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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 SEPTEMBER 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 November 9, 2001, the registrant had 17,761,302 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 September 30, 2001
and December 31, 2000................................................................ 3
Unaudited Consolidated Statements of Operations and Comprehensive Loss for the
Three Months Ended September 30, 2001 and 2000 and the Nine Months Ended
September 30, 2001 and 2000.......................................................... 4
Unaudited Consolidated Statements of Cash Flows for the
Nine Months Ended September 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................................................................ 13
Item 3. Quantitative and Qualitative Disclosures About Market Risk........................... 18
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................................................... 19
Item 2. Changes in Securities and Use of Proceeds............................................ 19
Item 3. Defaults upon Senior Securities...................................................... 19
Item 4. Submission of Matters to a Vote of Security Holders.................................. 20
Item 5. Other Information.................................................................... 20
Item 6. Exhibits and Reports on Form 8-K..................................................... 20
SIGNATURES........................................................................................ 21
2
ACACIA RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE AND PER SHARE INFORMATION)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2001 2000
------------ ------------
ASSETS
Current assets
Cash and cash equivalents ............................................. $ 40,234 $ 35,953
Other receivables ..................................................... 1,376 68
Prepaid expenses ...................................................... 161 369
Short-term investments ................................................ 49,567 40,600
Other assets .......................................................... 2,507 1,034
------------ ------------
Total current assets ............................................. 93,845 78,024
Property and equipment, net of accumulated depreciation .................... 5,510 3,727
Investment in affiliate, at equity ......................................... 184 346
Investment in affiliate, at cost ........................................... 3,000 3,000
Patents, net of accumulated amortization ................................... 7,711 9,038
Goodwill, net of accumulated amortization .................................. 4,126 3,904
Other assets ............................................................... 219 477
------------ ------------
$ 114,595 $ 98,516
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable, accrued expenses and other .......................... $ 8,129 $ 7,767
Accrued stock compensation ............................................ 31,163 10,392
Current portion of deferred revenues .................................. 2,159 --
Current portion of capital lease obligation ........................... 760 --
------------ ------------
Total current liabilities ........................................ 42,211 18,159
Deferred income taxes ...................................................... 2,571 2,689
Deferred revenues, net of current portion .................................. 1,000 --
Capital lease obligation, net of current portion ........................... 2,167 --
------------ ------------
Total liabilities ................................................ 47,949 20,848
------------ ------------
Minority interests ......................................................... 3,181 17,524
------------ ------------
Stockholders' equity
Common stock, par value $0.001 per share; 60,000,000 shares authorized;
19,530,911 (as adjusted for stock dividend declared. See Note 6) and
16,090,587 shares issued and outstanding as of September 30, 2001
and December 31, 2000, respectively ................................ 20 16
Additional paid-in capital ............................................ 157,858 116,017
Warrants to purchase common stock ..................................... 199 86
Unrealized gain on short-term investments ............................. 184 77
Unrealized loss on foreign currency translation ....................... (4) --
Accumulated deficit ................................................... (94,792) (56,052)
------------ ------------
Total stockholders' equity ....................................... 63,465 60,144
------------ ------------
$ 114,595 $ 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 NINE MONTHS ENDED
--------------------------- ---------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2001 2000 2001 2000
------------- ------------- ------------- -------------
Revenues:
License fee income .................................................... $ 10,740 $ -- $ 23,180 $ --
Grant revenue ......................................................... 91 -- 365 17
Other revenue ......................................................... -- 18 -- 40
------------- ------------- ------------- -------------
Total revenues ........................................................ 10,831 18 23,545 57
------------- ------------- ------------- -------------
Operating expenses:
Research and development expenses (including stock compensation
charges of $1,712 and $1,153 for the three months ended
September 2001 and 2000, respectively; and $6,123 and $1,153
for the nine months ended September 2001 and 2000, respectively) ... 5,865 5,947 16,077 7,577
Marketing, general and administrative expenses (including stock
compensation charges of $3,486 and $1,167 for the three months
ended September 2001 and 2000, respectively; and $14,684 and
$1,687 for the nine months ended September 2001 and 2000,
respectively) ...................................................... 12,008 5,226 38,556 10,133
Amortization of patents and goodwill .................................. 654 708 1,930 1,571
Loss on disposal of consolidated subsidiary ........................... -- -- 128 --
------------- ------------- ------------- -------------
Total operating expenses .............................................. 18,527 11,881 56,691 19,281
------------- ------------- ------------- -------------
Operating loss ........................................................ (7,696) (11,863) (33,146) (19,224)
------------- ------------- ------------- -------------
Other income (expense):
Interest income ....................................................... 839 983 3,064 1,904
Interest expense ...................................................... (23) -- (23) (1)
Unrealized gain on short-term investments ............................. 24 -- 24 --
Equity in losses of affiliates ........................................ (52) (529) (162) (1,353)
Other income .......................................................... 8 3 68 27
------------- ------------- ------------- -------------
Total other income .................................................... 796 457 2,971 577
------------- ------------- ------------- -------------
Loss from continuing operations before income taxes and minority interests . (6,900) (11,406) (30,175) (18,647)
(Provision) benefit for income taxes ....................................... (778) 38 (1,306) 31
------------- ------------- ------------- -------------
Loss from continuing operations before minority interests .................. (7,678) (11,368) (31,481) (18,616)
Minority interests ......................................................... 4,851 2,528 14,403 3,648
------------- ------------- ------------- -------------
Loss from continuing operations ............................................ (2,827) (8,840) (17,078) (14,968)
Discontinued operations
Loss from discontinued operations of Soundbreak.com ................... -- (2,057) -- (5,728)
------------- ------------- ------------- -------------
Loss before cumulative effect of change in accounting principle ............ (2,827) (10,897) (17,078) (20,696)
Cumulative effect of change in accounting principle due to beneficial
conversion feature ...................................................... -- -- -- (246)
------------- ------------- ------------- -------------
Net loss ................................................................... (2,827) (10,897) (17,078) (20,942)
Unrealized gain on short-term investments ............................. 68 -- 107 --
Unrealized loss on foreign currency translation ....................... (4) -- (4) --
------------- ------------- ------------- -------------
Comprehensive loss ......................................................... $ (2,763) $ (10,897) $ (16,975) $ (20,942)
============= ============= ============= =============
Loss per common share (as adjusted for stock dividend declared .............
See Note 6):
Basic
Loss from continuing operations ....................................... $ (0.14) $ (0.51) $ (0.89) $ (0.93)
Loss from discontinued operations ..................................... $ -- $ (0.12) $ -- $ (0.36)
Cumulative effect of change in accounting principle ................... $ -- $ -- $ -- $ (0.02)
------------- ------------- ------------- -------------
Net loss ................................................................ $ (0.14) $ (0.63) $ (0.89) $ (1.31)
============= ============= ============= =============
Diluted
Loss from continuing operations ....................................... $ (0.14) $ (0.51) $ (0.89) $ (0.93)
Loss from discontinued operations ..................................... $ -- $ (0.12) $ -- $ (0.36)
Cumulative effect of change in accounting principle ................... $ -- $ -- $ -- $ (0.02)
------------- ------------- ------------- -------------
Net loss ................................................................ $ (0.14) $ (0.63) $ (0.89) $ (1.31)
============= ============= ============= =============
Weighted average number of common and potential common shares outstanding
used in computation of loss per share (as adjusted for stock dividend
declared. See Note 6):
Basic ................................................................. 19,522,906 17,297,423 19,222,633 16,012,266
Diluted ............................................................... 19,522,906 17,297,423 19,222,633 16,012,266
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
4
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
NINE MONTHS ENDED
---------------------------
SEPTEMBER 30, SEPTEMBER 30,
2001 2000
------------ ------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Loss from continuing operations .............................................. $ (17,078) $ (14,968)
Adjustments to reconcile net loss from continuing operations
to net cash used in operating activities:
Depreciation and amortization ....................................... 2,724 1,805
Equity in losses of affiliates ...................................... 162 1,353
Minority interests .................................................. (14,403) (3,648)
Compensation expense relating to stock options/warrants ............. 20,807 2,840
Charge for acquired in-process research and development ............. -- 2,508
Deferred tax benefit ................................................ (118) (41)
Other ............................................................... 206 91
Changes in assets and liabilities, net of effects of acquisitions:
Other receivables, prepaid expenses and other assets ................ (1,650) (456)
Accounts payable, accrued expenses and other liabilities ............ 413 687
Deferred revenue .................................................... 2,500 --
------------ ------------
Net cash used in operating activities of continuing operations ...... (6,437) (9,829)
Net cash used in operating activities of discontinued operations .... (1,931) (13,979)
------------ ------------
Net cash used in operating activities ............................... (8,368) (23,808)
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital contribution to equity investments .......................... -- (54)
Purchase of additional equity in consolidated subsidiaries .......... -- (628)
Purchase of property and equipment .................................. (2,993) (1,633)
Proceeds from sale of property and equipment ........................ 524 --
Proceeds from sale and leaseback arrangement ........................ 3,000 --
Purchase of short-term investments .................................. (33,539) (40,863)
Sale of short-term investments ...................................... 24,743 --
Purchase of common stock from minority stockholders of subsidiary ... (1,101) --
------------ ------------
Net cash used in investing activities of continuing operations ...... (9,366) (43,178)
Net cash provided by (used in) investing activities of discontinued
operations ....................................................... 137 (990)
------------ ------------
Net cash used in investing activities ............................... (9,229) (44,168)
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from exercise of stock options and warrants ................ 1,648 16,840
Capital contributions from minority stockholders of subsidiaries,
net of issuance costs ........................................... 1,749 35,673
Proceeds from sale of common stock, net of issuance costs ........... 18,351 22,317
Principal payment on capital lease obligation ....................... (73) --
------------ ------------
Net cash provided by financing activities ........................... 21,675 74,830
------------ ------------
Increase in cash and cash equivalents ............................... 4,078 6,854
Cash and cash equivalents, beginning ................................ 36,163 37,631
Effect of exchange rate on cash ..................................... (7) --
------------ ------------
Cash and cash equivalents, ending ................................... $ 40,234 $ 44,485
============ ============
Schedule of non-cash investing and financing activities:
Purchase of equipment under capital lease agreement ..................... $ (3,000) $ --
============ ============
Capital lease obligation incurred ....................................... $ 3,000 $ --
============ ============
Accrued payments for purchase of common stock from minority stockholders
of subsidiary ...................................................... $ 1,549 $ --
============ ============
Issuance of common stock for additional equity in consolidated subsidiary $ -- $ 11,634
============ ============
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, (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, and (3) Greenwich Information Technologies, LLC
("Greenwich Information Technologies"), a wholly owned subsidiary that owns an
international portfolio of video-on-demand and audio-on-demand patents. As of
September 30, 2001, we held a 33% interest in Greenwich Information
Technologies. In November 2001, we increased our ownership of Greenwich
Information Technologies from 33% to 100% (see Note 6).
We also hold a minority-ownership position in Advanced Data Exchange
Corporation, which provides an electronic exchange to facilitate trading
relationships and document exchange.
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 1.10 shares of our common stock at a price of $19.09 per
share (as adjusted for stock dividend declared. See Note 6) 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 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, for finders' fees in
connection with the private placement. 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.
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 quarters 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. In the third quarter of 2001,
Soundview Technologies executed separate license agreements with Matsushita
Electric Industrial Co., Ltd. and Orion Electric Company, and received an
additional scheduled payment from Philips Electronics. Certain of these license
agreements constitute settlements of patent infringement litigation brought by
Soundview Technologies. As of September 30, 2001, we have received payments
totaling $24,630,000 from the settlement and license agreements, and have
granted 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, $10,000,000 of the license payments during
the three months ended June 30, 2001 and $10,740,000 of the license payments
during the three months ended September 30, 2001. Licensing payments received
during the nine months ended September 30, 2001 totaling $1,500,000 have been
recorded as deferred revenues pursuant to the terms of the respective
agreements.
6
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
1. DESCRIPTION OF BUSINESS (Continued)
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 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 terrestrial laboratories and in space.
We were incorporated on January 25, 1993 under the laws of the State of
California. In December 1999, we changed our state of incorporation from
California to Delaware.
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 September 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 period'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 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.
7
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
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 (as adjusted for stock
dividend declared. See Note 6):
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------- -----------------------
2001 2000 2001 2000
---------- ---------- ---------- ----------
Weighted Average Number of Common Shares Outstanding
Used in Computation of Basic EPS ....................... 19,522,906 17,297,423 19,222,633 16,012,266
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 .. 19,522,906 17,297,423 19,222,633 16,012,266
========== ========== ========== ==========
(a) Potential common shares of 165,535 and 1,186,562 for the three months ended
September 30, 2001 and 2000, respectively, have been excluded from the per
share calculation because the effect of their inclusion would be
anti-dilutive. Potential common shares of 724,313 and 1,368,220 for the
nine months ended September 30, 2001 and 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, money market accounts and other marketable securities. 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." Certain of our
investments are classified as available-for-sale, which are reported at fair
value with related unrealized gains and losses in the value of such securities
recorded as a separate component of comprehensive income (loss) in stockholders'
equity until realized. Certain of our investments are classified as trading
securities, which are reported at fair value. Related unrealized gains and
losses in the value of such securities are included in net income (loss) in the
consolidated statements of operations and comprehensive loss.
The fair value of our investments is primarily determined by quoted
market prices. Realized and unrealized gains and losses are recorded based on
the specific identification method. For all investment securities, unrealized
losses that are other than temporary are recognized in net income.
RECENT ACCOUNTING PRONOUNCEMENTS-In July 2001, the Financial Accounting
Standards Board issued Statement of Financial Accounting Standards ("SFAS") No.
141, "Business Combinations" ("SFAS No. 141"), and SFAS 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.
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144"). SFAS No. 144 provides specific guidance for long-lived assets to be
disposed of by sale, abandoned, exchanged for a similar productive asset or
distributed to owners in a spin-off. The impact, if any, of the adoption of SFAS
No. 144 on our consolidated results of operations or financial position is not
known at this time.
8
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
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 September 30, 2001 and 2000 (in
thousands):
CORPORATE SOUNDVIEW
THREE MONTHS ENDED SEPTEMBER 30, 2001 PORTFOLIO COMBIMATRIX TECHNOLOGIES OTHER TOTAL
- ------------------------------------- ------------ ------------ ------------ ------------ ------------
Revenue .......................................... $ -- $ 91 $ 10,740 $ -- $ 10,831
Amortization of patents and goodwill ............. 634 -- 20 -- 654
Other income ..................................... 8 -- -- -- 8
Interest income .................................. 365 386 48 40 839
Interest expense ................................. -- 23 -- -- 23
Equity in losses of affiliate .................... 52 -- -- -- 52
Loss (income) before minority interests and income
taxes ......................................... 1,440 11,399 (6,063) 124 6,900
Segment assets ................................... 51,978 37,582 12,256 7,825 109,641
Investment in affiliate, at equity ............... 184 -- -- -- 184
Investment in affiliate, at cost ................. 3,000 -- -- -- 3,000
Capital expenditures ............................. -- 390 1 -- 391
CORPORATE SOUNDVIEW
THREE MONTHS ENDED SEPTEMBER 30, 2000 PORTFOLIO COMBIMATRIX TECHNOLOGIES OTHER TOTAL
- ------------------------------------- ------------ ------------ ------------ ------------ ------------
Revenue .......................................... $ -- $ -- $ -- $ 18 $ 18
Amortization of patents and goodwill ............. 704 -- 4 -- 708
Other income ..................................... 2 -- -- 1 3
Interest income .................................. 351 609 -- 23 983
Equity in losses of affiliates ................... 529 -- -- -- 529
Loss before minority interests and income
taxes ......................................... 5,099 5,132 67 1,108 11,406
Segment assets ................................... 45,540 51,182 203 2,848 99,773
Investments in affiliates, at equity ............. 3,336 -- -- -- 3,336
Investment in affiliate, at cost ................. 3,000 -- -- -- 3,000
Capital expenditures ............................. 114 780 3 267 1,164
9
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
3. SEGMENT INFORMATION (Continued)
The table below presents information about our reportable segments in
continuing operations for the nine months ended September 30, 2001 and 2000 (in
thousands):
CORPORATE SOUNDVIEW
NINE MONTHS ENDED SEPTEMBER 30, 2001 PORTFOLIO COMBIMATRIX TECHNOLOGIES OTHER TOTAL
- ------------------------------------- ------------ ------------ ------------ ------------ ------------
Revenue........................................... $ -- $ 365 $ 23,130 $ 50 $ 23,545
Amortization of patents and goodwill.............. 1,895 -- 30 5 1,930
Other income...................................... 68 -- -- -- 68
Interest income................................... 1,263 1,602 84 115 3,064
Interest expense.................................. -- 23 -- -- 23
Equity in losses of affiliate..................... 162 -- -- -- 162
Loss (income) before minority interests and income
taxes.......................................... 5,499 36,899 (12,471) 248 30,175
Segment assets.................................... 51,978 37,582 12,256 7,825 109,641
Investment in affiliate, at equity................ 184 -- -- -- 184
Investment in affiliate, at cost.................. 3,000 -- -- -- 3,000
Capital expenditures.............................. 37 2,949 7 -- 2,993
CORPORATE SOUNDVIEW
NINE MONTHS ENDED SEPTEMBER 30, 2000 PORTFOLIO COMBIMATRIX TECHNOLOGIES OTHER TOTAL
- ------------------------------------- ------------ ------------ ------------ ------------ ------------
Revenue........................................... $ -- $ 17 $ -- $ 40 $ 57
Amortization of patents and goodwill.............. 1,560 -- 11 -- 1,571
Other income...................................... 26 -- -- 1 27
Interest income................................... 989 845 -- 70 1,904
Interest expense.................................. 1 -- -- -- 1
Equity in losses of affiliates.................... 1,353 -- -- -- 1,353
Loss before minority interests and income
taxes.......................................... 9,499 7,317 218 1,613 18,647
Segment assets.................................... 45,540 51,182 203 2,848 99,773
Investments in affiliates, at equity.............. 3,336 -- -- -- 3,336
Investment in affiliate, at cost.................. 3,000 -- -- -- 3,000
Capital expenditures.............................. 472 888 3 270 1,633
10
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, the nine months ended September 30, 2001, and the non-cash deferred stock
compensation amortization expense to be recorded for each of the next thirteen
quarters from October 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
------------
Gross CombiMatrix deferred non-cash stock compensation charges
(excluding options granted subsequent to December 31, 2000) 53,769,000
Less amounts amortized to date and other items:
Amortization through December 31, 2000 (9,709,000)
Amortization for the nine months ended September 30, 2001
(net of $1,192,000 of amortization reversal related to
forfeitures of certain unvested options and other) (19,138,000)
Forfeitures of certain unvested options (to be reflected
as a reduction in subsequent quarterly amortization
through 2004) (4,146,000)
------------
Remaining deferred non-cash stock compensation as of
September 30, 2001 (excluding options granted subsequent
to December 31, 2000) $20,776,000
============
During the three months ended September 30, 2001, certain unvested
options were forfeited. Pursuant to the provisions of APB Opinion No. 25,
"Accounting for Stock Issued to Employees," and related interpretations, the
reversal of previously recognized non-cash stock compensation expense on
forfeited unvested stock options, in the amount of $1,192,000, has been
reflected in the consolidated statements of operations and comprehensive loss as
a reduction in the third quarter 2001 non-cash stock compensation expense. In
addition, the forfeiture of certain unvested options during the third quarter of
2001 will result in a reduction of the gross non-cash deferred stock
compensation expense originally scheduled to be amortized in future periods.
Liabilities for recognized non-cash stock compensation expenses through
September 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 September 30, 2001 represents the future
non-cash deferred stock compensation expense which will be amortized and
reflected in our consolidated statements of operations and comprehensive loss as
non-cash stock compensation charges over the next thirteen quarters from October
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.
11
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(CONTINUED)
5. LEASES
In September 2001 CombiMatrix entered into a sale and leaseback
arrangement with a bank, providing up to $7,000,000 in financing for equipment
and other capital purchases. Pursuant to the terms of the agreement, certain
equipment and leasehold improvements, totaling $2,557,000 in net book value were
sold to the bank at a purchase price of $3,000,000, resulting in a deferred gain
on the sale of assets of $443,000. The deferred gain is being amortized over 3
years, the term of the related lease arrangement. In addition, CombiMatrix
entered into a capital lease arrangement to lease the fixed assets from the
bank. The capital lease agreement provides CombiMatrix with the option to
purchase the equipment for a nominal amount at the end of the lease term, which
expires in September 2004.
Future minimum lease payments under scheduled capital leases that have
initial or remaining noncancellable terms in excess of one year are as follows:
YEAR ENDING
DECEMBER 31,
------------
2001 $ 190,000
2002 1,141,000
2003 1,141,000
2004 855,000
-------------
Total minimum payments 3,327,000
Amount representing interest (400,000)
-------------
Obligations under capital lease 2,927,000
Obligations under capital lease - current (760,000)
-------------
Obligations under capital lease - noncurrent $ 2,167,000
=============
6. SUBSEQUENT EVENTS
On October 22, 2001, our Board of Directors declared a ten percent
(10%) stock dividend. The stock dividend is payable on December 5, 2001 for
stockholders of record as of November 21, 2001. Pursuant to applicable SEC
reporting guidelines, the ten percent stock dividend has been reflected
retroactively in the September 30, 2001 consolidated balance sheet. Accordingly,
common stock outstanding at September 30, 2001 has been increased by ten percent
or 1,775,537 shares and the fair value of the stock dividend payable on December
5, 2001 (based on market value of our common stock on the date of declaration as
adjusted for the dilutive effect of the stock dividend declared) has been
reflected at September 30, 2001 as a reclassification of accumulated deficit in
the amount of $21,662,000 to permanent capital, represented by our common stock
and additional paid-in capital accounts. Pursuant to guidance set forth in SFAS
No. 128, "Earnings per Share," the per-share computations for all periods
presented in the consolidated statements of operations and comprehensive loss
have been adjusted retroactively based on the ten percent stock dividend
declared.
In October 2001, our majority-owned subsidiary, CombiMatrix, formed a
joint venture with Marubeni Japan. The joint venture, based in Tokyo, will focus
on development and licensing opportunities for CombiMatrix's biochip technology
with pharmaceutical and biotechnology companies in the Japanese market. Marubeni
provided the funding and acquired a minority interest in the joint venture.
In November 2001, we increased our ownership of Greenwich Information
Technologies from 33% to 100% through the purchase of the ownership interest of
Greenwich Information Technologies' other member. Greenwich Information
Technologies owns a worldwide portfolio of pioneering patents relating to audio
and video transmission and receiving systems, commonly known as audio-on-demand
and video-on-demand, used for distributing content via computer networks, cable
television systems and direct broadcasting satellite systems. Greenwich
Information Technologies will operate as a wholly owned consolidated subsidiary
of Acacia Research Corporation.
12
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 September 30, 2001 and on our operations for the period from January
1, 2001 to September 30, 2001. The discussion compares the activities for the
three and nine months ended September 30, 2001 to the activities for the three
and nine months ended September 30, 2000. This information should be read in
conjunction with the accompanying consolidated financial statements and notes
thereto.
RESULTS OF OPERATIONS
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- -----------------------------
2001 2000 2001 2000
------------- ------------- ------------- -------------
Revenues .......................................... $ 10,831,000 $ 18,000 $ 23,545,000 $ 57,000
Operating expenses ................................ (18,527,000) (11,881,000) (56,691,000) (19,281,000)
Other income, net ................................. 796,000 457,000 2,971,000 577,000
Minority interests ................................ 4,851,000 2,528,000 14,403,000 3,648,000
Loss from discontinued operations ................. -- (2,057,000) -- (5,728,000)
Cumulative effect of change in accounting principle -- -- -- (246,000)
(Provision) benefit for income taxes .............. (778,000) 38,000 (1,306,000) 31,000
------------- ------------- ------------- -------------
Net loss .......................................... $ (2,827,000) $(10,897,000) $(17,078,000) $(20,942,000)
============= ============= ============= =============
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
COMPARISON OF THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2001 TO THE THREE
AND NINE MONTHS ENDED SEPTEMBER 30, 2000
LICENSE FEE INCOME. During the three months ended September 30, 2001,
license fee income was $10,740,000 as compared to no license fee income during
the three months ended September 30, 2000. During the nine months ended
September 30, 2001, license fee income was $23,180,000 as compared to no license
fee income during the nine months ended September 30, 2000. The increase in
license fee income for the three and nine month periods ended September 30, 2001
resulted primarily from the settlement of patent infringement litigation brought
by Soundview Technologies and includes settlement amounts received from eleven
of the twelve television manufacturers with whom we have executed separate
license and or settlement agreements during the nine months ended September 30,
2001. Pursuant to the terms of the respective settlement agreements with each of
the 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 September 30, 2001, grant
revenue was $91,000 as compared to no grant revenue during the three months
ended September 30, 2000. During the nine months ended September 30, 2001, grant
revenue was $365,000 as compared to $17,000 during the nine months ended
September 30, 2000. The increase in grant revenue during the three and nine
month periods ended September 30, 2001 resulted from CombiMatrix's continuing
performance under a Phase II Small Business Innovative Research Department of
Defense contract.
OTHER REVENUE. During the three and nine months ended September 30,
2001, there were no other revenues as compared to $18,000 and $40,000 during the
three and nine months ended September 30, 2000, respectively. 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 $18,527,000
($11,840,000 related to CombiMatrix) during the three months ended September 30,
2001 from $11,881,000 ($5,741,000 related to CombiMatrix) during the three
months ended September 30, 2000. Total operating expenses increased to
$56,691,000 ($38,802,000 related to CombiMatrix) during the nine months ended
September 30, 2001 from $19,281,000 ($8,178,000 related to CombiMatrix) during
the nine months ended September 30, 2000. The increase in operating expenses for
the three and nine months ended September 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, $5.2 million (three
months) and $20.8 million (nine 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, 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
September 30, 2001, research and development expense was $5,865,000, all of
which related to CombiMatrix, as compared to $5,947,000, of which $3,413,000
related to CombiMatrix, during the three months ended September 30, 2000. During
the nine months ended September 30, 2001, research and development expense was
$16,077,000, all of which related to CombiMatrix, as compared to $7,577,000, of
which $4,992,000 related to CombiMatrix, during the nine months ended September
30, 2000. Research and development expenses on a consolidated basis were
relatively consistent for the three months ended September 30, 2001 and 2000 due
to the inclusion of $2,508,000 of acquired in-process research and development
expense resulting from the acquisition of additional ownership positions from
existing CombiMatrix stockholders by Acacia in July 2000. Excluding the acquired
in-process research and development expense recorded in the 2000 period,
research and development expenses, all of which related to CombiMatrix,
increased to $5,865,000 for the three months ended September 30, 2001 as
compared to $3,439,000 for the comparable 2000 period. The increase in research
and development expense, excluding acquired in-process research and development
charges, for the three and nine months ended September 30, 2001 as compared to
the same periods in 2000 was due to an increase in CombiMatrix 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.
14
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
For the three months ended September 30, 2001, research and development
expense included non-cash stock compensation charges, all of which related to
CombiMatrix, totaling $1,712,000. For the nine months ended September 30, 2001,
research and development expense included non-cash stock compensation charges,
all of which related to CombiMatrix, totaling $6,123,000. Non-cash stock
compensation charges for the three and nine months ended September 30, 2001 are
net of $380,000 of non-cash stock compensation expense reversal related to the
forfeiture of certain unvested stock options during the third quarter of 2001.
For the three and nine months ended September 30, 2000, research and development
expense for non-cash stock compensation was $1,153,000.
MARKETING, GENERAL AND ADMINISTRATIVE EXPENSES. We incurred marketing,
general and administrative expenses of $12,008,000 ($5,976,000 related to
CombiMatrix) for the three months ended September 30, 2001, compared to
$5,226,000 ($2,328,000 related to CombiMatrix) during the three months ended
September 30, 2000. We incurred marketing, general and administrative expenses
of $38,556,000 ($22,724,000 related to CombiMatrix) for the nine months ended
September 30, 2001, compared to $10,133,000 ($3,186,000 related to CombiMatrix)
during the nine months ended September 30, 2000. The increase in marketing,
general and administrative expenses for the three and nine months ended
September 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 $3,486,000
($3,475,000 related to CombiMatrix) and $1,167,000 of non-cash stock
compensation charges for the three months ended September 30, 2001 and 2000,
respectively. Marketing, general and administrative expenses included
$14,684,000 ($13,839,000 related to CombiMatrix) and $1,687,000 of non-cash
stock compensation charges for the nine months ended September 30, 2001 and
2000, respectively. Non-cash stock compensation charges for the three and nine
months ended September 30, 2001 are net of $812,000 of non-cash stock
compensation expense reversal related to the forfeiture of certain unvested
stock options during the third quarter of 2001.
AMORTIZATION OF PATENTS AND GOODWILL. During the three months ended
September 30, 2001, amortization expense relating to patents and goodwill was
$654,000 as compared to $708,000 during the three months ended September 30,
2000. During the nine months ended September 30, 2001, amortization expense
relating to patents and goodwill was $1,930,000 as compared to $1,571,000 during
the nine months ended September 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.
OTHER INCOME, NET. For the three months ended September 30, 2001, other
income, net (primarily comprised of interest income, equity in losses of
affiliates and other) was $796,000 as compared to $457,000 for the three months
ended September 30, 2000. For the nine months ended September 30, 2001, other
income, net was $2,971,000 as compared to $577,000 for the nine months ended
September 30, 2000.
INTEREST INCOME. During the three months ended September 30, 2001,
interest income was $839,000 as compared to $983,000 during the three months
ended September 30, 2000. During the nine months ended September 30, 2001,
interest income was $3,064,000 as compared to $1,904,000 during the nine months
ended September 30, 2000. The decrease in interest income for the three months
ended September 30, 2001 as compared to the same period in 2000 was primarily
attributable to a decrease in interest rates on our short-term investments
related to sharp interest rate cuts by the Federal Open Market Committee and
other external economic factors negatively impacting rates of return on
short-term investments, occurring during the third quarter of 2001. The increase
in interest income during the nine months ended September 30, 2001 was due to
higher cash balances during the nine months ended September 30, 2001 as compared
to the same period in 2000 resulting from private equity financings and the
receipt of licensing payments by Soundview Technologies.
15
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
EQUITY IN LOSSES OF AFFILIATES. During the three months ended September
30, 2001, equity in losses of affiliates was $52,000 as compared to $529,000
during the three months ended September 30, 2000. Losses during the three months
ended September 30, 2001 were comprised of a loss of $52,000 for our investment
in Greenwich Information Technologies, as determined by the equity method of
accounting. Losses during the three months ended September 30, 2000 were
comprised of a loss of $91,000 for our investment in Signature-mail.com, a loss
of $51,000 for our investment in Greenwich Information Technologies, a loss of
$65,000 for our investment in Whitewing Labs and a loss of $322,000 for our
investment in Mediaconnex, as determined by the equity method of accounting.
During the nine months ended September 30, 2001, equity in losses of
affiliates was $162,000 as compared to $1,353,000 during the nine months ended
September 30, 2000. Equity in losses of affiliates during the nine months ended
September 30, 2001 was comprised of a loss of $162,000 for our investment in
Greenwich Information Technologies, as determined by the equity method of
accounting. Losses during the nine months ended September 30, 2000 were
comprised of a loss of $240,000 for our investment in Signature-mail.com, a loss
of $156,000 for our investment in Greenwich Information Technologies, a loss of
$93,000 for our investment in Whitewing Labs and a loss of $864,000 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 $4,851,000 in the three months ended September 30,
2001 as compared to $2,528,000 in the three months ended September 30, 2000.
Minority interests in the losses of consolidated subsidiaries increased to
$14,403,000 in the nine months ended September 30, 2001 as compared to
$3,648,000 in the nine months ended September 30, 2000. The increase in minority
interests during the three and nine months ended September 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 nine months
ended September 30, 2001.
PROVISION FOR INCOME TAXES. During the three months ended September
30, 2001, the provision for income taxes was $778,000 as compared to a benefit
of $38,000 during the three months ended September 30, 2000. During the nine
months ended September 30, 2001, the provision for income taxes was $1,306,000
as compared to a benefit of $31,000 during the nine months ended September 30,
2000. The increase in the provision for income taxes for the three and nine
months ended September 30, 2001 was primarily due to a significant increase in
net income generated by our Soundview Technologies subsidiary related to its
patent infringement settlement and patent licensing activities as compared to
the 2000 periods.
INFLATION
Inflation has not had a significant impact on Acacia or its
subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
At September 30, 2001, we had cash and short-term investments of $89.8
million on a consolidated basis, including discontinued operations, of which
Acacia had $37.3 million and our subsidiaries had $52.5 million. Working capital
was $51.6 million on a consolidated basis at September 30, 2001. Highlights of
the financing and commitment activities for the three months ended September 30,
2001 include the following:
o In September 2001, CombiMatrix entered into a sale and leaseback
arrangement with a bank, providing up to $7.0 million in financing
for equipment and other capital purchases. Pursuant to the terms of
the agreement, certain equipment and leasehold improvements,
totaling $2.6 million in net book value were sold to the bank at a
purchase price of $3.0 million resulting in a deferred gain on the
sale of assets of $0.4 million. In addition, CombiMatrix entered in
a capital lease arrangement to lease the fixed assets from the bank.
The capital lease agreement provides CombiMatrix with the option to
purchase the equipment for a nominal amount at the end of the lease
term, which expires in September 2004.
16
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (Continued)
LIQUIDITY AND CAPITAL RESOURCES (Continued)
As of September 30, 2001, we have no significant commitments for
capital expenditures. 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.
RECENT ACCOUNTING PRONOUNCEMENTS
In July 2001, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards ("SFAS") No. 141, "Business Combinations"
("SFAS No. 141"), and SFAS 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.
In August 2001, the Financial Accounting Standards Board issued SFAS
No. 144, "Accounting for Impairment or Disposal of Long-Lived Assets" ("SFAS No.
144"). SFAS No. 144 provides specific guidance for long-lived assets to be
disposed of by sale, abandoned, exchanged for a similar productive asset or
distributed to owners in a spin-off. The impact, if any, of the adoption of SFAS
No. 144 on our consolidated results of operations or financial position is not
known at this time.
17
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.
18
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
third 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., Sanyo Manufacturing Corporation, JVC Americas
Corporation and Thomson Multimedia, Inc., whereby Soundview Technologies will
receive payments and grant non-exclusive licenses of its V-chip patent. In the
third quarter of 2001, Soundview Technologies executed separate confidential
settlement and/or license agreements with Orion Electric Co., Ltd. and
Matsushita Electric Industrial Co., Ltd. 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.
19
PART II--OTHER INFORMATION--(CONTINUED)
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
None.
(b) Reports on Form 8-K
On July 25, 2001, Acacia filed a Current Report on Form 8-K to report
results for the quarter ended June 30, 2001.
20
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: November 12, 2001
21