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 MARCH 31, 2001
COMMISSION FILE NO. 0-26068
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
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 May 9, 2001, the registrant had 17,729,124 shares of common stock,
$0.001 par value, issued and outstanding.
ACACIA RESEARCH CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Consolidated Financial Statements
Unaudited Consolidated Balance Sheets as of March 31, 2001
and December 31, 2000........................................... 3
Unaudited Consolidated Statements of Operations and Comprehensive
Loss for the Three Months Ended March 31, 2001 and 2000......... 4
Unaudited Consolidated Statements of Cash Flows for the Three
Months Ended March 31, 2001 and 2000............................ 5
Notes to Consolidated Financial Statements ..................... 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations........................................... 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk...... 13
PART II. OTHER INFORMATION
Item 1. Legal Proceedings............................................... 14
Item 2. Changes in Securities........................................... 14
Item 6. Exhibits and Reports on Form 8-K................................ 15
SIGNATURES.................................................................. 17
2
ACACIA RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
(Unaudited)
MARCH 31, DECEMBER 31,
2001 2000
---------------- ---------------
ASSETS
Current assets
Cash and cash equivalents ..................................................... $ 52,769 $ 35,953
Other receivables ............................................................. 474 68
Prepaid expenses .............................................................. 484 369
Short-term investments ........................................................ 34,727 40,600
Other assets .................................................................. 2,189 1,034
---------------- ---------------
Total current assets ..................................................... 90,643 78,024
Property and equipment, net of accumulated depreciation............................. 4,814 3,727
Investments in affiliates, at equity ............................................... 291 346
Investment in affiliates, at cost .................................................. 3,000 3,000
Patents, net of accumulated amortization ........................................... 8,475 9,038
Goodwill, net of accumulated amortization .......................................... 3,669 3,904
Other assets ....................................................................... 470 477
---------------- ---------------
$ 111,362 $ 98,516
================ ===============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses ......................................... $ 6,341 $ 7,767
Accrued stock compensation .................................................... 18,799 10,392
Other current liabilities ..................................................... 1,000 -
---------------- --------------
Total current liabilities ................................................ 26,140 18,159
Deferred income taxes .............................................................. 2,650 2,689
---------------- ---------------
Total liabilities ........................................................ 28,790 20,848
---------------- ---------------
Minority interests ................................................................. 12,795 17,524
---------------- ---------------
Stockholders' equity
Common stock, par value $0.001 per share; 60,000,000 shares authorized;
17,702,124 and 16,090,587 shares issued and outstanding as of
March 31, 2001 and December 31, 2000, respectively.......................... 18 16
Additional paid-in capital .................................................... 134,976 116,017
Warrants to purchase common stock ............................................. 199 86
Unrealized gain on short-term investments ..................................... 116 77
Accumulated deficit ........................................................... (65,532) (56,052)
---------------- ---------------
Total stockholders' equity ............................................... 69,777 60,144
---------------- ---------------
$ 111,362 $ 98,516
================ ===============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
3
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
(Unaudited)
THREE MONTHS ENDED
------------------------------------
MARCH 31, 2001 MARCH 31, 2000
---------------- ----------------
Revenues:
License fee income ............................................................... $ 2,440 $ -
Grant revenue .................................................................... 183 17
---------------- ----------------
Total revenues ................................................................... 2,623 17
---------------- ----------------
Operating expenses:
Research and development expenses (including stock compensation charges of $2,398
in 2001) ..................................................................... 5,549 734
Marketing, general and administrative expenses (including stock compensation charges
of $6,021 and $512 in 2001 and 2000, respectively) ........................... 11,869 2,099
Amortization of patents and goodwill ............................................. 638 417
Loss on disposal of consolidated subsidiary ...................................... 128 -
---------------- ----------------
Total operating expenses ........................................................ 18,184 3,250
---------------- ----------------
Operating loss ................................................................... (15,561) (3,233)
---------------- ----------------
Other income (expense):
Interest income .................................................................. 1,195 366
Interest expense ................................................................. - (1)
Equity in losses of affiliates ................................................... (55) (286)
Other income ..................................................................... 51 20
---------------- ----------------
Total other income ............................................................... 1,191 99
---------------- ----------------
Loss from continuing operations before income taxes and minority interests ........... (14,370) (3,134)
Provision for income taxes ........................................................... (300) (5)
---------------- ----------------
Loss from continuing operations before minority interests ............................ (14,670) (3,139)
Minority interests ................................................................... 5,191 461
---------------- ----------------
Loss from continuing operations ...................................................... (9,479) (2,678)
Discontinued operations
Loss from discontinued operations of Soundbreak.com .............................. - (884)
---------------- ----------------
Loss before cumulative effect of change in accounting principle....................... (9,479) (3,562)
Cumulative effect of change in accounting principle due to beneficial conversion feature - (246)
---------------- ----------------
Net loss ............................................................................. (9,479) (3,808)
Unrealized gain on short-term investments ........................................ 39 -
---------------- ----------------
Comprehensive loss ................................................................... $ (9,440) $ (3,808)
================ ================
Loss per common share
Basic
Loss from continuing operations .................................................. $ (0.55) $ (0.19)
Loss from discontinued operations ................................................ $ - $ (0.06)
Cumulative effect of change in accounting principle .............................. $ - $ (0.02)
---------------- ----------------
Net loss ............................................................................. $ (0.55) $ (0.27)
================ ================
Diluted
Loss from continuing operations .................................................. $ (0.55) $ (0.19)
Loss from discontinued operations ................................................ $ - $ (0.06)
Cumulative effect of change in accounting principle .............................. $ - $ (0.02)
---------------- ----------------
Net loss ............................................................................. $ (0.55) $ (0.27)
================ ================
Weighted average number of common and potential common shares outstanding used
in computation of loss per share
Basic ............................................................................ 17,208,154 13,852,360
Diluted .......................................................................... 17,208,154 13,852,360
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
4
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(Unaudited)
THREE MONTHS ENDED
------------------------------------
MARCH 31, 2001 MARCH 31, 2000
---------------- ----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations ..................................................... $ (9,479) $ (2,678)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization .................................................... 837 467
Equity in loss of affiliates ..................................................... 55 286
Minority interests in net loss ................................................... (5,191) (461)
Compensation expense relating to stock options/warrants .......................... 8,419 508
Deferred tax benefit ............................................................. (39) -
Other ............................................................................ 182 -
Changes in assets and liabilities, net of effects of acquisitions:
Other receivables, prepaid expenses and other assets ............................. (1,424) 239
Accounts payable, accrued expenses and other liabilities ......................... 949 (251)
---------------- ----------------
Net cash used in operating activities of continuing operations ................... (5,691) (1,890)
Net cash used in operating activities of discontinued operations ................. (1,325) (4,901)
---------------- ----------------
Net cash used in operating activities ............................................ (7,016) (6,791)
---------------- ----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of additional equity in consolidated subsidiaries ....................... (100) -
Purchase of property and equipment ............................................... (1,517) (132)
Proceeds from sale of property and equipment ..................................... 10 -
Sale of short-term investments ................................................... 5,813 -
---------------- ----------------
Net cash provided by (used in) investing activities of continuing operations ..... 4,206 (132)
Net cash provided by (used in) investing activities of discontinued operations ... 111 (474)
---------------- ----------------
Net cash provided by (used in) investing activities .............................. 4,317 (606)
---------------- ----------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants ............................. 1,026 15,431
Capital contributions from minority shareholders of subsidiaries ................. - 16,506
Proceeds from sale of common stock, net of issuance costs ........................ 18,361 -
Other ............................................................................ 128 -
---------------- ----------------
Net cash provided by financing activities ........................................ 19,515 31,937
---------------- ----------------
Increase in cash and cash equivalents ............................................ 16,816 24,540
Cash and cash equivalents, beginning ............................................. 35,953 37,631
---------------- ----------------
Cash and cash equivalents, ending ................................................ $ 52,769 $ 62,171
================ ================
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 ("Acacia" or "we") develops and operates
life science and enabling technology companies. Our core technology opportunity
has been developed through our subsidiary, CombiMatrix Corporation
("CombiMatrix"). We intend to build and acquire companies in the life sciences
field that will utilize CombiMatrix's new biochip technology.
Our other majority-owned subsidiaries include: Advanced Material Sciences,
Inc., a development-stage entity with no operating history which holds the
exclusive license for CombiMatrix's biological array processor technology in
certain fields of material sciences, and Soundview Technologies, Inc.
("Soundview Technologies"), which owns a patent for television V-chip
technology. Our subsidiaries have primarily relied upon selling equity
securities, including sales to and loans from us, to generate the funds they
need to finance implementation of their operating plans.
We have also acquired minority-ownership positions in Advanced Data
Exchange, Corporation, which provides an electronic exchange to facilitate
trading relationships and document exchange, and Greenwich Information
Technologies, LLC, a licensing company for an international portfolio of
video-on-demand and audio-on-demand patents.
In January 2001, we completed an institutional private equity financing
raising gross proceeds of $19 million through the issuance of 1,107,274 units.
Each unit consists of one share of our common stock and one three-year callable
common stock purchase warrant. Each common stock purchase warrant entitles the
holder to purchase one share of our common stock at a price of $21.00 per share
and is callable by us once the closing bid price of our common stock averages
$26.25 or above for 20 or more consecutive trading days on the NASDAQ National
Market System. We issued an additional 20,000 units in lieu of cash payments in
conjunction with the private placement for finders' fees.
In the first quarter of 2001, Soundview Technologies executed separate
license agreements with Samsung Electronics, Hitachi America, Ltd., L.G.
Electronics, Inc., Funai Electric Co. Ltd., Daewoo Electronics Corporation of
America and Sanyo Manufacturing Corporation. In addition, Soundview Technologies
settled its lawsuits with Pioneer Electronics (USA) Incorporated, an affiliate
of Pioneer Corporation. Certain of these license agreements constitute
settlements of patent infringement litigation brought by Soundview Technologies.
The settlement and license agreements provide for a total of $8.89 million in
licensing payments to Soundview Technologies, and grant non-exclusive licenses
of Soundview Technologies' U.S. Patent No. 4,554,584 to the respective
manufacturers. Certain of the settlement and license agreements provide for
future royalty payments to Soundview Technologies. We recognized $2,390,000 of
the scheduled license payments as revenues during the three months ended March
31, 2001.
We were incorporated on January 25, 1993 under the laws of the State of
California. On December 28, 1999, we changed our state of incorporation from
California to Delaware. As a result, all shares of our common stock were
converted into shares of the Delaware Corporation. The stockholders also
approved an increase in the number of our 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, preference and powers would be
determined at a later date.
6
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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
Acacia and its subsidiaries at March 31, 2001 and the consolidated results of
operations and cash flows for the three months ended March 31, 2001 and 2000.
This interim financial information and notes thereto should be read in
conjunction with Acacia's Annual Report on Form 10-K for the year ended December
31, 2000. Acacia'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 2001 presentation.
REVENUE RECOGNITION--License fee income is recognized as revenue when all
obligations have been performed pursuant to the terms of the license agreement,
amounts are fixed or determinable and collectibility of amounts is reasonably
assured. Revenue from government grant and contract activities is accounted for
in the period the services are performed on a percentage-of-completion method of
accounting and when the services have been approved by the grantor and
collectibility is reasonably assured. Amounts recognized under the
percentage-of-completion method are limited to amounts due from customers based
on contract or grant terms.
LOSS PER SHARE--Losses per share is presented on both a basic and diluted
basis. A reconciliation of the denominator of the basic earnings per share or
EPS computation to the denominator of the diluted EPS computation is as follows:
THREE MONTHS ENDED
---------------------------
MARCH 31, MARCH 31,
2001 2000
---------------------------
Weighted Average Number of Common Shares Outstanding Used in Computation of
Basic EPS................................................................. 17,208,154 13,852,360
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............................................. 17,208,154 13,852,360
(a) Potential common shares of 681,374 and 1,565,304 for the three months
ended March 31, 2001 and March 31, 2000, respectively, have been
excluded from the per share calculation because the effect of their
inclusion would be anti-dilutive.
SHORT-TERM INVESTMENTS--Our short-term investments are held in a variety of
interest bearing instruments including: high-grade corporate bonds, commercial
paper, and money market accounts. These investments are classified as available
for sale and carried at fair value at March 31, 2001. Unrealized gains and
losses are included in the consolidated statement of operations and
comprehensive loss as a component of comprehensive loss.
3. SEGMENT INFORMATION
Acacia has two reportable segments: Corporate Portfolio and CombiMatrix.
The Corporate Portfolio segment which consists of Acacia Research Corporation,
develops and operates life science and enabling technology companies.
CombiMatrix is developing a proprietary biochip array processor system that
integrates semiconductor technology with new developments in biotechnology and
chemistry.
7
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
We evaluate 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 our reportable segments in
continuing operations for the three months ended March 31, 2001 and 2000 (in
thousands):
CORPORATE
THREE MONTHS ENDED MARCH 31, 2001 PORTFOLIO COMBIMATRIX OTHER TOTAL
--------- ----------- --------- ----------
Revenue.................................................... $ -- $ 183 $ 2,440 $ 2,623
Amortization of patents and goodwill....................... 628 -- 10 638
Other income............................................... 51 -- -- 51
Interest income............................................ 458 695 42 1,195
Equity in losses of affiliates............................. 55 -- -- 55
Loss (income) before minority interests and income
taxes................................................... 2,684 13,011 (1,325) 14,370
Segment assets............................................. 57,464 43,741 4,550 105,755
Investments in affiliates, at equity....................... 291 -- -- 291
Investments in affiliates, at cost......................... 3,000 -- -- 3,000
Capital expenditures....................................... 37 1,476 4 1,517
CORPORATE
THREE MONTHS ENDED MARCH 31, 2000 PORTFOLIO COMBIMATRIX OTHER TOTAL
--------- ----------- --------- ----------
Revenue.................................................... $ -- $ 17 $ -- $ 17
Amortization of patents and goodwill....................... 414 -- 3 417
Other income............................................... 20 -- -- 20
Interest income............................................ 326 17 23 366
Interest expense........................................... 1 -- -- 1
Equity in losses of affiliates............................. 286 -- -- 286
Loss before minority interests and income
taxes................................................... 2,086 885 163 3,134
Segment assets............................................. 35,666 18,221 2,205 56,092
Investments in affiliates, at equity....................... 4,350 -- -- 4,350
Investments in affiliates, at cost......................... 3,000 -- -- 3,000
Capital expenditures....................................... 132 -- -- 132
8
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
4. DEFERRED NON-CASH STOCK COMPENSATION CHARGES
During the year ended December 31, 2000, our majority-owned subsidiary,
CombiMatrix, recorded deferred non-cash stock compensation charges aggregating
approximately $53.7 million in connection with the granting of stock options.
Pursuant to Acacia's policy, the stock options were granted at exercise prices
equal to the fair value of the underlying CombiMatrix stock on the date of grant
as determined by Acacia. However, such exercise prices were subsequently
determined to be below fair value due to a substantial step-up in the fair value
of CombiMatrix pursuant to a valuation provided by an investment banker in
contemplation of a potential CombiMatrix initial public offering. In connection
with the proposed CombiMatrix initial public offering and pursuant to Securities
and Exchange Commission ("SEC") rules and guidelines, we were required to
reassess the value of stock options issued during the one-year period preceding
the potential initial public offering and utilize the stepped-up fair value
provided by the investment banker for purposes of determining whether such stock
option issuances were compensatory, resulting in the calculation of the $53.7
million in deferred non-cash stock compensation charges. These non-cash deferred
stock compensation charges are being amortized over the respective option grant
vesting periods which range from one to four years. The table below reflects the
non-cash deferred stock compensation amortization expense recorded by
CombiMatrix for the year ended December 31, 2000 and the three months ended
March 31, 2001 and the non-cash deferred stock compensation amortization expense
to be recorded for each of the next fifteen quarters from April 1, 2001 through
December 31, 2004 (excluding options granted subsequent to December 31, 2000) as
follows:
FIRST SECOND THIRD FOURTH
QUARTER QUARTER QUARTER QUARTER TOTAL
------- ------- ------- ------- -----
Fiscal 2000 $73,000 $487,000 $1,418,000 $7,731,000 $9,709,000
Fiscal 2001 7,597,000 6,875,000 6,213,000 4,130,000 24,815,000
Fiscal 2002 3,392,000 3,174,000 3,111,000 1,954,000 11,631,000
Fiscal 2003 1,668,000 1,598,000 1,469,000 881,000 5,616,000
Fiscal 2004 1,280,000 339,000 317,000 62,000 1,998,000
------------
Total CombiMatrix deferred non-cash stock compensation charges 53,769,000
Less amounts amortized to date:
Amortization through December 31, 2000 (9,709,000)
Amortization for the three months ended March 31, 2001 (7,597,000)
------------
Remaining deferred non-cash stock compensation as of
March 31, 2001 $36,463,000
============
Liabilities for recognized non-cash stock compensation expenses through
March 31, 2001 relating to unexercised options are included in accrued stock
compensation in the consolidated balance sheets. The remaining deferred non-cash
stock compensation balance as of March 31, 2001, represents the future non-cash
deferred stock compensation expense as of March 31, 2001 which will be amortized
and reflected in our consolidated statement of operations and comprehensive loss
as non-cash stock compensation charges over the next fifteen quarters through to
December 31, 2004 (excluding options granted subsequent to December 31, 2000).
Amounts to be amortized in future periods reflected above may be impacted by
certain subsequent stock option transactions including modification of terms,
forfeitures and other activity.
9
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
CAUTIONARY STATEMENT
You should read the following discussion and analysis in conjunction with
the Consolidated Financial Statements and related Notes thereto contained
elsewhere in this Report. The information contained in this Quarterly Report on
Form 10-Q is not a complete description of our business or the risks associated
with an investment in our common stock. We urge you to carefully review and
consider the various disclosures made by us in this Report and in our other
reports filed with the SEC, including our Annual Report on Form 10-K for the
year ended December 31, 2000 and our Registration Statement on Form S-3 filed
with the Securities and Exchange Commission on February 6, 2001, that discuss
our business in greater detail.
This Report contains forward-looking statements which include, but are not
limited to, statements concerning projected revenues, expenses, gross profit and
income, capital expenditures, regulatory matters, the need for additional
capital, the competitive nature of our markets, the status of evolving
technologies and their growth potential, accounting matters, and the success of
pending litigation. 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. 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 Acacia
and its subsidiaries operate, and other circumstances affecting anticipated
revenues and costs. Acacia expressly disclaims 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.
GENERAL
The following discussion is based primarily on our consolidated balance
sheet as of March 31, 2001, and on our operations for the period from January 1,
2001 to March 31, 2001. The discussion compares the activities for the three
months ended March 31, 2001 to the activities for the three months ended March
31, 2000. This information should be read in conjunction with the accompanying
consolidated financial statements and notes thereto.
RESULTS OF OPERATIONS
THREE MONTHS ENDED
------------------
MARCH 31,
---------
2001 2000
------------- -------------
Revenues..................................................................... $ 2,623,000 $ 17,000
Operating expenses........................................................... (18,184,000) (3,250,000)
Other income, net............................................................ 1,191,000 99,000
Minority interests........................................................... 5,191,000 461,000
Loss from discontinued operations of Soundbreak.com.......................... -- (884,000)
Cumulative effect of change in accounting principle.......................... -- (246,000)
Provision for income taxes................................................... (300,000) (5,000)
------------- -------------
Net loss..................................................................... $ (9,479,000) $ (3,808,000)
============= =============
10
COMPARISON OF THE THREE MONTHS ENDED MARCH 31, 2001 TO THE THREE MONTHS ENDED
MARCH 31, 2000
LICENSE FEE INCOME. During the three months ended March 31, 2001, license
fee income was $2,440,000 as compared to no license fee income during the three
months ended March 31, 2000. The license fee income resulted primarily from the
settlement of patent infringement litigation brought by Soundview Technologies
and includes settlement amounts received from four television manufacturers.
Pursuant to the terms of the respective settlement agreements with each of the
four manufacturers, Soundview Technologies also granted to such manufacturers
non-exclusive licenses for its U.S. Patent No. 4,554,584.
GRANT REVENUE. During the three months ended March 31, 2001, grant revenue
was $183,000 as compared to $17,000 during the three months ended March 31,
2000. CombiMatrix was awarded two Phase I Small Business Innovative Research, or
SBIR, grants in July 1999 from the Department of Energy and the Department of
Defense. In January 2000, 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. The increase in grant revenue during the
three-month period ended March 31, 2001 resulted from CombiMatrix's continuing
performance under the Phase II SBIR Department of Defense contract.
OPERATING EXPENSES. Total operating expenses increased to $18,184,000
($13,876,000 related to CombiMatrix) during the three months ended March 31,
2001 from $3,250,000 ($918,000 related to CombiMatrix) during the three months
ended March 31, 2000, primarily due to an increase in salary and benefit
expenses resulting from an increase in the number of CombiMatrix's research and
development and general and administrative personnel, $8.4 million in non-cash
stock compensation charges related to a substantial step-up in the value of
CombiMatrix in connection with its proposed initial public offering in 2000,
continued expansion of CombiMatrix's research and development efforts and
increased legal fees related to Soundview Technologies' patent infringement
settlements. Product development and commercialization relating to CombiMatrix's
technology will require additional personnel in areas such as regulatory
affairs, marketing and general operations. As such, we anticipate that our
operating expenses in connection with CombiMatrix will continue to increase in
future periods.
RESEARCH AND DEVELOPMENT EXPENSES. We incurred research and development
expenses of $5,549,000 for the three months ended March 31, 2001, compared to
$734,000 during the three months ended March 31, 2000. Research and development
expenses for the three months ended March 31, 2001 are comprised of expenses
incurred by CombiMatrix, which increased to $5,549,000 from $696,000 for the
three months ended March 31, 2000. The increase was due to an increase in
non-cash stock compensation charges and CombiMatrix's continued expansion of
research and development efforts, including an increase in the number of
CombiMatrix research and development personnel and an increase in research and
development supplies and related expenditures.
For the three months ended March 31, 2001, research and development
expenses also included non-cash stock compensation charges, all of which related
to CombiMatrix, totaling $2,398,000. For the three months ended March 31, 2000,
research and development expense for non-cash stock compensation, all of which
related to CombiMatrix, was not material.
MARKETING AND GENERAL AND ADMINISTRATIVE EXPENSES. We incurred marketing
and general and administrative expenses of $11,869,000 ($8,327,000 related to
CombiMatrix) for the three months ended March 31, 2001 compared to $2,099,000
($222,000 related to CombiMatrix) during the three months ended March 31, 2000.
During the three months ended March 31, 2001, the increase in expenses was
primarily due to an increase in non-cash stock compensation charges, the
continued expansion of CombiMatrix's operations including an increase in
salaries and benefits due to an increase in the number of CombiMatrix personnel,
an increase in personnel recruitment and relocation expenses, an increase in
rent and utilities expenses relating to CombiMatrix's move to larger office
facilities during the first quarter of fiscal 2001 and an increase in legal fees
related to Soundview Technologies' patent infringement settlements.
Marketing and general and administrative expenses included $6,021,000
($5,199,000 related to CombiMatrix) and $512,000 of non-cash stock compensation
charges for the three months ended March 31, 2001 and 2000, respectively.
CombiMatrix is increasing its employee base and has made extensive use of
consultants to assist in solving specialized issues or providing particular
services. Product development and commercialization relating to CombiMatrix's
technology will require additional personnel in areas such as regulatory
affairs, marketing and general operations. We anticipate that CombiMatrix will
continue to hire additional managerial and clerical employees in future periods.
11
AMORTIZATION OF PATENTS AND GOODWILL. During the three months ended March
31, 2001, amortization expense relating to patents and goodwill was $638,000 as
compared to $417,000 during the three months ended March 31, 2000. As a result
of our purchase of additional equity interests in CombiMatrix in July 2000, we
are incurring amortization expenses each quarter for periods ranging from three
to five years relating to the intangible assets acquired. Amortization expenses
at or above the current level are expected to continue for the foreseeable
future.
OTHER INCOME, NET. For the three months ended March 31, 2001, other income,
net (primarily comprised of interest income, equity in losses of affiliates and
other) was $1,191,000 as compared to $99,000 for the three months ended March
31, 2000.
INTEREST INCOME. During the three months ended March 31, 2001, interest
income was $1,195,000 as compared to $366,000 during the three months ended
March 31, 2000. The increase was due to higher cash balances in the three months
ended March 31, 2001 as compared to the three months ended March 31, 2000. In
August 2000, CombiMatrix completed a private equity financing raising gross
proceeds of $36 million through the sale of four million shares of CombiMatrix
common stock. In January 2001, Acacia completed an institutional private equity
financing raising gross proceeds of $19 million.
EQUITY IN LOSSES OF AFFILIATES. During the three months ended March 31,
2001, equity in losses of affiliates was $55,000 as compared to $286,000 during
the three months ended March 31, 2000. Losses during the three months ended
March 31, 2001 were comprised of a loss of $55,000 for our investment in
Greenwich Information Technologies as determined by the equity method of
accounting. Losses during the three months ended March 31, 2000 were comprised
of a loss of $74,000 for our investment in Signature-mail.com, a loss of $49,000
for our investment in Greenwich Information Technologies, a loss of $19,000 for
our investment in Whitewing Labs and a loss of $144,000 for our investment in
Mediaconnex, as determined by the equity method of accounting. We wrote-off our
equity investments in Mediaconnex, Signaturemail.com and Whitewing Labs as of
December 31, 2000.
MINORITY INTERESTS. Minority interests in the losses of consolidated
subsidiaries increased to $5,191,000 in the three months ended March 31, 2001 as
compared to $461,000 in the three months ended March 31, 2000. The increase in
minority interests during the three months ended March 31, 2001 was primarily
due to the increase in losses incurred by CombiMatrix as a result of its
continued expansion of research and development efforts and increased marketing
and general and administrative expenses.
INFLATION
Inflation has not had a significant impact on Acacia or its subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
At March 31, 2001, we had cash and short-term investments of $87.5 million
on a consolidated basis, including discontinued operations, of which Acacia had
$41.1 million and our subsidiaries had $46.4 million. Working capital was $64.5
million on a consolidated basis at March 31, 2001. Highlights of the financing
and commitment activities for the three months ended March 31, 2001 include the
following:
o In January 2001, we completed a $19 million institutional
private equity financing consisting of the sale of 1,107,274
units at offering price of $17.50 per unit in addition to
20,000 units in lieu of cash payments for finders' fees. Each
unit consisting of one share of common stock and one
three-year callable common stock purchase warrant.
o In February 2001, the board of directors of Soundbreak.com,
Inc., or Soundbreak.com, one of our majority-owned
subsidiaries, resolved to cease operations as of February 15,
2001 and liquidate its remaining assets and liabilities.
Accordingly, we reported the results of operations and the
estimated loss on disposal of Soundbreak.com as results of
discontinued operations in the Consolidated Statements of
Operations and Comprehensive Loss in 2000.
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As of March 31, 2001, we have no significant commitments for capital
expenditures. 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 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 will be available on favorable terms, if at all. Such financing
transactions may be dilutive to existing investors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Our exposure to market risk is limited to interest income sensitivity,
which is affected by changes in the general level of United States interest
rates, particularly because a significant portion of our investments are in
short-term debt securities issued by United States corporations. The primary
objective of our investment activities is to preserve principal while maximizing
interest income, without significantly increasing risk. To minimize risk, we
maintain a portfolio of cash, cash equivalents and short-term investments in a
variety of investment-grade securities and with a variety of issuers, including
corporate notes, commercial paper and money market funds. Due to the nature of
our short-term investments, we believe that we are not subject to any material
market risk exposure. We do not have any foreign currency or other derivative
financial instruments.
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PART II--OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
SOUNDVIEW TECHNOLOGIES
On April 5, 2000, Soundview Technologies filed a patent infringement and
antitrust lawsuit against Sony Corporation of America, Philips Electronics North
America Corporation, the Consumer Electronics Manufacturers Association, and the
Consumer Electronics Association in the United States District Court for the
Eastern District of Virginia, alleging that television sets fitted with
"V-chips" and sold in the United States infringe Soundview Technologies patent.
The case is now pending in the U.S. District Court for the District of
Connecticut, against Sony Corporation of America, Inc., the Consumer Electronic
Manufacturers Association, the Consumer Electronics Association, Thomson
Consumer Electronics, Inc., Mitsubishi Electronics America, Inc., Toshiba
America Consumer Products, Inc., Sharp Electronics Corporation, Matsushita
Electric Corporation of America and JVC Americas Corp. In December 2000,
Soundview Technologies and Philips Electronics North America Corporation reached
a confidential settlement agreement whereby Soundview Technologies will receive
payment and grant a non-exclusive license of its V-chip patent to Philips
Electronics North America Corporation. In the first quarter of 2001, Soundview
Technologies entered into separate confidential settlement and/or license
agreements with Hitachi America Ltd., L.G. Electronics, Inc., Daewoo Electronics
Corporation of America, Samsung Electronics, Funai Electric Co., and Sanyo
Manufacturing Corporation, whereby Soundview Technologies will receive payments
and grant non-exclusive licenses of its V-chip patent. Also in the first quarter
of 2001, Soundview Technologies settled its lawsuit with Pioneer Electronics
(USA) Inc., an affiliate of Pioneer Corporation.
COMBIMATRIX
On November 28, 2000, Nanogen, Inc., or Nanogen, filed a complaint in the
United States District Court for the Southern District of California, against
CombiMatrix and Donald D. Montgomery, Ph.D., CombiMatrix's Senior Vice
President, Chief Technology Officer and a director. Dr. Montgomery was employed
by Nanogen as a senior research scientist between May 1994 and August 1995. The
Nanogen complaint alleges, among other things, breach of contract, trade secret
misappropriation, and that U.S. Patent No. 6,093,302 and other proprietary
information belonging to CombiMatrix are instead the property of Nanogen. The
complaint seeks, among other things, correction of inventorship on the patent,
the assignment of rights in the patent and pending patent applications to
Nanogen, an injunction preventing disclosure of trade secrets, damages for trade
secret misappropriation and the imposition of a constructive trust. On March 9,
2001, CombiMatrix and Dr. Montgomery filed a counterclaim, alleging breach of
express covenants not to sue or otherwise interfere with Dr. Montgomery arising
out of a release signed by Nanogen in 1996. Although we believe that Nanogen's
claims are without merit, we cannot predict the outcome of the litigation.
ITEM 2. CHANGES IN SECURITIES
In January 2001, we completed an institutional private equity financing
raising gross proceeds of $19 million through the sale of 1,107,274 units at a
purchase price of $17.50. Each unit consists of one share of Acacia'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 Acacia's
common stock at a price of $21.00 per share and is callable by Acacia once the
closing bid price of Acacia's common stock averages $26.25 or above for 20 or
more consecutive trading days on the NASDAQ National Market System. Acacia
issued an additional 20,000 units in lieu of cash payments in conjunction with
the private placement for finders' fees. Acacia's sale of these units was exempt
from registration, as a private placement, under Section 4(2) of the Securities
Act of 1933 and Regulation D promulgated thereunder.
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ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) EXHIBITS. The following exhibits are 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 between Soundbreak.com Incorporated and 8730
Sunset Towers and related Guaranty (11)
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)
- ------------------------
(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
as Appendix A Statement on Schedule 14A filed on April 26,
1996 (SEC File No. 000-26068).
(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. (SEC File No.
000-26068).
(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 filed on March
31, 1997 (SEC File No. 000-26068).
(7) Incorporate by reference from the Company's Annual Report on
Form 10-K for the year ended December 31, 1997 filed on March
30, 1998 (SEC File No. 000-26068).
(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) and to the Definitive Proxy Statement on
Schedule 14A filed on April 10, 2000 (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 A to the Definitive
Proxy Statement on Schedule 14A filed on April 10, 2000 (SEC
File No. 000-26068).
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(11) Incorporated by reference from the Company's Quarterly Report
on Form 10-Q filed on November 15, 1999. (SEC File No.
000-26068).
(b) Reports on Form 8-K
On February 16, 2001, Acacia filed a Current Report on Form 8-K to report
the closing of Soundbreak.com Incorporated.
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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/ PAUL RYAN
Paul Ryan
Chief Executive Officer (Authorized Signatory)
By: /s/ CLAYTON J. HAYNES
Clayton J. Haynes
Senior Vice President of Finance/Treasurer
(Chief Accounting Officer)
Date: May 10, 2001
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