16,283 193
Capital contributions from minority shareholders
of subsidiaries................................. 16,836 33
-------- -------
Net cash provided by financing activities........ 33,119 226
-------- -------
Increase in cash and cash equivalents.............. 17,043 (1,788)
Cash and cash equivalents, beginning............... 37,631 7,508
-------- -------
Cash and cash equivalents, ending.................. $ 54,674 $ 5,720
======== =======
The accompanying notes are an integral part of these consolidated financial
statements.
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. The
Company is currently engaged in developing new technology-related businesses.
The Company's current new business focus is to identify and develop
opportunities in the life science sector that will be created by
commercializing of the new biochip technology of the Company's subsidiary,
CombiMatrix Corporation, and other new technologies investing in that sector.
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.
At June 30, 2000, the Company had significant economic interests in a
number of companies and takes an active role in each company's growth and
advancement. These companies are: CombiMatrix Corporation ("CombiMatrix"),
Acacia Launchpad LLC ("Launchpad"), Soundbreak.com Incorporated
("Soundbreak.com"), Soundview Technologies Incorporated ("Soundview
Technologies"), MerkWerks Corporation ("MerkWerks"), Signature-mail.com llc
("Signature-mail.com"), Mediaconnex Communications, Inc. ("Mediaconnex"), and
Greenwich Information Technologies LLC ("Greenwich Information Technologies").
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 its December 1999 private placement. Holders of
these warrants had 30 days to exercise the warrants at a 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 warrants in conjunction with the private placement for
finders fees. A total of 31,050 warrants to purchase CombiMatrix's common
stock at a per share exercise 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
approximately $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's equity
ownership in Soundbreak.com decreased from 73.6% to 66.9%, on an as converted
basis. 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.
6
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The Acacia Research Corporation 1996 Stock Option Plan (the "1996 Plan")
provides for the grant of Nonqualified Stock Options and Incentive Stock
Options to key employees, including officers of the Company and its
subsidiaries and certain other individuals. In May 2000, the Company increased
the authorized number of shares of common stock subject to the amended 1996
Plan by 1,000,000 shares to a total of 4,000,000 shares.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--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, 2000 and the consolidated results
of operations and cash flows for the three and six months ended June 30, 2000
and 1999. This interim financial information and notes thereto should be read
in conjunction with the Company's Annual Report on Form 10-K for the year
ended December 31, 1999. The Company's consolidated results of operations and
cash flows for interim periods are not necessarily indicative of the results
to be expected for any other interim period or the full year.
RECLASSIFICATIONS--Certain reclassifications of prior year's amounts have
been made to conform to the 2000 presentation.
3. SEGMENT INFORMATION
The Company has three reportable segments: Corporate Portfolio, CombiMatrix
and Soundbreak.com.
The Corporate Portfolio segment makes direct investments in emerging
companies with intellectual property rights, most of which are involved in
developing new or unproven technologies.
CombiMatrix is a biotech company with a proprietary biochip array processor
system for the rapid, cost competitive synthesis of DNA, peptides and other
chemical compounds on a software programmable semiconductor chip. This
proprietary technology has significant applications in the areas of genomics,
proteomics and diagnostics.
Soundbreak.com is a new media company featuring 24-hour audio and video
streaming of music performances and live performances hosted by professional
talent targeting a demographic of viewers under age 35 and including extensive
viewer interaction formats.
The Company evaluates segment performances based on earnings potential and
cost 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 used in the
preparation of the Company's consolidated financial statements.
7
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The table below presents information about the Company's reportable segments
for the six months ended June 30, 2000 and 1999 (in thousands).
Corporate
Six months ended June 30, Portfolio CombiMatrix Soundbreak.com Other Total
2000 --------- ----------- -------------- ------ -------
Revenue................... $ -- $ 17 $ -- $ 22 $ 39
Amortization of patents
and goodwill............. 856 -- -- 7 863
Other income.............. 24 -- -- -- 24
Interest income........... 638 236 288 47 1,209
Interest expense.......... 1 -- -- -- 1
Equity in losses of
affiliates............... 824 -- -- -- 824
Loss before minority
interests and income
taxes.................... 4,665 2,185 9,113 391 16,354
Segment assets............ 34,876 17,427 15,638 1,962 69,903
Investments in affiliates,
at equity................ 3,845 -- -- -- 3,845
Investments in affiliates,
at cost.................. 3,000 -- -- -- 3,000
Capital Expenditures...... 358 108 831 3 1,300
Corporate
Portfolio CombiMatrix Other Total
Six months ended June 30, 1999 --------- ----------- ----- -------
Management fee income..................... $ 91 $ -- $ -- $ 91
Amortization of patents and goodwill...... 782 -- 7 789
Interest income........................... 135 10 -- 145
Interest expense.......................... -- 83 -- 83
Equity in losses of affiliates............ 620 -- -- 620
Equity in income of partnerships.......... 50 -- -- 50
Loss before minority interests and Income
taxes.................................... 2,789 1,079 152 4,020
Segment assets............................ 15,577 460 242 16,279
Investments in affiliates, at equity...... 2,885 -- -- 2,885
Partnerships interests, at equity......... 1,432 -- -- 1,432
Capital expenditures...................... 77 24 -- 101
8
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The table below presents information about the Company's reportable segments
for the three months ended June 30, 2000 and 1999 (in thousands).
Corporate
Three Months Ended June Portfolio CombiMatrix Soundbreak.com Other Total
30, 2000 --------- ----------- -------------- ------ -------
Revenue................... $ -- $ -- $ -- $ 22 $ 22
Amortization of patents
and goodwill............. 442 -- -- 4 446
Other income.............. 4 -- -- -- 4
Interest income........... 312 219 227 24 782
Interest expense.......... -- -- -- -- --
Equity in losses of
affiliates............... 538 -- -- -- 538
Loss before minority
interests and income
taxes.................... 2,579 1,300 6,687 228 10,794
Segment assets............ 34,738 17,427 15,638 2,100 69,903
Investments in affiliates,
at equity................ 3,845 -- -- -- 3,845
Investments in affiliates,
at cost.................. 3,000 -- -- -- 3,000
Purchase of property and
equipment................ 264 108 357 3 732
Corporate
Portfolio CombiMatrix Other Total
Three Months Ended June 30, 1999 --------- ----------- ----- -------
Management fee income..................... $ 30 $ -- $ -- $ 30
Amortization of patents and goodwill...... 395 -- 4 399
Other income.............................. -- -- -- --
Interest income........................... 72 1 -- 73
Interest expense.......................... -- 42 -- 42
Equity in losses of affiliates............ 187 -- -- 187
Equity in income of partnerships.......... 6 -- -- 6
Loss before minority interests and income
taxes.................................... 1,417 597 66 2,080
Segment assets............................ 15,577 460 242 16,279
Investments in affiliates, at equity...... 2,885 -- -- 2,885
Investments in affiliates, at cost........ 1,432 -- -- 1,432
Purchase of property and equipment........ 7 2 -- 9
9
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. SUBSEQUENT EVENTS
In July 2000, the Company increased its ownership of privately held
CombiMatrix Corporation from 51.8% to 61.4%. The Company acquired the
additional ownership position from existing shareholders of CombiMatrix in
exchange for approximately 489,000 restricted shares of the Company's common
stock, valued at approximately $9.4 million. This purchase will be accounted
for as a step acquisition. The purchase price will be allocated to the fair
value of assets acquired and liabilities assumed, including acquired in-
process research and development. Any amount attributable to in-process
research and development will be charged to expense in the third quarter of
2000. The allocation of the purchase price is expected to be completed in the
third quarter of 2000.
In July 2000, the Company completed an institutional private equity
financing raising gross proceeds of $23.7 million through the sale of 861,638
units, each unit consisting of one share of the Company's common stock and one
three-year callable common stock purchase warrant. Each common stock purchase
warrant entitles the holder to purchase one share of the Company's common
stock at a price of $33.00 per share and is callable by the Company once the
closing bid price of the Company's common stock averages $39.60 or above for
20 consecutive trading days on the Nasdaq National Market System. The Company
issued an additional 11,000 units in lieu of cash payments in conjunction with
the private placement for finders fees.
In August 2000, CombiMatrix completed a private equity financing raising
gross proceeds of $36 million through the sale of 4 million shares of
CombiMatrix common stock. The Company invested $17.5 million in this private
placement and acquired 1,944,445 shares. As a result of the transaction, the
Company decreased its equity ownership in CombiMatrix from 61.2 % to 58.4%.
10
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
This report contains forward-looking statements within the meaning of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Reference is made in particular to the description of 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-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 disclaim any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statements contained in this
report 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 and the Company's Annual Report
on Form 10-K filed with the Securities and Exchange Commission.
General
The following discussion is based primarily on our consolidated balance
sheet as of June 30, 2000, and on our operations for the period from January
1, 2000 to June 30, 2000. The discussion compares the activities for the six
and three months ended June 30, 2000 to the activities for the six and three
months ended June 30, 1999. This information should be read in conjunction
with the accompanying consolidated financial statements and notes thereto.
Results of Operations
Six Months Ended Three Months Ended
June 30, June 30,
------------------------- -------------------------
2000 1999 2000 1999
------------ ----------- ------------ -----------
Revenues................ $ 39,000 $ 91,000 $ 22,000 $ 30,000
Operating expenses...... (16,801,000) (3,603,000) (11,064,000) (1,914,000)
Other income (expense),
net.................... 408,000 (508,000) 248,000 (149,000)
Minority interests...... 6,564,000 -- 4,559,000 --
(Provision) benefit for
income taxes........... (9,000) (20,000) (2,000) (3,000)
------------ ----------- ------------ -----------
Net loss................ $ (9,799,000) $(4,040,000) $ (6,237,000) $(2,036,000)
============ =========== ============ ===========
11
For The Six Months Ended June 30, 2000 and June 30, 1999
Net Revenues. Net revenues decreased to $39,000 for the six months ended
June 30, 2000 from $91,000 for the six month's ended June 30, 1999 primarily
due to lower returns and the winding down of the Acacia Capital Management
division, which ceased operations as of December 31, 1999. Revenues recognized
are primarily attributable to advertising earned by a newly acquired company,
and grant income recognized by CombiMatrix. CombiMatrix has been awarded three
contracts from the federal government with respect to its biochip technology.
CombiMatrix was awarded two grants in July 1999 for Phase I SBIR from the
Department of Energy and the Department of Defense. CombiMatrix was further
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.
Operating Expenses. Total operating expenses increased to $16,801,000 for
the six months ended June 30, 2000 from $3,603,000 for the six months ended
June 30, 1999 primarily due to an increase in marketing, general, and
administrative expenses. Our marketing, general and administrative costs
consist primarily of advertising, employee compensation, outside professional
services such as legal, accounting and consulting, rent, and travel-related
costs. We expanded our operations during 2000 to grow our infrastructure,
including additions to personnel and office space. Subsequent to the second
quarter of 1999, Soundbreak.com was incorporated and launched its music
lifestyle destination website. The quick progress of Soundbreak.com from a
developmental stage enterprise to a fully functioning interactive music
website required significant marketing and administrative expenditures. For
the six months ended June 30, 2000, Soundbeak.com's operating expenses totaled
approximately $9.4 million. Of this amount, approximately $4.9 million is
attributable to marketing expenses, which were spent in accordance with the
Company's marketing initiative. We anticipate continued dedication of
substantial resources to enhance Soundbreak.com's website and that these costs
may substantially increase in future periods. In addition, during the later
half of 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.
Also, during June 2000, CombiMatrix began its relocation efforts. These costs,
in the aggregate, will be approximately $500,000. These efforts were completed
during the third quarter of 2000 and approximately $152,000 associated with
such efforts was recognized during the three months ended June 30, 2000.
Other Income, Net. Other income, net recognized during the first half of
2000 totaled $408,000 compared to other expense, net of $508,000 for the six
months ended June 30, 1999. Interest income totaling $1,209,000 was recognized
for the six month period ended June 30, 2000 compared to $145,000 for the six
month period ended June 30, 1999. The increase in interest income is primarily
attributable to the increased cash balances received from two private
placements completed during March 2000 for CombiMatrix and Soundbreak.com and
our warrant call during the first quarter of 2000. These activities generated
an additional $32.3 million in cash from outside investors. Interest expense
for the six months ended June 30, 2000 decreased to $1,000 compared to $83,000
during the six months ended June 30, 1999. During the fourth quarter of 1999,
CombiMatrix note-holders converted their unsecured subordinated notes into
CombiMatrix common stock. The increase in equity in losses of affiliates is
primarily attributable to losses of $543,000 from Mediaconnex. This amount was
offset by a decrease in the recognized loss for Whitewing Labs, another one of
our portfolio companies, Greenwhich and Signature-mail.com totaling $281,000
for the six month period ended June 30, 2000 compared to $620,000 for the six
month period ended June 30, 1999.
Minority Interests. Minority interests increased to $6,564,000 for the six
month period ended June 30, 2000, primarily reflecting minority interests in
net losses of CombiMatrix and Soundbreak.com which obtained outside equity
financing during the later half of 1999. Minority shareholders participated in
the losses of these two subsidiaries for the six month period ended June 30,
2000.
12
For The Three Months Ended June 30, 2000 and June 30, 1999
Net Revenues. Our reported net revenues decreased to $22,000 during the
three months ended June 30, 2000 from $30,000 during the three months ended
June 30, 1999, primarily due to recognition of advertising income in a newly
invested company, and the winding down of the Acacia Capital Management
division, which ceased operations as of December 31, 1999.
Operating Expenses. Total operating expenses increased to $11,064,000
during the three months ended June 30, 2000 from $1,914,000 during the three
months ended June 30, 1999 primarily due to an increase in marketing, general,
and administrative expenses. Our marketing, general and administrative costs
consist primarily of marketing, employee compensation, outside professional
services such as legal, accounting and consulting, rent, and travel-related
costs. We expanded our operations during 2000 to grow our infrastructure,
including additions to personnel and office space. Subsequent to the second
quarter of 1999, Soundbreak.com was incorporated and launched its music
lifestyle destination website. The quick progress of Soundbreak.com from a
developmental stage enterprise to a fully functioning interactive music
website required significant marketing and administrative expenditures. For
the three months ended June 30, 2000, Soundbeak.com's operating expenses
totaled approximately $6.9 million. Of this amount, approximately $4.2 million
is attributable to marketing expenses, which were spent in accordance with the
Company's marketing initiative. We anticipate continued dedication of
substantial resources to enhance Soundbreak.com's website and that these costs
may substantially increase in future periods. In addition, during the later
half of 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.
Also, during June 2000, CombiMatrix began its relocation efforts. These costs,
in the aggregate, will be approximately $500,000. These efforts were completed
during the third quarter of 2000 and approximately $152,000 associated with
such efforts was recognized during June 2000.
Other Income, Net. Other income, net recognized during the three month
period ended June 30, 2000 totaled $248,000 compared to other expense, net of
$149,000 for the three month period ended June 30, 1999. Interest income
totaling $782,000 was recognized for the three month period ended June 30,
2000 compared to $73,000 for the three month period ended June 30, 1999. The
increase in interest income is primarily attributable to the increased cash
balances received from two private placements completed during March 2000 for
CombiMatrix and Soundbreak.com and our warrant call during the first quarter
of 2000. These activities generated an additional $32.3 million in cash from
outside investors. Interest expense for the three months ended June 30, 2000
decreased to $0 compared to $42,000 during the three months ended June 30,
1999. During the fourth quarter of 1999, CombiMatrix note-holders converted
their unsecured subordinated notes into CombiMatrix common stock. The increase
in equity in losses of affiliates is primarily attributable to losses of
$685,000 from Mediaconnex. This amount was offset by a decrease in the
recognized loss for Whitewing Labs, Greenwich and Signature-mail.com totaling
$139,000 for the three month period ended June 30, 2000 compared to $187,000
for the three month period ended June 30, 1999.
Minority Interests. Minority interests increased to $4,559,000 for the
three month period ended June 30, 2000, primarily reflecting minority
interests in net losses of CombiMatrix and Soundbreak.com, which obtained
outside equity financing during the later half of 1999, including. Minority
shareholders participated in the losses of these two subsidiaries for the
three month period ended June 30, 2000.
Inflation
Inflation has not had a significant impact on the Company.
13
Liquidity and Capital Resources
At June 30, 2000, we had cash and cash equivalents of $54.7 million on a
consolidated basis, of which the parent company had $22.6 million and our
subsidiaries had $32.1 million. Working capital was $54.6 million on a
consolidated basis at June 30, 2000. Highlights of the financing and
commitment activities for the six months ended June 30, 2000 include:
First Quarter:
. $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 gross proceeds from a private equity financing
completed for CombiMatrix, in which we contributed $10 million.
. $19 million of gross proceeds from a private equity financing completed
for Soundbreak.com, in which we contributed $9 million.
. In April 2000, we entered into a commitment for relocation costs and
services related to the move of CombiMatrix's operating facilities to
the State of Washington. This commitment provides for moving and
relocation expenses for employees including real estate and apartment
search services. Costs associated with the relocation efforts are
expected, in the aggregate, to be approximately $500,000, of which
$152,000 was recognized during the three months ended June 30, 2000.
Second Quarter:
. We entered into a lease commitment for additional office space, which
increased our monthly lease payment from approximately $22,000 to
$26,000. The amendment calls for reimbursement of improvements to the
expansion space approximating $19,000 by the landlord. The lease is
anticipated to begin October 1, 2000 and ends in November 2003.
. Acacia Launchpad LLC entered into a one-year lease commitment for new
office space. The monthly lease payments are approximately $14,000 per
month.
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 and investment activities for at least the
next twelve months. For new or existing businesses that require additional
capital needs above the funds provided by us, we intend to seek additional
financing. There can be no assurance that we will not encounter unforeseen
difficulties that may deplete our capital resource more rapidly than
anticipated. Any efforts to seek additional funds could be made through
equity, debt, or other external financing and there can be no assurance that
additional funding will be available on favorable terms, if at all. Such
financing transactions may be dilutive to existing investors.
Subsequent to June 30, 2000:
In July 2000, the Company increased its ownership of privately held
CombiMatrix Corporation from 51.8% to 61.4%. The Company acquired the
additional ownership position from existing shareholders of CombiMatrix in
exchange for approximately 489,000 restricted shares of the Company's common
stock, valued at approximately $9.4 million. This purchase will be accounted
for as a step acquisition. The purchase price will be
14
allocated to the fair value of assets acquired and liabilities assumed,
including acquired in process research and development. Any amount attributed
to in-process R& D will be charged to expense in the third quarter of 2000.
The allocation of the purchase price is expected to be in the third quarter of
2000.
In July 2000, the Company completed an institutional private equity
financing raising gross proceeds of $24 million through the sale of 861,638
shares of units, each unit consisting of one share of the Company's common
stock and one three-year callable common stock purchase warrant. Each common
stock purchase warrant entitles the holder to purchase one share of the
Company's common stock at a price of $33.00 per share and is callable by the
company's once the closing bid price of the Company's common stock averages
$39.60 or above for 20 consecutive trading days on the Nasdaq National Market
System. The Company issued an additional 11,000 units in lieu of cash payments
in conjunction with the private placement for finders fees.
In August 2000, CombiMatrix was granted a United States patent for its
biochip array processor system, which enables quick and economical turnaround
of custom-designed microarrays for use in biological research. The patent
covers CombiMatrix's core technology, which is a method for producing
microarrays by synthesizing biological materials on a three-dimensional,
active surface.
In August 2000, CombiMatrix completed a private equity financing raising
gross proceeds of $36 million through the sale of 4 million shares of
CombiMatrix common stock. The Company invested $17.5 million in this private
placement and acquired 1,944,445 shares. As a result of the transaction, the
Company decreased its equity ownership in CombiMatrix from 61.2% to 58.4%.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
Not Applicable.
15
PART II--OTHER INFORMATION
Item 1. Legal Proceedings
During April 2000, Soundview Technologies filed a federal patent and
antitrust lawsuit against Sony Corporation of America, Philips Electronics
North America Corporation, the Consumer Electronics Manufacturers Association,
and the Consumer Electronics Association. The suit relates to television video
and audio blanking technology, commonly known as "V-chip" technology and
Soundview Technologies is alleging that Sony and Philips television sets
fitted with "V-chips" infringe upon Soundview Technologies' patent.
Item 2. Changes in Securities
After receiving shareholder approval at the last annual meeting, the
Company amended its certificate of incorporation so that the Board of
Directors will be divided into three classes (denominated Class I, Class II,
and Class III) which shall be as nearly equal in number as possible. The
directors in each class will hold office following their initial
classification for terms of one year, two years and three years, respectively.
Thereafter, the successors to each class of directors shall be elected for
three-year terms. Under Delaware law, the Board of Directors may fill
vacancies on a classified board and the directors so appointed will hold
office until the next election of the class to which the director was
appointed. Delaware law also provides that, unless a corporation's certificate
of incorporation provides otherwise, directors serving on a classified board
of directors may be removed only for cause.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
At the Annual Meeting of Shareholders of the Company (the "Annual Meeting")
on May 16, 2000, the following matters were acted upon by the shareholders of
the Company:
. The approval of an amendment to the Company's Certificate of
Incorporation to provide for a classified board of directors.
. The election of directors to the Board of Directors.
. Ratification of an amendment to the Company's 1996 Stock Option Plan to
increase by 1,000,000 shares the number of shares available under the
plan to 4,000,000 shares.
. Ratification of the selection of PricewaterhouseCoopers LLP as
independent accountants of the Company for the fiscal year ending
December 31, 2000.
The number of votes for and withheld for each director were as follows:
For Withheld
---------- --------
Class I (term expiring 2001)
Robert L. Harris..................................... 12,744,172 231,162
Fred A. de Boom...................................... 12,406,977 598,357
Class II (term expiring 2002)
Thomas B. Akin....................................... 12,774,322 231,012
Edward W. Frykman.................................... 12,774,522 230,812
Class III (term expiring 2003)
Paul R. Ryan......................................... 12,774,172 231,162
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The results of the voting on the other matters presented to shareholders at
the Annual Meeting are set forth below:
Votes Votes Broker
Votes For Against Abstain Non-Votes
----------- --------- ------- ---------
Approval of the amendment to the
Company's Certificate of
Incorporation...................... 7,921,685 922,811 32,152 4,128,686
Ratification of an amendment to the
Company's 1996 Stock Option Plan... 7,784,961 1,061,130 30,557 4,128,686
Ratification of
PricewaterhouseCoopers LLP......... 12,942,284 45,323 17,727 0
Item 5. Other Information
In July 2000, Gerald D. Knudson, the Chief Executive Officer of
CombiMatrix, was appointed to the Company's Board of Directors for a term
expiring 2003 and Robert L. Harris II, a director of the Company, was named
President of the Company.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Certificate of Incorporation, as amended
10.1 1996 Stock Option Plan, as amended (1)
27 Financial Data Schedule
- --------
(1) Previously filed and incorporated by reference as Appendix A to the
Company's Definitive Proxy Statement on Schedule 14A filed with the
Commission on April 20, 2000 (file number 000-26068)
(b) Reports on Form 8-K
On April 7, 2000, we filed a Current Report on Form 8-K dated April 7,
2000 to report under Item 5 (Other Events).
17
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
/s/ Paul Ryan
By: _________________________________
Paul Ryan
Chief Executive Officer
(Authorized Signatory)
/s/ Mary Rose Colonna
By: _________________________________
Mary Rose Colonna
VP of Finance/Controller (Chief
Accounting Officer)
Date: August 10, 2000
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