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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTER ENDED JUNE 30, 2001
COMMISSION FILE NUMBER 0-26068
ACACIA RESEARCH CORPORATION
(Exact name of registrant as specified in its charter)
DELAWARE 95-4405754
(State or other jurisdiction of (I.R.S. Employer
incorporation or 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
filing requirements for the past 90 days. Yes [X] No [ ]
At August 8, 2001, the registrant had 17,755,374 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
Unaudited Consolidated Balance Sheets as of June 30, 2001
and December 31, 2000............................................................. 3
Unaudited Consolidated Statements of Operations and Comprehensive Loss for the
Three Months Ended June 30, 2001 and 2000 and the Six Months Ended June 30, 2001
and 2000.......................................................................... 4
Unaudited Consolidated Statements of Cash Flows for the
Six Months Ended June 30, 2001 and 2000........................................... 5
Notes to Consolidated Financial Statements........................................ 6
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................. 12
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................ 17
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................. 18
Item 2. Changes in Securities and Use of Proceeds......................................... 18
Item 3. Defaults upon Senior Securities................................................... 18
Item 4. Submission of Matters to a Vote of Security Holders............................... 19
Item 5. Other Information................................................................. 19
Item 6. Exhibits and Reports on Form 8-K.................................................. 19
SIGNATURES.......................................................................................... 20
2
ACACIA RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
(UNAUDITED)
JUNE 30, DECEMBER 31,
2001 2000
----------- -----------
ASSETS
Current assets
Cash and cash equivalents ..................................................... $ 47,920 $ 35,953
Other receivables ............................................................. 112 68
Prepaid expenses .............................................................. 396 369
Short-term investments ........................................................ 39,513 40,600
Other assets .................................................................. 2,340 1,034
----------- -----------
Total current assets ..................................................... 90,281 78,024
Property and equipment, net of accumulated depreciation ............................ 5,516 3,727
Investment in affiliate, at equity ................................................. 235 346
Investment in affiliate, at cost ................................................... 3,000 3,000
Patents, net of accumulated amortization ........................................... 8,101 9,038
Goodwill, net of accumulated amortization .......................................... 3,139 3,904
Other assets ....................................................................... 251 477
----------- -----------
$ 110,523 $ 98,516
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses ......................................... $ 6,880 $ 7,767
Accrued stock compensation .................................................... 25,976 10,392
Deferred revenues ............................................................. 1,000 --
----------- -----------
Total current liabilities ................................................ 33,856 18,159
Deferred income taxes .............................................................. 2,610 2,689
----------- -----------
Total liabilities ........................................................ 36,466 20,848
----------- -----------
Minority interests ................................................................. 9,182 17,524
----------- -----------
Stockholders' equity
Common stock, par value $0.001 per share; 60,000,000 shares authorized;
17,728,374 and 16,090,587 shares issued and outstanding as of June 30, 2001
and December 31, 2000, respectively ........................................ 18 16
Additional paid-in capital .................................................... 134,845 116,017
Warrants to purchase common stock ............................................. 199 86
Unrealized gain on short-term investments ..................................... 116 77
Accumulated deficit ........................................................... (70,303) (56,052)
----------- -----------
Total stockholders' equity ............................................... 64,875 60,144
----------- -----------
$ 110,523 $ 98,516
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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 SIX MONTHS ENDED
--------------------- ---------------------
JUNE 30, JUNE 30, JUNE 30, JUNE 30,
2001 2000 2001 2000
---------- ---------- ---------- ----------
Revenues:
License fee income ................................................................. $ 10,000 $ -- $ 12,440 $ --
Grant revenue ...................................................................... 91 -- 274 17
Other revenue ...................................................................... -- 22 -- 22
---------- ---------- ---------- ----------
Total revenues ..................................................................... 10,091 22 12,714 39
---------- ---------- ---------- ----------
Operating expenses:
Research and development expenses (including stock compensation charges of
$2,013 and $0 for the three months ended June 2001 and 2000, respectively; and,
$4,411 and $0 for the six months ended June 2001 and 2000, respectively) ........ 4,664 896 10,213 1,630
Marketing, general and administrative expenses (including stock compensation
charges of $5,176 and $12 for the three months ended June 2001 and 2000,
respectively; and, $11,197 and $520 for the six months ended June 2001 and 2000,
respectively) ................................................................... 14,679 2,808 26,548 4,907
Amortization of patents and goodwill ............................................... 638 446 1,276 863
Loss on disposal of consolidated subsidiary ........................................ -- -- 128 --
---------- ---------- ---------- ----------
Total operating expenses ........................................................... 19,981 4,150 38,165 7,400
---------- ---------- ---------- ----------
Operating loss ..................................................................... (9,890) (4,128) (25,451) (7,361)
---------- ---------- ---------- ----------
Other income (expense):
Interest income .................................................................... 1,029 555 2,224 921
Interest expense ................................................................... -- -- -- (1)
Equity in losses of affiliates ..................................................... (55) (538) (110) (824)
Other income ....................................................................... 10 4 61 24
---------- ---------- ---------- ----------
Total other income ................................................................. 984 21 2,175 120
---------- ---------- ---------- ----------
Loss from continuing operations before income taxes and minority interests ........... (8,906) (4,107) (23,276) (7,241)
Provision for income taxes ........................................................... (228) (2) (528) (7)
---------- ---------- ---------- ----------
Loss from continuing operations before minority interests ............................ (9,134) (4,109) (23,804) (7,248)
Minority interests ................................................................... 4,362 659 9,553 1,120
---------- ---------- ---------- ----------
Loss from continuing operations ...................................................... (4,772) (3,450) (14,251) (6,128)
Discontinued operations
Loss from discontinued operations of Soundbreak.com ................................ -- (2,787) -- (3,671)
---------- ---------- ---------- ----------
Loss before cumulative effect of change in accounting principle ...................... (4,772) (6,237) (14,251) (9,799)
Cumulative effect of change in accounting principle due to beneficial conversion feature -- -- -- (246)
---------- ---------- ---------- ----------
Net loss ............................................................................. (4,772) (6,237) (14,251) (10,045)
Unrealized gain on short-term investments .......................................... -- -- 39 --
---------- ---------- ---------- ----------
Comprehensive loss ................................................................... $ (4,772) $ (6,237) $ (14,212) $ (10,045)
========== ========== ========== ==========
Loss per common share:
Basic
Loss from continuing operations .................................................... $ (0.27) $ (0.24) $ (0.82) $ (0.42)
Loss from discontinued operations .................................................. $ -- $ (0.19) $ -- $ (0.25)
Cumulative effect of change in accounting principle ................................ $ -- $ -- $ -- $ (0.02)
---------- ---------- ---------- ----------
Net loss ............................................................................. $ (0.27) $ (0.43) $ (0.82) $ (0.69)
========== ========== ========== ==========
Diluted
Loss from continuing operations .................................................... $ (0.27) $ (0.24) $ (0.82) $ (0.42)
Loss from discontinued operations .................................................. $ -- $ (0.19) $ -- $ (0.25)
Cumulative effect of change in accounting principle ................................ $ -- $ -- $ -- $ (0.02)
---------- ---------- ---------- ----------
Net loss ............................................................................. $ (0.27) $ (0.43) $ (0.82) $ (0.69)
========== ========== ========== ==========
Weighted average number of common and potential common shares outstanding used
in computation of loss per share:
Basic ..............................................................................17,725,935 14,515,149 17,482,384 14,521,311
Diluted ............................................................................17,725,935 14,515,149 17,482,384 14,521,311
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF
THESE CONSOLIDATED FINANCIAL STATEMENTS.
4
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
SIX MONTHS ENDED
----------------------------
JUNE 30, 2001 JUNE 30, 2000
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CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations ........................................................ $ (14,251) $ (6,128)
Adjustments to reconcile net loss from continuing operations
to net cash used in operating activities:
Depreciation and amortization ................................................. 1,740 1,275
Equity in loss of affiliates .................................................. 110 824
Minority interests in net losses .............................................. (9,553) (6,564)
Compensation expense relating to stock options/warrants ....................... 15,608 520
Deferred tax benefit .......................................................... (79) --
Other ......................................................................... 361 --
Changes in assets and liabilities, net of effects of acquisitions:
Other receivables, prepaid expenses and other assets .......................... (922) (86)
Accounts payable, accrued expenses and other liabilities ...................... 1,364 (80)
---------- ----------
Net cash used in operating activities of continuing operations ................ (5,622) (10,239)
Net cash used in operating activities of discontinued operations .............. (1,698) (4,504)
---------- ----------
Net cash used in operating activities ......................................... (7,320) (14,743)
---------- ----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital contribution to equity investments .................................... -- (33)
Purchase of property and equipment ............................................ (2,602) (469)
Proceeds from sale of property and equipment .................................. 48 --
Purchase of short-term investments ............................................ (11,120) --
Sale of short-term investments ................................................ 11,923 --
Purchase of common stock from minority stockholders of subsidiaries ........... (584) --
---------- ----------
Net cash used in investing activities of continuing operations ................ (2,335) (502)
Net cash provided by (used in) investing activities of discontinued operations. 137 (831)
---------- ----------
Net cash used in investing activities ......................................... (2,198) (1,333)
---------- ----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants .......................... 1,165 16,283
Capital contributions from minority stockholders of subsidiaries,
net of issuance costs ..................................................... 1,749 16,836
Proceeds from sale of common stock, net of issuance costs ..................... 18,361 --
---------- ----------
Net cash provided by financing activities ..................................... 21,275 33,119
---------- ----------
Increase in cash and cash equivalents ......................................... 11,757 17,043
Cash and cash equivalents, beginning .......................................... 36,163 37,631
---------- ----------
Cash and cash equivalents, ending ............................................. $ 47,920 $ 54,674
========== ==========
Schedule of non-cash investing activity:
Accrued payments for purchase of common stock from minority stockholders
of subsidiary ..................................................................... $ 517 $ --
========== ==========
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 majority-owned subsidiary, CombiMatrix
Corporation ("CombiMatrix"). We intend to build and acquire companies in the
life sciences field, including companies that will utilize CombiMatrix's new
biochip technology.
Our other majority-owned subsidiaries are: (1) Soundview Technologies,
Incorporated ("Soundview Technologies"), a wholly owned subsidiary that owns
intellectual property related to the telecommunications field, including a
television blanking system, also known as the "V-chip," which it licenses to
television manufacturers, and (2) 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. Our subsidiaries have primarily relied upon selling
equity securities, including sales to us and loans from us, to generate the
funds they need to finance implementation of their operating plans.
We also hold 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 for
finders' fees in conjunction with the private placement.
In June 2001, our ownership interest in Soundview Technologies
increased from 67% to 100%, following Soundview Technologies' completion of a
stock repurchase transaction with the former minority stockholders of the
company. Soundview repurchased the stock of the former minority stockholders in
exchange for a cash payment and the grant to such stockholders of the right to
receive 26% of future net revenues generated by the company's current patent
portfolio, which includes its V-chip patent.
During the first and second quarter of 2001, Soundview Technologies
executed separate license agreements with Samsung Electronics, Hitachi America,
Ltd., LG Electronics, Inc., Funai Electric Co. Ltd., Daewoo Electronics
Corporation of America, Sanyo Manufacturing Corporation, Thomson Multimedia,
Inc. and JVC Americas Corporation. In addition, Soundview Technologies settled
its lawsuits with Pioneer Electronics (USA) Incorporated, an affiliate of
Pioneer Corporation, and received a payment from Philips Electronics pursuant to
a license agreement, signed in December 2000. 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 $13.39 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
received and recognized as revenue $2,390,000 of the license payments during the
three months ended March 31, 2001 and $10,000,000 of the license payments during
the three months ended June 30, 2001.
In May 2001, Advanced Material Sciences, Inc. completed a private
equity financing raising gross proceeds of $2 million through the issuance of
2,000,000 shares of common stock. Advanced Material Sciences, Inc. issued an
additional 29,750 shares of common stock, in lieu of cash payments, and warrants
to purchase approximately 54,000 shares of common stock, in conjunction with the
private placement for finders' fees. Each common stock purchase warrant entitles
the holder to purchase shares of Advanced Material Sciences, Inc. common stock
at a price of $1.10 per share.
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. Our 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 June 30, 2001 and the consolidated results of
operations and cash flows for the periods presented. Certain information and
footnote disclosures normally included in audited financial information prepared
in accordance with generally accepted accounting principles have been condensed
or omitted pursuant to the Securities and Exchange Commission's ("SEC") rules
and regulations. 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.
PRINCIPLES OF CONSOLIDATION-The accompanying unaudited consolidated
financial statements include the accounts of Acacia and its wholly owned and
majority-owned subsidiaries. Material intercompany transactions and balances
have been eliminated in consolidation.
RECLASSIFICATIONS-Certain reclassifications of the prior year's amounts
have been made to conform to the 2001 presentation.
REVENUE RECOGNITION-License fee income is recognized as revenue when
(i) all obligations have been performed pursuant to the terms of the license
agreement, (ii) amounts are fixed or determinable and (iii) 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-Loss per share is presented on both a basic and diluted
basis. A reconciliation of the denominator of the basic EPS computation to the
denominator of the diluted EPS computation is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------- ------------------------
JUNE 30, JUNE 30,
2001 2000 2001 2000
------------ ------------ ------------ ------------
Weighted Average Number of Common Shares Outstanding
Used in Computation of Basic EPS ........................ 17,725,935 14,515,149 17,482,384 14,521,311
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 ... 17,725,935 14,515,149 17,482,384 14,521,311
(a) Potential common shares of 163,882 and 963,770 for the three months ended
June 30, 2001 and June 30, 2000, respectively, have been excluded from the
per share calculation because the effect of their inclusion would be
anti-dilutive. Potential common shares of 671,090 and 1,258,676 for the six
months ended June 30, 2001 and June 30, 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. Investments in securities with maturities of
less than one year are classified as short-term investments. Investments are
classified into categories in accordance with the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." Currently, we classify our securities as
available-for-sale, which are reported at fair value. Related unrealized gains
and losses in the value of securities are included in other comprehensive income
(loss). The carrying value of those investments approximates their cost at June
30, 2001. Realized and unrealized gains and losses are based on the specific
identification method.
7
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
RECENT ACCOUNTING PRONOUNCEMENTS-In late July 2001, the Financial
Accounting Standards Board issued Statement of Financial Accounting Standards
No. 141, "Business Combinations" ("SFAS No. 141"), and Statement of Financial
Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS No.
142"). SFAS No. 141 requires that all business combinations be accounted for
under a single method--the purchase method. Use of the pooling-of-interests
method is no longer permitted. SFAS No. 141 requires that the purchase method be
used for business combinations initiated after June 30, 2001. We believe that
the adoption of SFAS No. 141 will not have a material effect on our consolidated
results of operations or financial position.
SFAS No. 142 requires that goodwill no longer be amortized to earnings,
but instead be reviewed for impairment periodically. We will adopt SFAS No. 142
effective January 1, 2002. The impact, if any, of the adoption of SFAS No. 142
on our consolidated results of operations or financial position is not known at
this time.
3. SEGMENT INFORMATION
Acacia has three reportable segments as follows:
CORPORATE PORTFOLIO-The Corporate Portfolio segment consists of Acacia
Research Corporation, which develops and operates life science and enabling
technology companies.
COMBIMATRIX-CombiMatrix is developing a proprietary biochip array
processor system that integrates semiconductor technology with new developments
in biotechnology and chemistry.
SOUNDVIEW TECHNOLOGIES-Soundview Technologies owns intellectual
property related to the telecommunications field, including a television
blanking system, also known as the "V-chip," which it licenses to television
manufacturers.
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 June 30, 2001 and 2000 (in
thousands):
CORPORATE SOUNDVIEW
THREE MONTHS ENDED JUNE 30, 2001 PORTFOLIO COMBIMATRIX TECHNOLOGIES OTHER TOTAL
- -------------------------------- --------- ----------- ------------ ------- ---------
Revenue.............................................. $ -- $ 91 $ 10,000 $ -- $ 10,091
Amortization of patents and goodwill................. 633 -- 5 -- 638
Other income......................................... 10 -- -- -- 10
Interest income...................................... 438 521 32 38 1,029
Equity in losses of affiliate........................ 55 -- -- -- 55
Loss (income) before minority interests and income
taxes............................................. 1,376 12,489 (5,055) 96 8,906
Segment assets....................................... 54,977 39,180 6,326 4,820 105,303
Investment in affiliate, at equity................... 235 -- -- -- 235
Investment in affiliate, at cost..................... 3,000 -- -- -- 3,000
Capital expenditures................................. -- 1,083 2 -- 1,085
8
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. SEGMENT INFORMATION (CONTINUED)
CORPORATE SOUNDVIEW
THREE MONTHS ENDED JUNE 30, 2000 PORTFOLIO COMBIMATRIX TECHNOLOGIES OTHER TOTAL
- -------------------------------- --------- ----------- ------------ ------- ---------
Revenue.............................................. $ -- $ -- $ -- $ 22 $ 22
Amortization of patents and goodwill................. 442 -- 4 -- 446
Other income......................................... 4 -- -- -- 4
Interest income...................................... 312 219 -- 24 555
Equity in losses of affiliates....................... 538 -- -- -- 538
Loss before minority interests and income
taxes............................................. 2,311 1,300 73 423 4,107
Segment assets....................................... 34,738 17,427 144 1,956 54,265
Investments in affiliates, at equity................. 3,845 -- -- -- 3,845
Investment in affiliate, at cost..................... 3,000 -- -- -- 3,000
Capital expenditures................................. 264 108 -- 3 375
The table below presents information about our reportable segments in
continuing operations for the six months ended June 30, 2001 and 2000 (in
thousands):
CORPORATE SOUNDVIEW
SIX MONTHS ENDED JUNE 30, 2001 PORTFOLIO COMBIMATRIX TECHNOLOGIES OTHER TOTAL
- -------------------------------- --------- ----------- ------------ ------- ---------
Revenue.............................................. $ -- $ 274 $ 12,390 $ 50 $ 12,714
Amortization of patents and goodwill................. 1,261 -- 10 5 1,276
Other income......................................... 61 -- -- -- 61
Interest income...................................... 898 1,216 35 75 2,224
Equity in losses of affiliate........................ 110 -- -- -- 110
Loss (income) before minority interests and income
taxes............................................. 4,061 25,500 (6,409) 124 23,276
Segment assets....................................... 54,977 39,180 6,326 4,820 105,303
Investment in affiliate, at equity................... 235 -- -- -- 235
Investment in affiliate, at cost..................... 3,000 -- -- -- 3,000
Capital expenditures................................. 37 2,559 6 -- 2,602
CORPORATE SOUNDVIEW
SIX MONTHS ENDED JUNE 30, 2000 PORTFOLIO COMBIMATRIX TECHNOLOGIES OTHER TOTAL
- -------------------------------- --------- ----------- ------------ ------- ---------
Revenue.............................................. $ -- $ 17 $ -- $ 22 $ 39
Amortization of patents and goodwill................. 856 -- 7 -- 863
Other income......................................... 24 -- -- -- 24
Interest income...................................... 638 236 -- 47 921
Interest expense..................................... 1 -- -- -- 1
Equity in losses of affiliates....................... 824 -- -- -- 824
Loss before minority interests and income
taxes............................................. 4,400 2,185 151 505 7,241
Segment assets....................................... 34,738 17,427 144 1,956 54,265
Investments in affiliates, at equity................. 3,845 -- -- -- 3,845
Investment in affiliate, at cost..................... 3,000 -- -- -- 3,000
Capital expenditures................................. 358 108 -- 3 469
9
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 $53.8 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 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 $53.8 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 six months ended June 30, 2001, and the non-cash deferred stock
compensation amortization expense to be recorded for each of the next fourteen
quarters from July 1, 2001 through December 31, 2004 (excluding options granted
subsequent to December 31, 2000) as follows:
FIRST SECOND THIRD FOURTH
YEAR QUARTER QUARTER QUARTER QUARTER TOTAL
---- ------------ ------------ ------------ ------------ -------------
2000 $ 73,000 $ 487,000 $ 1,418,000 $ 7,731,000 $ 9,709,000
2001 7,597,000 6,875,000 6,213,000 4,130,000 24,815,000
2002 3,392,000 3,174,000 3,111,000 1,954,000 11,631,000
2003 1,668,000 1,598,000 1,469,000 881,000 5,616,000
2004 1,280,000 339,000 317,000 62,000 1,998,000
-------------
Total CombiMatrix deferred non-cash stock compensation charges
(excluding options granted subsequent to December 31, 2000) 53,769,000
Less amounts amortized to date:
Amortization through December 31, 2000 (9,709,000)
Amortization for the six months ended June 30, 2001 (14,472,000)
-------------
Remaining deferred non-cash stock compensation as of June 30, 2001
(excluding options granted subsequent to December 31, 2000) $ 29,588,000
=============
Liabilities for recognized non-cash stock compensation expenses through
June 30, 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 June 30, 2001 represents the future non-cash
deferred stock compensation expense which will be amortized and reflected in our
consolidated statement of operations and comprehensive loss as non-cash stock
compensation charges over the next fourteen quarters from July 1, 2001 through
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,
cancellations, forfeitures and other activity.
10
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. SUBSEQUENT EVENTS
In July 2001, our majority-owned subsidiary, CombiMatrix, entered into
a non-exclusive worldwide license, supply, research and development agreement
with Roche Diagnostics ("Roche"). Under the terms of the agreement, it is
contemplated that Roche will purchase, use and resell CombiMatrix's biochips
(microarrays) and related technology for rapid production of customizable
biochips. Additionally, CombiMatrix and Roche will develop a platform
technology, providing a range of standardized biochips for use in important
research applications. Roche will make payments for the deliverables
contemplated and expanded license rights.
The agreement allows Roche in the future to use, develop and resell
licensed CombiMatrix products in diagnostic applications. The agreement includes
a revenue sharing arrangement and has a term of 15 years. The agreement provides
for minimum payments by Roche to CombiMatrix over the first three years,
including royalties and payments for products and R&D projects.
In July 2001, our wholly owned subsidiary, Soundview Technologies,
executed a license agreement with Orion Electric Co., Ltd., whereby Soundview
Technologies will receive payment and grant a non-exclusive license of its U.S.
Patent No. 4,554,584 to Orion Electric Co., Ltd., a manufacturer of televisions
sold under the Orion and Sansui brands.
In August 2001, CombiMatrix entered into a license and supply agreement
with the National Aeronautics and Space Administration (NASA). The agreement
provides for the license, purchase and use by the NASA Ames Research Center of
CombiMatrix's active biochips (microarrays) and related technology to conduct
biological research in both terrestrial laboratories and in space.
11
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 June 30, 2001 and on our operations for the period from January 1,
2001 to June 30, 2001. The discussion compares the activities for the three and
six months ended June 30, 2001 to the activities for the three and six months
ended June 30, 2000. This information should be read in conjunction with the
accompanying consolidated financial statements and notes thereto.
RESULTS OF OPERATIONS
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
JUNE 30, JUNE 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Revenues .................................................. $ 10,091,000 $ 22,000 $ 12,714,000 $ 39,000
Operating expenses ........................................ (19,981,000) (4,150,000) (38,165,000) (7,400,000)
Other income, net ......................................... 984,000 21,000 2,175,000 120,000
Minority interests ........................................ 4,362,000 659,000 9,553,000 1,120,000
Loss from discontinued operations of
Soundbreak.com ........................................ -- (2,787,000) -- (3,671,000)
Cumulative effect of change in accounting principle ....... -- -- -- (246,000)
Provision for income taxes ................................ (228,000) (2,000) (528,000) (7,000)
------------- ------------- ------------- -------------
Net loss .................................................. $ (4,772,000) $ (6,237,000) $(14,251,000) $(10,045,000)
============= ============= ============= =============
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
COMPARISON OF THE THREE AND SIX MONTHS ENDED JUNE 30, 2001 TO THE THREE AND SIX
MONTHS ENDED JUNE 30, 2000
LICENSE FEE INCOME. During the three months ended June 30, 2001,
license fee income was $10,000,000 as compared to no license fee income during
the three months ended June 30, 2000. During the six months ended June 30, 2001,
license fee income was $12,440,000 as compared to no license fee income during
the six months ended June 30, 2000. The increase in license fee income for the
three and six month periods ended June 30, 2001 resulted primarily from the
settlement of patent infringement litigation brought by Soundview Technologies
and includes settlement amounts received from nine television manufacturers
during the first half of 2001. Pursuant to the terms of the respective
settlement agreements with each of the nine 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 June 30, 2001, grant
revenue was $91,000 as compared to no grant revenue during the three months
ended June 30, 2000. During the six months ended June 30, 2001, grant revenue
was $274,000 as compared to $17,000 during the six months ended June 30, 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 and six month
periods ended June 30, 2001 resulted from CombiMatrix's continuing performance
under the Phase II SBIR Department of Defense contract.
OTHER REVENUE. During the three and six months ended June 30, 2001,
there were no other revenues as compared to $22,000 during the three and six
months ended June 30, 2000. The decrease in other revenues in 2001 was due to
the December 2000 exit from our investment in the majority-owned subsidiary from
which the other revenue was derived during 2000.
OPERATING EXPENSES. Total operating expenses increased to $19,981,000
($13,086,000 related to CombiMatrix) during the three months ended June 30, 2001
from $4,150,000 ($1,471,000 related to CombiMatrix) during the three months
ended June 30, 2000. Total operating expenses increased to $38,165,000
($26,962,000 related to CombiMatrix) during the six months ended June 30, 2001
from $7,400,000 ($2,389,000 related to CombiMatrix) during the six months ended
June 30, 2000. The increase in operating expenses for the three and six months
ended June 30, 2001 as compared to the same periods in 2000 was 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, $14.8 million (six months) and $7.2 million (three months) 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.
RESEARCH AND DEVELOPMENT EXPENSES. During the three months ended June
30, 2001, research and development expense was $4,664,000, all of which related
to CombiMatrix, as compared to $896,000, of which $883,000 related to
CombiMatrix, during the three months ended June 30, 2000. During the six months
ended June 30, 2001 research and development expense was $10,213,000, all of
which related to CombiMatrix, as compared to $1,630,000, of which $1,579,000
related to CombiMatrix, during the six months ended June 30, 2000. The increase
in research and development expense for the three and six months ended June 30,
2001 as compared to the same periods in 2000 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 June 30, 2001, research and development
expense included non-cash stock compensation charges, all of which related to
CombiMatrix, totaling $2,013,000. For the six months ended June 30, 2001,
research and development expense included non-cash stock compensation charges,
all of which related to CombiMatrix, totaling $4,411,000. For the three and six
months ended June 30, 2000, research and development expense for non-cash stock
compensation was not material.
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. We incurred marketing,
general and administrative expenses of $14,679,000 ($8,422,000 related to
CombiMatrix) for the three months ended June 30, 2001, compared to $2,808,000
($636,000 related to CombiMatrix) during the three months ended June 30, 2000.
We incurred marketing, general and administrative expenses of $26,548,000
($16,749,000 related to CombiMatrix) for the six months ended June 30, 2001,
compared to $4,907,000 ($858,000 related to CombiMatrix) during the six months
ended June 30, 2000. The increase in marketing, general and administrative
expenses for the three and six months ended June 30, 2001, as compared to the
same periods in 2000 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 2001 and an
increase in legal fees related to Soundview Technologies' patent infringement
settlements.
Marketing, general and administrative expenses included $5,176,000
($5,165,000 related to CombiMatrix) and $12,000 of non-cash stock compensation
charges for the three months ended June 30, 2001 and 2000, respectively.
Marketing, general and administrative expenses included $11,197,000 ($10,364,000
related to CombiMatrix) and $520,000 of non-cash stock compensation charges for
the six months ended June 30, 2001 and 2000, respectively.
AMORTIZATION OF PATENTS AND GOODWILL. During the three months ended
June 30, 2001, amortization expense relating to patents and goodwill was
$638,000 as compared to $446,000 during the three months ended June 30, 2000.
During the six months ended June 30, 2001, amortization expense relating to
patents and goodwill was $1,276,000 as compared to $863,000 during the six
months ended June 30, 2000. As a result of our purchase of additional equity
interests in CombiMatrix in July 2000, we are incurring amortization expense
each quarter for periods ranging from two to twenty 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 June 30, 2001, other
income, net (primarily comprised of interest income, equity in losses of
affiliates and other) was $984,000 as compared to $21,000 for the three months
ended June 30, 2000. For the six months ended June 30, 2001, other income, net
was $2,175,000 as compared to $120,000 for the six months ended June 30, 2000.
INTEREST INCOME. During the three months ended June 30, 2001, interest
income was $1,029,000 as compared to $555,000 during the three months ended June
30, 2000. During the six months ended June 30, 2001, interest income was
$2,224,000 as compared to $921,000 during the six months ended June 30, 2000.
The increase in interest income was due to higher cash balances in the three and
six months ended June 30, 2001 as compared to the same periods in 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. In addition, during the six
months ended June 30, 2001, Soundview Technologies received a total of $13.39
million in licensing payments (before deduction of related expenses) from
several television manufacturers, which contributed to the net increase in cash
balances during the period.
EQUITY IN LOSSES OF AFFILIATES. During the three months ended June 30,
2001, equity in losses of affiliates was $55,000 as compared to $538,000 during
the three months ended June 30, 2000. Losses during the three months ended June
30, 2001 were comprised of a loss of $55,000 for our investment in Greenwich
Information Technologies, LLC, as determined by the equity method of accounting.
Losses during the three months ended June 30, 2000 were comprised of a loss of
$74,000 for our investment in Signature-mail.com, a loss of $56,000 for our
investment in Greenwich Information Technologies, LLC, a loss of $9,000 for our
investment in Whitewing Labs and a loss of $399,000 for our investment in
Mediaconnex, as determined by the equity method of accounting.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
During the six months ended June 30, 2001, equity in losses of
affiliates was $110,000 as compared to $824,000 during the six months ended June
30, 2000. Losses during the six months ended June 30, 2001 were comprised of a
loss of $110,000 for our investment in Greenwich Information Technologies, LLC,
as determined by the equity method of accounting. Losses during the six months
ended June 30, 2000 were comprised of a loss of $148,000 for our investment in
Signature-mail.com, a loss of $105,000 for our investment in Greenwich
Information Technologies, LLC, a loss of $28,000 for our investment in Whitewing
Labs and a loss of $543,000 for our investment in Mediaconnex, as determined by
the equity method of accounting.
We wrote off our equity investments in Mediaconnex, Signature-mail.com
and Whitewing Labs as of December 31, 2000.
MINORITY INTERESTS. Minority interests in the losses of consolidated
subsidiaries increased to $4,362,000 in the three months ended June 30, 2001 as
compared to $659,000 in the three months ended June 30, 2000. Minority interests
in the losses of consolidated subsidiaries increased to $9,553,000 in the six
months ended June 30, 2001 as compared to $1,120,000 in the six months ended
June 30, 2000. The increase in minority interests during the three and six
months ended June 30, 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, general and administrative
expenses. The increase in minority interests resulting from CombiMatrix's
increased losses was partially offset by minority interests in the income of
Soundview Technologies for the three and six months ended June 30, 2001.
INFLATION
Inflation has not had a significant impact on Acacia or its
subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2001, we had cash and short-term investments of $87.4
million on a consolidated basis, including discontinued operations, of which
Acacia had $40.8 million and our subsidiaries had $46.6 million. Working capital
was $56.4 million on a consolidated basis at June 30, 2001. Highlights of the
financing and commitment activities for the three months ended June 30, 2001
include the following:
o In May 2001, our majority-owned subsidiary, Advanced Material Sciences,
Inc. completed a private equity financing raising gross proceeds of $2
million through the issuance of 2,000,000 shares of common stock.
Advanced Material Sciences, Inc. issued an additional 29,750 shares of
common stock, in lieu of cash payments, and warrants to purchase
approximately 54,000 shares of common stock, in conjunction with the
private placement for finders' fees. Each common stock purchase warrant
entitles the holder to purchase one share of Advanced Material
Sciences, Inc. common stock at a price of $1.10 per share.
o In June 2001, our ownership interest in Soundview Technologies
increased from 67% to 100%, following Soundview Technologies'
completion of a stock repurchase transaction with the former minority
stockholders of the company. Soundview repurchased the stock of the
former minority stockholders in exchange for a cash payment and the
right to receive 26% of future net revenues generated by the company's
current patent portfolio, which includes its V-chip patent.
As of June 30, 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.
15
RECENT ACCOUNTING PRONOUNCEMENTS
In late July 2001, the Financial Accounting Standards Board recently
issued Statement of Financial Accounting Standards No. 141, "Business
Combinations" ("SFAS No. 141"), and Statement of Financial Accounting Standards
No. 142, "Goodwill and Other Intangible Assets" ("SFAS No. 142"). SFAS No. 141
requires that all business combinations be accounted for under a single
method--the purchase method. Use of the pooling-of-interests method is no longer
permitted. SFAS No. 141 requires that the purchase method be used for business
combinations initiated after June 30, 2001. We believe that the adoption of SFAS
No. 141 will not have a material effect on our consolidated results of
operations or financial position.
SFAS No. 142 requires that goodwill no longer be amortized to earnings,
but instead be reviewed for impairment. We will adopt SFAS No. 142 effective
January 1, 2002. The impact, if any, of the adoption of SFAS No. 142 on our
consolidated results of operations or financial position is not known at this
time.
16
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.
17
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 Electronic 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., Sony Electronics, Inc.,
the Electronics Industries Alliance, the Consumer Electronic Manufacturers
Association, Mitsubishi Digital Electronics America, Inc., Mitsubishi
Electronics America, Inc., Toshiba America Consumer Products, Inc., Matsushita
Electric Corporation of America and Sharp Electronics Corporation. Prior to the
second quarter of 2001, Soundview Technologies entered into separate
confidential settlement and/or license agreements with Philips Electronics North
America Corporation, Pioneer Electronics (USA) Inc., Hitachi America Ltd., LG
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. In the second quarter of 2001, Soundview Technologies
executed separate confidential settlement and/or license agreements with JVC
Americas Corporation and Thomson Multimedia, Inc., whereby Soundview
Technologies will receive payments and grant non-exclusive licenses of its
V-chip patent.
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 of CombiMatrix. 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. On April 4, 2001, Nanogen filed a motion to dismiss the counterclaim,
which the court denied in its entirety on July 27, 2001. CombiMatrix intends to
vigorously defend the lawsuit and pursue the counterclaim. Although we believe
that Nanogen's claims are without merit, we cannot predict the outcome of the
litigation.
ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.
18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
Acacia held its annual meeting of stockholders (the "Annual Meeting")
on May 22, 2001 in Pasadena, California. At the Annual Meeting, the following
persons were elected directors for a three-year term ending in 2004 based on the
voting results below:
Name For Withheld
---- --- --------
Robert L. Harris II 13,261,878 224,671
Fred A. de Boom 13,242,878 243,671
The following persons' terms as directors continued after the Annual
Meeting and end in 2002: Thomas B. Akin and Edward W. Frykman.
The following persons' terms as directors continued after the Annual
Meeting and end in 2003: Gerald D. Knudson and Paul R. Ryan.
The stockholders also ratified the appointment of
PricewaterhouseCoopers LLP as independent accountants of Acacia for the fiscal
year ending December 31, 2001. The voting results were as follows:
For Against Abstain
--- ------- -------
13,377,840 75,027 33,682
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Bylaws of Acacia Research Corporation,
dated as of March 28, 2000
10.1* Research & Development Agreement by and between CombiMatrix
Corporation and Roche Diagnostics GmbH, dated as of June 18,
2001
10.2* License and Supply Agreement by and between CombiMatrix
Corporation and Roche Diagnostics GmbH, dated as of July 1,
2001
- ---------------
* Confidential treatment requested for portions of these exhibits.
(b) Reports on Form 8-K
The Company has not filed any Reports on Form 8-K during this reporting
period.
19
SIGNATURES
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: August 10, 2001
20
EXHIBIT INDEX
EXHIBIT
NUMBER EXHIBIT
- ------ -------
3.1 Amended and Restated Bylaws of Acacia Research Corporation, dated as of
March 28, 2000
10.1* Research & Development Agreement by and between CombiMatrix
Corporation and Roche Diagnostics GmbH, dated as of June 18, 2001
10.2* License and Supply Agreement by and between CombiMatrix Corporation and
Roche Diagnostics GmbH, dated as of July 1, 2001
- ---------------
* Confidential treatment requested for portions of these exhibits.