FILED PURSUANT TO RULE 424(B)(5)
REGISTRATION NO. 333-128367
REGISTRATION NO. 333-112885
PROSPECTUS SUPPLEMENT
TO PROSPECTUS DATED MARCH 17, 2004
6,385,907 SHARES
WARRANTS TO PURCHASE 1,596,478 SHARES
ACACIA RESEARCH CORPORATION [LOGO HERE]
ACACIA RESEARCH - COMBIMATRIX COMMON STOCK
$ 1.65 PER SHARE
- -----------------------------------------------------------------------------------------------------------
o Acacia Research Corporation is offering 6,385,907 o Trading symbol: Nasdaq National Market --CBMX
shares of its Acacia Research - CombiMatrix common
stock and warrants to purchase up to 1,596,478
shares of its Acacia Research - CombiMatrix
common stock. Each warrant has an exercise price
of $2.40 per share, has a term of 5 years and
is exercisable beginning on the date of issue.
o The last reported sale price of our Acacia Research
- CombiMatrix Common Stock on September 15, 2005
was $1.98 per share.
________________
THIS INVESTMENT INVOLVES A HIGH DEGREE OF RISK. SEE "RISK FACTORS" BEGINNING ON PAGE 2 OF THE
ACCOMPANYING PROSPECTUS.
===========================================================================================================
PER SHARE TOTAL
--------- -----------------
Public offering price............................................... $ 1.6500 $ 10,536,747
Placement agency fees............................................... $ 0.1155 $ 737,572
Proceeds, before expenses, to Acacia Research Corporation........... $ 1.5345 $ 9,799,175
===========================================================================================================
Delivery of the shares and warrants will be made on or about September 21, 2005.
Certain purchaser funds will be deposited into an escrow account and held until
jointly released by us and the placement agent on the date the shares and
warrants are to be delivered to the purchasers. All funds received will be held
in a non-interest bearing account.
Piper Jaffray & Co. is acting as placement agent in this offering. Because there
is no minimum offering amount required as a condition to closing in this
offering, the placement agency fees and net proceeds to us, if any, in this
offering may be less than the maximum offering amounts set forth above.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OF ANYONE'S INVESTMENT IN THESE SECURITIES OR DETERMINED
IF THIS PROSPECTUS SUPPLEMENT AND THE ACCOMPANYING PROSPECTUS ARE TRUTHFUL OR
COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
PIPER JAFFRAY
The date of this prospectus supplement is September 15, 2005.
TABLE OF CONTENTS
PAGE
----
Prospectus Supplement
About This Prospectus Supplement.......................................S-1
Information Incorporated by Reference..................................S-2
Description of Warrants................................................S-3
Dilution...............................................................S-4
Plan of Distribution...................................................S-5
Legal Matters..........................................................S-6
Prospectus
About This Prospectus....................................................1
Our Company..............................................................1
Risk Factors.............................................................2
Forward-Looking Statements..............................................22
Use of Proceeds.........................................................22
Description of our Capital Stock........................................23
Description of Warrants.................................................29
Plan of Distribution....................................................30
Experts.................................................................31
Legal Matters...........................................................31
Where You Can Find More Information.....................................31
Information Incorporated by Reference...................................32
_____________________________
ABOUT THIS PROSPECTUS SUPPLEMENT
This prospectus supplement and the accompanying prospectus dated March 17, 2004
relate to the offer by us of 6,385,907 shares of our Acacia Research -
CombiMatrix Common Stock and warrants to purchase up to 1,596,478 shares of our
Acacia Research - CombiMatrix Common Stock. In the accompanying prospectus, we
provide you with a general description of our securities that we are offering.
These documents contain important information you should consider when making
your investment decision. This prospectus supplement may add, update or change
information in the accompanying prospectus. You should read both this prospectus
supplement and the accompanying prospectus as well as the additional information
described under "Information Incorporated by Reference" on page S-2 of this
prospectus supplement and "Where You Can Find More Information" on page 31 of
the accompanying prospectus before investing in our securities.
You should rely only on the information contained or incorporated by reference
into this prospectus supplement and the accompanying prospectus. We have not,
and the placement agent has not, authorized any other person to provide you with
information different from that contained or incorporated in this prospectus
supplement and the accompanying prospectus. We are offering to sell our
securities only in jurisdictions where offers and sales are permitted. The
information contained or incorporated into this prospectus supplement and the
accompanying prospectus is complete and accurate only as of the date of such
information, regardless of the time of delivery of this prospectus supplement
and the accompanying prospectus or of any sale of our securities.
In this prospectus supplement, unless the context otherwise indicates, the terms
"we," "our," "us," and "the company" refer to Acacia Research Corporation.
S-1
INFORMATION INCORPORATED BY REFERENCE
The Securities and Exchange Commission (the "SEC") allows us to "incorporate by
reference" the information we file with it, which means that we can disclose
important information to you by referring you to those documents. The
information incorporated by reference is an important part of this prospectus
supplement or the accompanying prospectus, and information that we file later
with the SEC will automatically update and supersede this information. We
incorporate by reference the documents listed below and any future filings we
make with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Securities
Exchange Act of 1934 until all of the securities that we may offer with this
prospectus supplement and the accompanying prospectus are sold:
o Our Annual Report on Form 10-K for the fiscal year ended December
31, 2004.
o Our Quarterly Report on Form 10-Q for the fiscal quarter ended
March 31, 2005.
o Our Quarterly Report on Form 10-Q for the fiscal quarter ended
June 30, 2005.
o Our Current Reports on Form 8-K filed on April 27, 2005, June 30,
2005, July 26, 2005, August 16, 2005 and August 25, 2005.
You may request a copy of these filings at no cost, by writing or telephoning
Chief Financial Officer, Acacia Research Corporation, 500 Newport Center Drive,
7th Floor, Newport Beach, CA 92660, (949) 480-8300.
S-2
DESCRIPTION OF WARRANTS
Each warrant entitles the holder to purchase from us up to the number
of shares of common stock set forth in such warrant at an exercise price of
$2.40 per share. The Warrant may be exercised at any time until and including
the fifth anniversary of the closing date of the issuance of the offering.
EXERCISE. A warrant may be exercised if there is a then effective
registration statement, such as the registration statement of which this
prospectus supplement and the accompanying prospectus form a part, covering the
common stock to be issued upon exercise. At any time that such a registration
statement is not effective, a warrant may only be exercised if the holder agrees
to customary transfer restrictions that we request in order to ensure that we
comply with all applicable laws when we issue the shares of common stock upon
exercise of the warrant. In addition to agreeing to any necessary transfer
restrictions, an investor must surrender the warrant certificate on or before
the expiration date of the warrant, at our offices, with the form of "Notice of
Exercise" completed and executed as indicated. A warrant must be exercised for
cash, by wire transfer of immediately available funds or by certified or
official bank check for the number of shares with respect to which the warrant
is being exercised, unless there is not an effective registration statement
covering the common stock to be issued upon exercise of the warrant, in which
case a holder may exercise the warrant for cash or by net exercise. A holder who
elects to exercise a warrant by net exercise, rather than for cash, upon
exercise will receive a number of shares of common stock equal in value to the
aggregate value of the warrant (or the portion thereof being exercised).
If we fail to deliver to a holder a certificate or certificates
representing the shares issuable pursuant to an exercise of the warrant by the
3rd trading day after exercise thereof, then the holder will have the right to
rescind such exercise. In addition, if we fail to cause our transfer agent to
transmit to the holder a certificate or certificates representing the shares
issuable pursuant to an exercise on or before the 3rd trading day following a
warrant exercise, and if after such date the holder is required by its broker to
purchase shares of our common stock to deliver in satisfaction of a sale by the
holder of the shares which the holder anticipated receiving upon such exercise,
then the Company will (1) pay in cash to the holder the amount by which (x) the
holder's total purchase price (including brokerage commissions, if any) for the
shares so purchased exceeds (y) the amount obtained by multiplying (A) the
number of shares that we were required to deliver to the holder in connection
with the exercise at issue by (B) the price at which the sell order giving rise
to such purchase obligation was executed, and (2) at the option of the holder,
either reinstate the portion of the Warrant and equivalent number of shares for
which such exercise was not honored or deliver to the holder the number of
shares that would have been issued had the Company timely complied with its
exercise and delivery obligations under the warrant.
ANTIDILUTION ADJUSTMENTS. The warrants are subject to provisions that
adjust the number of shares that may be purchased by the holders and the
exercise price in the event of a common stock split, payment of stock dividend
on common stock or certain other events.
If we effect any merger or consolidation with or into another
corporation where we are not the surviving corporation, effect any sale of all
or substantially all of our assets, or effect any capital reorganization or
reclassification of our common stock, then each holder's warrant will become the
right to receive, upon exercise of such warrant, in lieu of our common stock,
the same amount and kind of securities, cash or property as it would have been
entitled to receive upon the occurrence of such transaction, if the warrant had
been exercised immediately prior to such transaction.
DELIVERY OF CERTIFICATES. Upon exercise of a warrant, we will promptly
deliver a certificate representing the shares of common stock issuable upon
exercise of the warrant. In addition, if there is a then effective registration
statement covering the issuance of the shares of common stock upon exercise of
the warrant, we will, if requested by the holder, so long as our transfer agent
is a participant in the DTC FAST system, deliver the shares electronically
through The Depository Trust Corporation pursuant to the DWAC system.
ADDITIONAL PROVISIONS. The above summary of certain terms and
provisions of the warrants is qualified in its entirety by reference to the
detailed provisions of the warrants, the form of which will be filed as an
exhibit to a current report on Form 8-K that will be incorporated herein by
reference. We are not required to issue fractional shares upon the exercise of
the warrants. No holder of the warrants will possess any rights as a shareholder
under those warrants until the holder exercises those warrants. The warrants may
be transferred independent of the common stock they are issued with, subject to
all applicable laws.
S-3
DILUTION
Our net tangible book value on June 30, 2005 was as follows:
- ------------------------------- --------------------- ----------------------- ----------------------
Net Tangible Shares of Common Net Tangible Book
Book Value Stock Outstanding Value Purchase
- ------------------------------- --------------------- ----------------------- ----------------------
CombiMatrix Group 14,285,000 31,206,051 0.46
- ------------------------------- --------------------- ----------------------- ----------------------
Acacia Technologies Group 38,256,000 27,273,019 1.40
- ------------------------------- --------------------- ----------------------- ----------------------
Acacia Research Corporation
Consolidated 52,541,000 N/A N/A
- ------------------------------- --------------------- ----------------------- ----------------------
- ------------------------------- --------------------- ----------------------- ----------------------
Without taking into account any other changes in the net tangible book
value for the CombiMatrix group after June 30, 2005, other than to give effect
to our receipt of the estimated net proceeds from the sale of the maximum number
of shares issuable in this offering (6,385,907 shares of Acacia
Research-CombiMatrix common stock) at an offering price of $1.65 per share, less
our estimated offering expenses, the net tangible book value of the CombiMatrix
group as of June 30, 2005, after giving effect to the items above, would have
been approximately $23,954,000, or $0.64 per share. This represents an immediate
increase in the net tangible book value of $0.18 per share to existing holders
of Acacia Research-CombiMatrix common stock and an immediate dilution of $1.01
per share to new investors.
The following table illustrates this per share dilution:
- --------------------------------------------------------------------------------------- --------------------
Offering price per share of Acacia Research-CombiMatrix common stock $1.65
- --------------------------------------------------------------------------------------- --------------------
Net tangible book value per share as of June 30, 2005 (1) 0.46
- --------------------------------------------------------------------------------------- --------------------
Increase in net tangible book value per share attributable to the offering (1) 0.18
- --------------------------------------------------------------------------------------- --------------------
Pro forma net tangible book value per share as of June 30, 2005, after giving
effect to the offering (1) 0.64
- --------------------------------------------------------------------------------------- --------------------
Dilution per share to new investors in the Offering $1.01
- --------------------------------------------------------------------------------------- --------------------
- --------------------------------------------------------------------------------------- --------------------
(1) Per share amounts calculated using the net tangible book value of Acacia
Research Corporation's CombiMatrix group.
The tables above are based on 27,273,019 shares of Acacia
Research-Acacia Technologies common stock and 31,206,051 shares of Acacia
Research-CombiMatrix common stock outstanding as of June 30, 2005 and exclude
the shares of Acacia Research-Acacia Technologies common stock and Acacia
Research-CombiMatrix common stock that may be issued upon the exercise of
outstanding options granted and shares reserved for issuance under our 2002
Acacia Technologies Stock Incentive Plan and our 2002 CombiMatrix Stock
Incentive Plan, as of June 30, 2005.
To the extent that any Acacia Research-CombiMatrix common stock options
outstanding as of June 30, 2005 are exercised, new Acacia Research-CombiMatrix
common stock options are issued under our stock incentive plans and exercised,
or we issue additional shares of Acacia Research-CombiMatrix common stock in the
future, there will be further dilution to new investors.
S-4
PLAN OF DISTRIBUTION
We have entered into a placement agency agreement, dated as of September 15,
2005, with Piper Jaffray & Co. Subject to the terms and conditions contained in
the placement agency agreement, Piper Jaffray has agreed to act as the placement
agent in connection with the sale of up to 6,385,907 shares of our Acacia
Research - CombiMatrix Common Stock and warrants to purchase up to 1,596,478
shares of our Acacia Research - CombiMatrix Common Stock in this offering. The
placement agent is not purchasing or selling any securities by this prospectus
supplement and the accompanying prospectus, nor is it required to arrange the
purchase or sale of any specific number or dollar amount of the securities, but
it has agreed to use its commercially reasonable efforts to arrange for the sale
of all of the securities in this offering.
The placement agency agreement provides that the obligations of the placement
agent and the investors are subject to certain conditions precedent, including,
among other things, the absence of any material adverse change in our business
and the receipt of certain opinions, letters and certificates from our counsel,
our independent auditors and us.
We currently anticipate that the closing of the sale of 6,385,907 shares of our
Acacia Research - CombiMatrix Common Stock and warrants to purchase up to
1,596,478 shares of our Acacia Research - CombiMatrix Common Stock will take
place on or about September 21, 2005. On the scheduled closing date, the
following will occur:
o we anticipate receipt of funds in the amount of the aggregate
purchase price; and
o Piper Jaffray will receive the placement agent fee in accordance
with the terms of the placement agency agreement.
The placement agent proposes to arrange for the sale to one or more purchasers
of the securities offered pursuant to this prospectus supplement and the
accompanying prospectus through direct purchase agreements between the
purchasers and us. Certain purchaser funds will be deposited into an escrow
account and held until jointly released by us and the placement agent on the
date the securities are delivered to the purchasers. The escrow agent will
invest all funds it receives in a non-interest bearing account in accordance
with Rule 15c2-4 under the Securities Exchange Act of 1934. The escrow agent
will not accept any purchaser funds until the date of this prospectus
supplement.
We have agreed to pay Piper Jaffray an aggregate fee equal to 7.0% of the gross
proceeds from the sale of securities in this offering. In addition, for a period
of one year from August 25, 2005, we have granted Piper Jaffray the right of
first refusal to act as our exclusive financial advisor, sole book-running
manager or exclusive placement agent, as the case may be, in connection with any
restructuring, public or private offering, or acquisition or disposition
relating to CombiMatrix Corporation or its subsidiaries or any shares of our
Acacia Research - CombiMatrix Common Stock. Pursuant to a requirement by the
National Association of Securities Dealers, Inc., or NASD, the maximum
commission or discount to be received by any NASD member or independent
broker/dealer may not be greater than eight percent of the gross proceeds
received by us for the sale of any securities being registered pursuant to SEC
Rule 415. The following table shows the per share and warrant and total fees we
will pay to the placement agent in connection with the sale of the securities
offered pursuant to this prospectus supplement and the accompanying prospectus,
assuming the purchase of all of the securities offered hereby.
Per share placement agent fees $ 0.1155
Maximum offering total $ 737,572
Because there is no minimum offering amount required as a condition to closing
in this offering, the actual total offering fees, if any, are not presently
determinable and may be substantially less than the maximum amount set forth
above.
We have agreed to indemnify Piper Jaffray and certain other persons against
certain liabilities under the Securities Act of 1933. We have also agreed to
contribute to payments Piper Jaffray and the purchasers may be required to make
in respect of such liabilities.
S-5
A copy of the placement agency agreement is included as an exhibit to our
Current Report on Form 8-K that will be filed with the Securities and Exchange
Commission in connection with the consummation of this offering
The placement agent has informed us that it will not engage in overallotment,
stabilizing transactions or syndicate covering transactions in connection with
this offering.
We and each of our directors and executive officers have agreed to certain
restrictions on the ability to sell shares of our Acacia Research - CombiMatrix
Common Stock and other securities that they beneficially own, including
securities convertible into or exercisable or exchangeable for our Acacia
Research - CombiMatrix Common Stock, for a period of 90 days following the date
of this prospectus supplement. This means that, subject to certain exceptions,
for a period of 90 days following the date of this prospectus supplement, we and
such persons may not, directly or indirectly, offer, pledge, announce the
intention to sell, sell, contract to sell, sell any option or contract to
purchase, purchase any option or contract to sell, grant any option, right or
warrant to purchase, or otherwise transfer or dispose of any shares of our
Acacia Research - CombiMatrix Common Stock or any, without the prior written
consent of Piper Jaffray. Notwithstanding the foregoing, if (x) during the last
17 days of such 90 day period, we announce that we will release earnings results
or publicly announce other material news or a material event relating to us
occurs or (y) prior to the expiration of the 90 day period, we announce that we
will release earnings results during the 16 day period beginning on the last day
of the 90 day period, then in each case the 90 day period will be extended until
the expiration of the 18 day period beginning on the date of release of the
earnings results or the public announcement regarding the material news or the
occurrence of the material event, as applicable, unless Piper Jaffray waives, in
writing, such extension. At any time and without public notice, Piper Jaffray
may in its sole discretion release all or some of the securities from these
lock-up agreements.
The transfer agent for our common stock is U.S. Stock Transfer.
Our Acacia Research - CombiMatrix Common Stock is traded on the Nasdaq National
Market under the symbol "CBMX".
LEGAL MATTERS
Certain legal matters in connection with the legality of the offering of the
securities hereby will be passed upon for us by Greenberg Traurig LLP, Costa
Mesa, California. The placement agent is being represented in connection with
this offering by Lowenstein Sandler PC, New York, New York.
S-6
Filed Pursuant to Rule 424(b)(3)
Registration No. 333-112885
PROSPECTUS
$50,000,000
[LOGO]
ACACIA RESEARCH CORPORATION
ACACIA RESEARCH-COMBIMATRIX COMMON STOCK
ACACIA RESEARCH-ACACIA TECHNOLOGIES COMMON STOCK
WARRANTS
_______________________________
By this prospectus, we may offer, from time to time:
o shares of our Acacia Research-CombiMatrix common stock;
o shares of our Acacia Research-Acacia Technologies common stock;
o warrants to purchase shares of our Acacia Research-CombiMatrix
common stock and our Acacia Research-Acacia Technologies common
stock; or
o any combination of the foregoing.
We will provide specific terms of each issuance of these securities in
supplements to this prospectus. You should read this prospectus and any
supplement carefully before you decide to invest.
This prospectus may not be used to consummate sales of these securities unless
it is accompanied by a prospectus supplement.
Our Acacia Research-CombiMatrix common stock is traded on the Nasdaq National
Market under the ticker symbol "CBMX." On March 16, 2004, the last reported
sales price of our Acacia Research-CombiMatrix common stock was $6.01 per share.
Our Acacia Research-Acacia Technologies common stock is traded on the Nasdaq
National Market under the ticker symbol "ACTG." On March 16, 2004, the last
reported sales price of our Acacia Research-Acacia Technologies common stock was
$6.54 per share.
We may sell these securities to or through underwriters, dealers or agents, or
we may sell the securities directly to investors on our own behalf.
INVESTING IN OUR SECURITIES INVOLVES A HIGH DEGREE OF RISK. YOU SHOULD CAREFULLY
CONSIDER THE INFORMATION UNDER THE HEADING "RISK FACTORS" BEGINNING ONPAGE 2 OF
THIS PROSPECTUS BEFORE BUYING ANY OF THE SECURITIES OFFERED HEREBY.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES, OR DETERMINED IF
THIS PROSPECTUS IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
THE DATE OF THIS PROSPECTUS IS MARCH 17, 2004
YOU SHOULD RELY ONLY ON THE INFORMATION CONTAINED IN OR INCORPORATED BY
REFERENCE INTO THIS PROSPECTUS. WE HAVE NOT AUTHORIZED ANY OTHER PERSON TO
PROVIDE YOU WITH DIFFERENT INFORMATION. IF ANYONE PROVIDES YOU WITH DIFFERENT OR
INCONSISTENT INFORMATION, YOU SHOULD NOT RELY ON IT. THE INFORMATION IN THIS
PROSPECTUS IS CURRENT AS OF THE DATE OF THIS PROSPECTUS. OUR BUSINESS, FINANCIAL
CONDITION, RESULTS OF OPERATIONS AND PROSPECTS MAY HAVE CHANGED SINCE THAT DATE.
TABLE OF CONTENTS
About This Prospectus..........................................................1
Our Company....................................................................1
Risk Factors...................................................................2
Forward-Looking Statements....................................................22
Use Of Proceeds...............................................................22
Description of our Capital Stock..............................................23
Description of Warrants.......................................................29
Plan of Distribution..........................................................30
Experts.......................................................................31
Legal Matters.................................................................31
Where You Can Find More Information...........................................31
Information Incorporated By Reference.........................................32
ABOUT THIS PROSPECTUS
This prospectus is part of a registration statement that we filed with the
Securities and Exchange Commission, or SEC, using a "shelf" registration
process. Under this process, we may offer and sell any combination of Acacia
Research-CombiMatrix common stock ("AR-CombiMatrix Stock"), Acacia
Research-Acacia Technologies common stock ("AR-Acacia Technologies Stock") and
warrants to purchase our AR-CombiMatrix Stock or our AR-Acacia Technologies
stock in one or more offerings for total proceeds of up to $50,000,000. This
prospectus provides you with a general description of the securities we may
offer. Each time we offer to sell securities, we will provide a supplement to
this prospectus that will contain specific information about the terms of that
offering. The prospectus supplement may also add, update or change information
contained in this prospectus. It is important for you to consider the
information contained in this prospectus and any prospectus supplement together
with additional information described under the heading "Where You Can Find More
Information."
OUR COMPANY
OUR BUSINESS
Acacia Research develops, acquires and licenses enabling technologies for the
life sciences and media technologies sectors, which comprise the two business
groups of Acacia Research.
Our life sciences business, referred to as the "CombiMatrix group," is comprised
of our wholly owned subsidiaries, CombiMatrix Corporation, CombiMatrix
Corporation's majority owned subsidiary, Advanced Material Sciences, Inc., and
CombiMatrix Corporation's wholly owned subsidiary, CombiMatrix KK. CombiMatrix
Corporation is a life sciences technology company with a proprietary system for
rapid, cost competitive creation of DNA and other compounds on a programmable
semiconductor chip. This proprietary technology has applications in the areas of
genomics, proteomics, biosensors, drug discovery, drug development, diagnostics,
combinatorial chemistry, material sciences and nanotechnology.
Our media technologies business, referred to as the "Acacia Technologies group,"
is primarily comprised of our interests in two wholly owned media technologies
subsidiaries: Acacia Media Technologies Corporation and Soundview Technologies,
Inc. The Acacia Technologies group owns patented digital media transmission, or
DMT, technology enabling the digitization, encryption, storage, transmission,
receipt and playback of digital content. The DMT technology is protected by five
United States and 31 foreign patents. The DMT technology is utilized by a
variety of companies, including cable companies, hotel in-room entertainment
companies, Internet movie companies, Internet music companies, on-line adult
entertainment companies, on-line learning companies and other companies that
stream audio or audio/video content. The Acacia Technologies group's United
States DMT patents expire in 2011 and its international DMT patents expire in
2012. The Acacia Technologies group also owns technology known as the V-chip.
The V-chip was adopted by manufacturers of televisions sold in the United States
to provide blocking of certain programming based upon its content rating code,
in compliance with the Telecommunications Act of 1996. The V-chip technology was
protected by U.S. Patent No. 4,554,584, which expired in July 2003.
GENERAL INFORMATION
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. Our principal executive office is located at 500 Newport
Center Drive, 7th Floor, Newport Beach, California 92660. Our telephone number
is (949) 480-8300.
1
RISK FACTORS
AN INVESTMENT IN OUR STOCK INVOLVES A NUMBER OF RISKS. BEFORE MAKING A DECISION
TO PURCHASE OUR SECURITIES, YOU SHOULD CAREFULLY CONSIDER ALL OF THE RISKS
DESCRIBED IN THIS PROSPECTUS. IF ANY OF THE RISKS DISCUSSED IN THIS PROSPECTUS
ACTUALLY OCCUR, OUR BUSINESS, FINANCIAL CONDITION AND RESULTS OF OPERATIONS
COULD BE MATERIALLY ADVERSELY AFFECTED. IF THIS WERE TO OCCUR, THE TRADING PRICE
OF OUR SECURITIES COULD DECLINE SIGNIFICANTLY AND YOU MAY LOSE ALL OR PART OF
YOUR INVESTMENT.
GENERAL RISKS
THE CONTINUING WORLDWIDE ECONOMIC SLOWDOWN AND RELATED UNCERTAINTIES MAY
CONTINUE TO ADVERSELY IMPACT OUR REVENUES AND OPERATING RESULTS.
Slower economic activity, concerns about inflation, decreased consumer
confidence, reduced corporate profits and capital spending, adverse business
conditions and liquidity concerns in the technology and biotechnology and
related industries, the lingering effects of the war in Iraq, recent
international conflicts and the events of September 11, 2001 and other terrorist
and military activity have resulted in a continuing downturn in worldwide
economic conditions. We cannot predict the timing, strength and duration of any
economic recovery in our industries. These conditions make it extremely
difficult for us to accurately forecast and plan future business activities. We
cannot predict the timing, strength and duration of any economic recovery,
worldwide or in our markets. If such conditions continue or worsen, our
business, financial condition and results of operations will likely be
materially and adversely affected.
BECAUSE OUR BUSINESS OPERATIONS ARE SUBJECT TO MANY INHERENT AND UNCONTROLLABLE
RISKS, WE MAY NOT SUCCEED.
We have significant economic interests in our subsidiary companies. Our business
operations are subject to numerous risks, challenges, expenses and uncertainties
inherent in the establishment of new business enterprises. Many of these risks
and challenges are subject to outside influences over which we have no control,
including:
o our subsidiary companies' products and services face uncertain
market acceptance;
o technological advances may make our subsidiary companies' products
and services obsolete or less competitive;
o competition is intense in the industries in which our subsidiaries
do business;
o increases in operating costs, including costs for supplies,
personnel and equipment;
o the availability and cost of capital;
o general economic conditions; and
o governmental regulation that excessively restricts our subsidiary
companies' businesses.
We cannot assure you that our subsidiary companies will be able to market any
product or service on a large commercial scale, that our subsidiary companies
will ever achieve or maintain profitable operations or that they, or we, will be
able to remain in business.
WE HAVE A HISTORY OF LOSSES AND EXPECT TO INCUR ADDITIONAL LOSSES IN THE FUTURE.
We have sustained substantial losses since our inception resulting in an
accumulated deficit, as of December 31, 2003, of $183.4 million on a
consolidated basis. We may never become profitable or if we do, we may never be
able to sustain profitability. We expect to incur significant research and
development, marketing, general and administrative expenses. As a result, we
expect to incur significant losses for the foreseeable future.
2
OUR STOCK PRICE MAY BE VOLATILE, WHICH COULD RESULT IN SUBSTANTIAL LOSSES FOR
INVESTORS IN OUR SECURITIES.
The stock markets in general, and the markets for technology stocks in
particular, have experienced extreme volatility that has often been unrelated to
the operating performance of particular companies. These broad market
fluctuations may adversely affect the trading price of our two classes of common
stock.
The market prices of our securities may also fluctuate significantly in response
to the following factors, some of which are beyond our control:
o variations in our quarterly operating results;
o changes in management's or securities analysts' estimates of our
financial performance;
o changes in market valuations of similar companies;
o announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures, capital
commitments, new products or product enhancements;
o failure to complete significant transactions; and
o additions or departures of key personnel.
BECAUSE CERTAIN OF OUR SUBSIDIARY COMPANIES MAY NOT GENERATE ANY SIGNIFICANT
REVENUES, AND OPERATING RESULTS FROM OUR SUBSIDIARY COMPANIES MAY FLUCTUATE
SIGNIFICANTLY, OUR OWN OPERATING RESULTS MAY BE NEGATIVELY AFFECTED.
Our operating results may be materially impacted by the operating results of our
subsidiary companies. We cannot assure that these companies will be able to meet
their anticipated working capital needs to develop their products and services.
If they fail to properly develop these products and services, they will be
unable to generate meaningful product sales. We anticipate that our operating
results are likely to vary significantly as a result of a number of factors,
including:
o the timing of new product introductions by each subsidiary
company;
o the stage of development of the business of each subsidiary
company;
o the technical feasibility of each subsidiary company's
technologies and techniques;
o the novelty of the technology owned by our subsidiary companies;
o the accuracy, effectiveness and reliability of products developed
by our subsidiary companies;
o the level of product acceptance;
o the strength of each subsidiary company's intellectual property
rights;
o the ability of each subsidiary company to avoid infringing the
intellectual property rights of others;
o each subsidiary company's ability to exploit and commercialize its
technology;
o the volume and timing of orders received and product line
maturation;
o the impact of price competition; and
3
o each subsidiary company's ability to access distribution channels.
Many of these factors are beyond our subsidiary companies' control. We cannot
provide any assurance that any subsidiary company will experience growth in the
future or be profitable on an operating basis in any future period.
IF WE, OR OUR SUBSIDIARIES, ENCOUNTER UNFORESEEN DIFFICULTIES AND CANNOT OBTAIN
ADDITIONAL FUNDING ON FAVORABLE TERMS, OUR BUSINESS MAY SUFFER.
As of December 31, 2003, we had cash and short-term investments of $50.5 million
on our consolidated financial statements.
To date, our subsidiary companies have relied primarily upon selling equity
securities, including sales to and loans from us, to generate the funds needed
to finance implementing their plans of operations. Our subsidiary companies may
be required to obtain additional financing through bank borrowings, debt or
equity financings or otherwise, which would require us to make additional
investments or face a dilution of our equity interests.
We cannot assure 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
financings. Nevertheless, we cannot assure that additional funding will be
available on favorable terms, if at all. If we fail to obtain additional funding
when needed for our subsidiary companies and ourselves, we may not be able to
execute our business plans and our business may suffer.
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, WE CANNOT ASSURE THAT OUR
OPERATIONS WILL BE PROFITABLE.
We commenced operations in 1993 and, accordingly, have a limited operating
history. In addition, certain of our subsidiary companies are in the early
stages of development and or operations and have limited operating histories.
You should consider our prospects in light of the risks, expenses and
difficulties frequently encountered by companies with such limited operating
histories. Since we have a limited operating history, we cannot assure you that
our operations will be profitable or that we will generate sufficient revenues
to meet our expenditures and support our activities.
During the fiscal year ended December 31, 2003, we had operating losses of
approximately $25.4 million and net losses of approximately $24.4 million. If we
continue to incur operating losses, we may not have enough money to expand our
business and our subsidiary companies' businesses in the future.
OUR FUTURE SUCCESS DEPENDS IN PART ON THE CONTINUED SERVICE OF OUR KEY
EXECUTIVES, AND THE LOSS OF ANY OF THESE KEY EXECUTIVES COULD ADVERSELY AFFECT
OUR BUSINESS AND OPERATING RESULTS.
Our success depends in part upon the continued service of our executive
officers, particularly Paul R. Ryan, our Chairman and Chief Executive Officer,
Robert L. Harris, II, our President, and Dr. Amit Kumar, President and Chief
Executive Officer of CombiMatrix Corporation. Neither Messrs. Ryan or Harris nor
Dr. Kumar has an employment or non-competition agreement with us. The loss of
any of these key individuals would be detrimental to our ongoing operations and
prospects.
OUR FUTURE SUCCESS AND THE SUCCESS OF OUR SUBSIDIARY COMPANIES DEPENDS ON OUR
AND THEIR ABILITIES TO ATTRACT AND RETAIN QUALIFIED TECHNICAL PERSONNEL AND
QUALIFIED MANAGEMENT AND MARKETING TEAMS. FAILURE TO DO SO WOULD HARM OUR
ONGOING OPERATIONS AND BUSINESS PROSPECTS.
We believe that our success will depend on continued employment by us and our
subsidiary companies of senior management and key technical personnel. Our
subsidiary companies will need to attract, retain and motivate qualified
management personnel to execute their current business plans and to successfully
develop commercially viable products and services. Competition for qualified
personnel is intense and we cannot assure you that we will successfully retain
our existing key employees or attract and retain any additional personnel we may
require.
4
Each of our subsidiary companies has key executives upon whom we significantly
depend, and the success of those subsidiary companies depends on their ability
to retain and motivate those individuals.
FAILURE TO EFFECTIVELY MANAGE OUR GROWTH COULD PLACE STRAINS ON OUR MANAGERIAL,
OPERATIONAL AND FINANCIAL RESOURCES AND COULD ADVERSELY AFFECT OUR BUSINESS AND
OPERATING RESULTS.
Our growth has placed, and is expected to continue to place, a strain on our
managerial, operational and financial resources. Further, as our subsidiary
companies' businesses grow, we will be required to manage multiple
relationships. Any further growth by us or our subsidiary companies or an
increase in the number of our strategic relationships will increase this strain
on our managerial, operational and financial resources. This strain may inhibit
our ability to achieve the rapid execution necessary to successfully implement
our business plan. In addition, our future success depends on our ability to
expand our organization to match the growth of our subsidiaries.
THE AVAILABILITY OF SHARES FOR SALE IN THE FUTURE COULD REDUCE THE MARKET PRICE
OF OUR COMMON STOCK.
In the future, we may issue securities to raise cash for acquisitions. We may
also pay for interests in additional subsidiary companies by using a combination
of cash and our common stock or just our common stock. We may also issue
securities convertible into our common stock. Any of these events may dilute
your ownership interest in us and have an adverse impact on the price of our
common stock.
In addition, sales of a substantial amount of our common stock in the public
market, or the perception that these sales may occur, could reduce the market
price of our common stock. This could also impair our ability to raise
additional capital through the sale of our securities.
DELAWARE LAW AND OUR CHARTER DOCUMENTS CONTAIN PROVISIONS THAT COULD DISCOURAGE
OR PREVENT A POTENTIAL TAKEOVER OF ACACIA RESEARCH CORPORATION THAT MIGHT
OTHERWISE RESULT IN OUR STOCKHOLDERS RECEIVING A PREMIUM OVER THE MARKET PRICE
OF THEIR SHARES.
Provisions of Delaware law and our certificate of incorporation and bylaws could
make more difficult the acquisition of Acacia Research Corporation by means of a
tender offer, proxy contest or otherwise, and the removal of incumbent officers
and directors. These provisions include:
o Section 203 of the Delaware General Corporation Law, which
prohibits a merger with a 15%-or-greater stockholder, such as a
party that has completed a successful tender offer, until three
years after that party became a 15%-or-greater stockholder;
o amendment of our bylaws by the stockholders requires a two-thirds
approval of the outstanding shares;
o the authorization in our certificate of incorporation of
undesignated preferred stock, which could be issued without
stockholder approval in a manner designed to prevent or discourage
a takeover;
o provisions in our bylaws eliminating stockholders' rights to call
a special meeting of stockholders, which could make it more
difficult for stockholders to wage a proxy contest for control of
our board of directors or to vote to repeal any of the
anti-takeover provisions contained in our certificate of
incorporation and bylaws; and
o the division of our board of directors into three classes with
staggered terms for each class, which could make it more difficult
for an outsider to gain control of our board of directors.
Such potential obstacles to a takeover could adversely affect the ability of our
stockholders to receive a premium price for their stock in the event another
company wants to acquire us.
5
RISKS RELATING TO THE COMBIMATRIX GROUP
The risk factors beginning on this page discuss risks relating to the
CombiMatrix group. Because each holder of AR- CombiMatrix stock is also a holder
of the common stock of one company, Acacia Research Corporation, the risks
associated with the Acacia Technologies group could affect our AR-CombiMatrix
stock. As such, we urge you to read carefully the section "Risks Relating to the
Acacia Technologies Group" below.
THE COMBIMATRIX GROUP HAS A HISTORY OF LOSSES AND EXPECTS TO INCUR ADDITIONAL
LOSSES IN THE FUTURE.
The CombiMatrix group has sustained substantial losses since its inception. The
CombiMatrix group may never become profitable or if it does, it may never be
able to sustain profitability. We expect the CombiMatrix group to incur
significant research and development, marketing, general and administrative
expenses. As a result, we expect the CombiMatrix group to incur significant
losses for the foreseeable future.
THE COMBIMATRIX GROUP MAY FAIL TO MEET MARKET EXPECTATIONS BECAUSE OF
FLUCTUATIONS IN ITS QUARTERLY OPERATING RESULTS, WHICH COULD CAUSE ITS STOCK
PRICE TO DECLINE.
The CombiMatrix group's revenues and operating results have fluctuated in the
past and may continue to fluctuate significantly from quarter to quarter in the
future. It is possible that in future periods the CombiMatrix group's revenues
could fall below the expectations of securities analysts or investors, which
could cause the market price of our AR-CombiMatrix stock to decline. The
following are among the factors that could cause the CombiMatrix group's
operating results to fluctuate significantly from period to period:
o its unpredictable revenue sources, as described below;
o the nature, pricing and timing of the CombiMatrix group's and its
competitors' products;
o changes in the CombiMatrix group's and its competitors' research
and development budgets;
o expenses related to, and the CombiMatrix group's ability to comply
with, governmental regulations of its products and processes; and
o expenses related to, and the results of, patent filings and other
proceedings relating to intellectual property rights.
The CombiMatrix group anticipates significant fixed expenses due in part to its
need to continue to invest in product development. It may be unable to adjust
its expenditures if revenues in a particular period fail to meet its
expectations, which would harm its operating results for that period. As a
result of these fluctuations, the CombiMatrix group believes that
period-to-period comparisons of the CombiMatrix group's financial results will
not necessarily be meaningful, and you should not rely on these comparisons as
an indication of its future performance.
THE COMBIMATRIX GROUP'S REVENUES WILL BE UNPREDICTABLE, AND THIS MAY HARM ITS
FINANCIAL CONDITION.
The amount and timing of revenues that the CombiMatrix group may realize from
its business will be unpredictable because:
o whether products are commercialized and generate revenues depends,
in part, on the efforts and timing of its potential customers;
o its sales cycles may be lengthy; and
o it cannot be sure as to the timing of receipt of payment for its
products.
6
As a result, the CombiMatrix group's revenues may vary significantly from
quarter to quarter, which could make its business difficult to manage and cause
its quarterly results to be below market expectations. If this happens, the
price of the CombiMatrix group's common stock may decline significantly.
TECHNOLOGY COMPANY STOCK PRICES ARE ESPECIALLY VOLATILE, AND THIS VOLATILITY MAY
DEPRESS THE PRICE OF OUR AR-COMBIMATRIX STOCK.
The stock market has experienced significant price and volume fluctuations, and
the market prices of technology companies, particularly biotechnology companies,
has been highly volatile. We believe that various factors may cause the market
price of our AR-CombiMatrix stock to fluctuate, perhaps substantially,
including, among others, announcements of:
o its or its competitors' technological innovations;
o developments or disputes concerning patents or proprietary rights;
o supply, manufacturing or distribution disruptions or other similar
problems;
o proposed laws regulating participants in the biotechnology
industry;
o developments in relationships with collaborative partners or
customers;
o its failure to meet or exceed securities analysts' expectations of
its financial results; or
o a change in financial estimates or securities analysts'
recommendations.
In the past, companies that have experienced volatility in the market price of
their stock have been the objects of securities class action litigation. If our
AR-CombiMatrix stock was the object of securities class action litigation, it
could result in substantial costs and a diversion of management's attention and
resources, which could materially harm the business and financial results of the
CombiMatrix group.
THE COMBIMATRIX GROUP IS DEPLOYING NEW AND UNPROVEN TECHNOLOGIES WHICH MAKES
EVALUATION OF ITS BUSINESS AND PROSPECTS DIFFICULT AND IT MAY BE FORCED TO CEASE
OPERATIONS IF IT DOES NOT DEVELOP COMMERCIALLY SUCCESSFUL PRODUCTS.
The CombiMatrix group has not proven its ability to commercialize products on a
large scale. In order to successfully commercialize products on a large scale,
it will have to make significant investments, including investments in research
and development and testing, to demonstrate their technical benefits and
cost-effectiveness. Problems frequently encountered in connection with the
commercialization of products using new and unproven technologies might limit
its ability to develop and commercialize its products. For example, the
CombiMatrix group's products may be found to be ineffective, unreliable or
otherwise unsatisfactory to potential customers. The CombiMatrix group may
experience unforeseen technical complications in the processes it uses to
develop, manufacture, customize or receive orders for its products. These
complications could materially delay or limit the use of products the
CombiMatrix group attempts to commercialize, substantially increase the
anticipated cost of its products or prevent it from implementing its processes
at appropriate quality and scale levels, thereby causing its business to suffer.
THE COMBIMATRIX GROUP MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE, AND IF
ADDITIONAL CAPITAL IS NOT AVAILABLE ON ACCEPTABLE TERMS, THE COMBIMATRIX GROUP
MAY HAVE TO CURTAIL OR CEASE OPERATIONS.
The CombiMatrix group's future capital requirements will be substantial and will
depend on many factors including how quickly it commercializes its products, the
progress and scope of its collaborative and independent research and development
projects, the filing, prosecution, enforcement and defense of patent claims and
the need to obtain regulatory approval for certain products in the United States
or elsewhere. Changes may occur that would cause the CombiMatrix group's
available capital resources to be consumed significantly sooner than it expects.
7
The CombiMatrix group may be unable to raise sufficient additional capital on
favorable terms or at all. If it fails to do so, it may have to curtail or cease
operations or enter into agreements requiring it to relinquish rights to certain
technologies, products or markets because it will not have the capital necessary
to exploit them.
IF THE COMBIMATRIX GROUP DOES NOT ENTER INTO SUCCESSFUL PARTNERSHIPS AND
COLLABORATIONS WITH OTHER COMPANIES, IT MAY NOT BE ABLE TO FULLY DEVELOP ITS
TECHNOLOGIES OR PRODUCTS, AND ITS BUSINESS WOULD BE HARMED.
Since the CombiMatrix group does not possess all of the resources necessary to
develop and commercialize products that may result from its technologies on a
mass scale, it will need either to grow its sales, marketing and support group
or make appropriate arrangements with strategic partners to market, sell and
support its products. The CombiMatrix group believes that it will have to enter
into additional strategic partnerships to develop and commercialize future
products. If it does not enter into adequate agreements, or if its existing
arrangements or future agreements are not successful, its ability to develop and
commercialize products will be impacted negatively, and its revenues will be
adversely affected.
The current business of the CombiMatrix group is substantially dependent on its
existing arrangement with Roche. The CombiMatrix group currently relies upon
payments by Roche for a majority of its future revenues and expends a majority
of its resources toward fulfilling its contractual obligations to Roche. Roche's
primary service to the CombiMatrix group is to distribute and proliferate its
technology platform. If the CombiMatrix group were to lose its relationship with
Roche, the CombiMatrix group would be required to establish a distribution
agreement with another partner or distribute its technology platform itself.
This could prove difficult, time-consuming and expensive, and the CombiMatrix
group may not be successful in achieving this objective.
THE COMBIMATRIX GROUP HAS LIMITED EXPERIENCE COMMERCIALLY MANUFACTURING,
MARKETING OR SELLING ANY OF ITS POTENTIAL PRODUCTS, AND UNLESS IT DEVELOPS THESE
CAPABILITIES, IT MAY NOT BE SUCCESSFUL.
Even if the CombiMatrix group is able to develop its products for commercial
release on a large-scale, it has limited experience in manufacturing its
products in the volumes that will be necessary for it to achieve commercial
sales and in marketing or selling its products to potential customers. We cannot
assure you that the CombiMatrix group will be able to commercially produce its
products on a timely basis, in sufficient quantities or on commercially
reasonable terms.
THE COMBIMATRIX GROUP FACES INTENSE COMPETITION AND WE CANNOT ASSURE YOU THAT IT
WILL BE SUCCESSFUL.
The CombiMatrix group expects to compete with companies that design, manufacture
and market instruments for analysis of genetic variation and function and other
applications using established sequential and parallel testing technologies. The
CombiMatrix group is also aware of other biotechnology companies that have or
are developing testing technologies for the SNP genotyping, gene expression
profiling and proteomic markets. The CombiMatrix group anticipates that it will
face increased competition in the future as new companies enter the market with
new technologies and its competitors improve their current products.
The markets for the CombiMatrix group's products are characterized by rapidly
changing technology, evolving industry standards, changes in customer needs,
emerging competition and new product introductions. One or more of the
CombiMatrix group's competitors may offer technology superior to those of the
CombiMatrix group and render its technology obsolete or uneconomical. Many of
its competitors have greater financial and personnel resources and more
experience in marketing, sales and research and development than it has. Some of
its competitors currently offer arrays with greater density than it does and
have rights to intellectual property, such as genomic information or proprietary
technology, which provides them with a competitive advantage. If the CombiMatrix
group were not able to compete successfully, its business and financial
condition would be materially harmed.
8
IF THE COMBIMATRIX GROUP'S NEW AND UNPROVEN TECHNOLOGY IS NOT USED BY
RESEARCHERS IN THE PHARMACEUTICAL, BIOTECHNOLOGY AND ACADEMIC COMMUNITIES, ITS
BUSINESS WILL SUFFER.
The CombiMatrix group's products may not gain market acceptance. In that event,
it is unlikely that its business will succeed. Biotechnology and pharmaceutical
companies and academic research centers have historically analyzed genetic
variation and function using a variety of technologies, and many of them have
made significant capital investments in existing technologies. Compared to
existing technologies, the CombiMatrix group's technologies are new and
unproven. In order to be successful, its products must meet the commercial
requirements of the biotechnology, pharmaceutical and academic communities as
tools for the large-scale analysis of genetic variation and function. Market
acceptance will depend on many factors, including:
o the development of a market for its tools for the analysis of
genetic variation and function, the study of proteins and other
purposes;
o the benefits and cost-effectiveness of its products relative to
others available in the market;
o its ability to manufacture products in sufficient quantities with
acceptable quality and reliability and at an acceptable cost;
o its ability to develop and market additional products and
enhancements to existing products that are responsive to the
changing needs of its customers;
o the willingness and ability of customers to adopt new technologies
requiring capital investments or the reluctance of customers to
change technologies in which they have made a significant
investment; and
o the willingness of customers to transmit test data and permit the
CombiMatrix group to transmit test results over the Internet,
which will be a necessary component of its product and services
packages unless customers purchase or license its equipment for
use in their own facilities.
IF THE MARKET FOR ANALYSIS OF GENOMIC INFORMATION DOES NOT DEVELOP OR IF GENOMIC
INFORMATION IS NOT AVAILABLE TO THE COMBIMATRIX GROUP'S POTENTIAL CUSTOMERS, ITS
BUSINESS WILL NOT SUCCEED.
The CombiMatrix group is designing its technology primarily for applications in
the biotechnology, pharmaceutical and academic communities. The usefulness of
the CombiMatrix group's technology depends in part upon the availability of
genomic data. The CombiMatrix group is initially focusing on markets for
analysis of genetic variation and function, namely SNP genotyping and gene
expression profiling. These markets are new and emerging, and they may not
develop as the CombiMatrix group anticipates, or at all. Also, researchers may
not seek or be able to convert raw genomic data into medically valuable
information through the analysis of genetic variation and function. If genomic
data is not available for use by the CombiMatrix group's customers or if its
target markets do not emerge in a timely manner, or at all, demand for its
products will not develop as it expects, and it may never become profitable.
THE COMBIMATRIX GROUP'S FUTURE SUCCESS DEPENDS ON THE CONTINUED SERVICE OF ITS
ENGINEERING, TECHNICAL AND KEY MANAGEMENT PERSONNEL AND ITS ABILITY TO IDENTIFY,
HIRE AND RETAIN ADDITIONAL ENGINEERING, TECHNICAL AND KEY MANAGEMENT PERSONNEL.
There is intense competition for qualified personnel in the CombiMatrix group's
industry, particularly for engineers and senior level management. Loss of the
services of, or failure to recruit, engineers or other technical and key
management personnel could be significantly detrimental to the group and could
adversely affect its business and operating results. The CombiMatrix group may
not be able to continue to attract and retain engineers or other qualified
personnel necessary for the development of its products and business or to
replace engineers or other qualified personnel who may leave the group in the
future. The CombiMatrix group's anticipated growth is expected to place
increased demands on its resources and likely will require the addition of new
management personnel.
9
THE EXPANSION OF THE COMBIMATRIX GROUP'S PRODUCT LINES MAY SUBJECT IT TO
REGULATION BY THE UNITED STATES FOOD AND DRUG ADMINISTRATION AND FOREIGN
REGULATORY AUTHORITIES, WHICH COULD PREVENT OR DELAY ITS INTRODUCTION OF NEW
PRODUCTS.
If the CombiMatrix group manufactures, markets or sells any products for any
regulated clinical or diagnostic applications, those products will be subject to
extensive governmental regulation as medical devices in the United States by the
FDA and in other countries by corresponding foreign regulatory authorities. The
process of obtaining and maintaining required regulatory clearances and
approvals is lengthy, expensive and uncertain. Products that CombiMatrix
Corporation manufactures, markets or sells for research purposes only are not
subject to governmental regulations as medical devices or as analyte specific
reagents to aid in disease diagnosis. We believe that the CombiMatrix group's
success will depend upon commercial sales of improved versions of products,
certain of which cannot be marketed in the United States and other regulated
markets unless and until the CombiMatrix group obtains clearance or approval
from the FDA and its foreign counterparts, as the case may be. Delays or
failures in receiving these approvals may limit our ability to benefit from new
CombiMatrix group products.
AS THE COMBIMATRIX GROUP'S OPERATIONS EXPAND, ITS COSTS TO COMPLY WITH
ENVIRONMENTAL LAWS AND REGULATIONS WILL INCREASE, AND FAILURE TO COMPLY WITH
THESE LAWS AND REGULATIONS COULD HARM ITS FINANCIAL RESULTS.
The CombiMatrix group's operations involve the use, transportation, storage and
disposal of hazardous substances, and as a result it is subject to environmental
and health and safety laws and regulations. As the CombiMatrix group expands its
operations, its use of hazardous substances will increase and lead to additional
and more stringent requirements. The cost to comply with these and any future
environmental and health and safety regulations could be substantial. In
addition, the CombiMatrix group's failure to comply with laws and regulations,
and any releases of hazardous substances into the environment or at its disposal
sites, could expose the CombiMatrix group to substantial liability in the form
of fines, penalties, remediation costs and other damages, or could lead to a
curtailment or shut down of its operations. These types of events, if they
occur, would adversely impact the group's financial results.
THE COMBIMATRIX GROUP'S BUSINESS DEPENDS ON ISSUED AND PENDING PATENTS, AND THE
LOSS OF ANY PATENTS OR THE GROUP'S FAILURE TO SECURE THE ISSUANCE OF PATENTS
COVERING ELEMENTS OF ITS BUSINESS PROCESSES WOULD MATERIALLY HARM ITS BUSINESS
AND FINANCIAL CONDITION.
The CombiMatrix group's success depends on its ability to protect and exploit
its intellectual property. The CombiMatrix group currently has two patents
issued in the United States, one patent issued in Europe and more than 44 patent
applications pending in the United States, Europe and elsewhere. The patent
application process before the United States Patent and Trademark Office and
other similar agencies in other countries is initially confidential in nature.
Patents that are filed outside the United States, however, are published
approximately eighteen months after filing. The CombiMatrix group cannot
determine in a timely manner whether patent applications covering technology
that competes with its technology have been filed in the United States or other
foreign countries or which, if any, will ultimately issue or be granted as
enforceable patents. Some of the CombiMatrix group's patent applications may
claim compositions, methods or uses that may also be claimed in patent
applications filed by others. In some or all of these applications, a
determination of priority of inventorship may need to be decided in a proceeding
before the United States Patent and Trademark Office or a foreign regulatory
body or a court. If the CombiMatrix group is unsuccessful in these proceedings,
it could be blocked from further developing, commercializing or selling
products. Regardless of the ultimate outcome, this process is time-consuming and
expensive.
ANY INABILITY TO ADEQUATELY PROTECT THE COMBIMATRIX GROUP'S PROPRIETARY
TECHNOLOGIES COULD MATERIALLY HARM THE COMBIMATRIX GROUP'S COMPETITIVE POSITION
AND FINANCIAL RESULTS.
If the CombiMatrix group does not protect its intellectual property adequately,
competitors may be able to use its technologies and erode any competitive
advantage that it may have. The laws of some foreign countries do not protect
proprietary rights to the same extent as the laws of the United States, and many
companies have encountered significant problems in protecting their proprietary
rights abroad. These problems can be caused by the absence of rules and methods
for defending intellectual property rights.
10
The patent positions of companies developing tools for the biotechnology,
pharmaceutical and academic communities, including the CombiMatrix group's
patent position, generally are uncertain and involve complex legal and factual
questions. The CombiMatrix group will be able to protect its proprietary rights
from unauthorized use by third parties only to the extent that its proprietary
technologies are covered by valid and enforceable patents or are effectively
maintained as trade secrets. The CombiMatrix group's existing patents and any
future issued or granted patents it obtains may not be sufficiently broad in
scope to prevent others from practicing its technologies or from developing
competing products. There also is a risk that others may independently develop
similar or alternative technologies or designs around the CombiMatrix group's
patented technologies. In addition, others may oppose or invalidate its patents,
or its patents may fail to provide it with any competitive advantage. Enforcing
the CombiMatrix group's intellectual property rights may be difficult, costly
and time-consuming and ultimately may not be successful.
The CombiMatrix group also relies upon trade secret protection for its
confidential and proprietary information. While it has taken security measures
to protect its proprietary information, these measures may not provide adequate
protection for its trade secrets or other proprietary information. The
CombiMatrix group seeks to protect its proprietary information by entering into
confidentiality and invention disclosure and transfer agreements with employees,
collaborators and consultants. Nevertheless, employees, collaborators or
consultants may still disclose its proprietary information, and the CombiMatrix
group may not be able to meaningfully protect its trade secrets. In addition,
others may independently develop substantially equivalent proprietary
information or techniques or otherwise gain access to its trade secrets.
ANY LITIGATION TO PROTECT THE COMBIMATRIX GROUP'S INTELLECTUAL PROPERTY OR ANY
THIRD-PARTY CLAIMS OF INFRINGEMENT, COULD DIVERT SUBSTANTIAL TIME AND MONEY FROM
THE COMBIMATRIX GROUP'S BUSINESS AND COULD SHUT DOWN SOME OF ITS OPERATIONS.
The CombiMatrix group's commercial success depends in part on its
non-infringement of the patents or proprietary rights of third parties. Many
companies developing tools for the biotechnology and pharmaceutical industries
use litigation aggressively as a strategy to protect and expand the scope of
their intellectual property rights. Accordingly, third parties may assert that
the CombiMatrix group is employing their proprietary technology without
authorization. In addition, third parties may claim that use of the CombiMatrix
group's technologies infringes their current or future patents. The CombiMatrix
group could incur substantial costs and the attention of its management and
technical personnel could be diverted while defending ourselves against any of
these claims. The CombiMatrix group may incur the same liabilities in enforcing
its patents against others. The CombiMatrix group has not made any provision in
its financial plans for potential intellectual property related litigation, and
it may not be able to pursue litigation as aggressively as competitors with
substantially greater financial resources.
If parties making infringement claims against the CombiMatrix group are
successful, they may be able to obtain injunctive or other equitable relief,
which effectively could block the CombiMatrix group's ability to further
develop, commercialize and sell products, and could result in the award of
substantial damages against it. If the CombiMatrix group is unsuccessful in
protecting and expanding the scope of its intellectual property rights, its
competitors may be able to develop, commercialize and sell products that compete
with it using similar technologies or obtain patents that could effectively
block its ability to further develop, commercialize and sell its products. In
the event of a successful claim of infringement against the CombiMatrix group,
we may be required to pay substantial damages and either discontinue those
aspects of its business involving the technology upon which it infringed or
obtain one or more licenses from third parties. While the CombiMatrix group may
license additional technology in the future, it may not be able to obtain these
licenses at a reasonable cost, or at all. In that event, it could encounter
delays in product introductions while it attempts to develop alternative methods
or products, which may not be successful. Defense of any lawsuit or failure to
obtain any of these licenses could prevent it from commercializing available
products.
11
RISKS RELATING TO THE ACACIA TECHNOLOGIES GROUP
The risk factors beginning on this page discuss risks relating to the Acacia
Technologies group. Because each holder of AR-Acacia Technologies stock is a
holder of the common stock of one company, Acacia Research Corporation, the
risks associated with the CombiMatrix group could affect the AR-Acacia
Technologies stock. As such, we also urge you to read carefully the section
"Risks Relating to the CombiMatrix Group" above.
THE ACACIA TECHNOLOGIES GROUP HAS INCURRED LOSSES IN THE PAST AND EXPECTS TO
INCUR ADDITIONAL LOSSES IN THE FUTURE.
The Acacia Technologies group has sustained substantial losses in the past. We
expect the Acacia Technologies group to incur significant research and
development, marketing, general and administrative expenses. As a result, we
expect the Acacia Technologies group to incur significant losses for the
foreseeable future.
THE V-CHIP TECHNOLOGY PATENT HELD BY THE ACACIA TECHNOLOGIES GROUP EXPIRED IN
JULY 2003, AND IF THE GROUP DOES NOT DEVELOP OTHER RECURRING SOURCES OF REVENUE,
ITS FINANCIAL CONDITION WILL BE ADVERSELY IMPACTED.
The Acacia Technologies group, and Acacia Research Corporation as a whole, has
generated substantially all of its revenues from licensing the V-chip technology
to television manufacturers. The Acacia Technologies group's patent on the
V-chip technology expired in July 2003. The Acacia Technologies group will not
be able to collect royalties for televisions containing V-chip technology sold
after the expiration of that patent, but it may still collect revenues from the
sale of such televisions in the U.S. before that date. The Acacia Technologies
group is beginning to market its digital media transmission technology and is
developing other technologies and products. The eventual licensing and sale of
these technologies is intended to replace the revenue currently being generated
by licensing its V-chip technology. If the Acacia Technologies group does not
succeed in developing such technologies or is unable to commercially license its
existing and future technologies, its financial condition will be adversely
impacted.
THE ACACIA TECHNOLOGIES GROUP MAY FAIL TO MEET MARKET EXPECTATIONS BECAUSE OF
FLUCTUATIONS IN ITS QUARTERLY OPERATING RESULTS, WHICH COULD CAUSE THE PRICE OF
AR-ACACIA TECHNOLOGIES STOCK TO DECLINE.
The Acacia Technologies group's revenues and operating results have fluctuated
in the past and may continue to fluctuate significantly from quarter to quarter
in the future. It is possible that in future periods the Acacia Technologies
group's revenues could fall below the expectations of securities analysts or
investors, which could cause the market price of our AR-Acacia Technologies
stock to decline. The following are among the factors that could cause the
Acacia Technologies group's operating results to fluctuate significantly from
period to period:
o its unpredictable revenue sources, as described below;
o costs related to acquisitions, alliances, licenses and other
efforts to expand its operations;
o the timing of payments under the terms of any customer or license
agreements into which the Acacia Technologies group may enter; and
o expenses related to, and the results of, patent filings and other
proceedings relating to intellectual property rights.
THE ACACIA TECHNOLOGIES GROUP'S REVENUES WILL BE UNPREDICTABLE, AND THIS MAY
HARM ITS FINANCIAL CONDITION.
The amount and timing of revenues that the Acacia Technologies group may realize
from its business will be unpredictable because:
o whether the Acacia Technologies group generates revenues depends,
in part, on the success of its licensing efforts;
12
o its cycle of obtaining licensees may be lengthy; and
o it cannot be sure as to the timing of receipt of payment.
As a result, the Acacia Technologies group's revenues may vary significantly
from quarter to quarter, which could make its business difficult to manage and
cause its quarterly results to be below market expectations. If this happens,
the price of our AR-Acacia Technologies stock may decline significantly.
TECHNOLOGY COMPANY STOCK PRICES ARE ESPECIALLY VOLATILE, AND THIS VOLATILITY MAY
DEPRESS THE PRICE OF OUR AR-ACACIA TECHNOLOGIES STOCK.
The stock market has experienced significant price and volume fluctuations, and
the market prices of technology companies have been highly volatile. We believe
that various factors may cause the market price of our AR-Acacia Technologies
stock to fluctuate, perhaps substantially, including, among others,
announcements of:
o its or its competitors' technological innovations;
o developments or disputes concerning patents or proprietary rights;
o developments in relationships with licensees;
o its failure to meet or exceed securities analysts' expectations of
its financial results; or
o a change in financial estimates or securities analysts'
recommendations.
In the past, companies that have experienced volatility in the market price of
their stock have been the objects of securities class action litigation. If our
AR-Acacia Technologies stock was the object of securities class action
litigation, it could result in substantial costs and a diversion of management's
attention and resources, which could materially harm the business and financial
results of the Acacia Technologies group.
THE ACACIA TECHNOLOGIES GROUP FACES INTENSE COMPETITION, AND WE CANNOT ASSURE
YOU THAT IT WILL BE SUCCESSFUL.
Although the Acacia Technologies group believes that Acacia Media Technologies
has marketing and licensing rights to enforceable patents and other intellectual
property relating to video and audio on demand, the Acacia Technologies group
cannot assure you that other companies will not develop competing technologies
that offer better or less expensive alternatives to those offered by Acacia
Media Technologies. In the event a competing technology emerges, Acacia Media
Technologies would expect substantial additional competition.
THE MARKETS SERVED BY THE ACACIA TECHNOLOGIES GROUP ARE SUBJECT TO RAPID
TECHNOLOGICAL CHANGE, AND IF THE ACACIA TECHNOLOGIES GROUP IS UNABLE TO DEVELOP
AND INTRODUCE NEW PRODUCTS, ITS REVENUES COULD STOP GROWING OR COULD DECLINE.
The markets served by the Acacia Technologies group frequently undergo
transitions in which products rapidly incorporate new features and performance
standards on an industry-wide basis. Products for communications applications,
as well as for high-speed computing applications, are based on continually
evolving industry standards. A significant portion of the Acacia Technologies
group's revenues in recent periods has been, and is expected to continue to be,
derived from licensing of technologies based on existing transmission standards.
The Acacia Technologies group's ability to compete in the future will, however,
depend on its ability to identify and ensure compliance with evolving industry
standards.
13
THE ACACIA TECHNOLOGIES GROUP'S SUCCESS IS BASED ON ITS ABILITY TO PROTECT ITS
PROPRIETARY TECHNOLOGY AND ITS ABILITY TO DEFEND ITSELF AGAINST INFRINGEMENT
CLAIMS.
The success of the Acacia Technologies group relies, to varying degrees, on its
proprietary rights and their protection or exclusivity. Although reasonable
efforts will be taken to protect the Acacia Technologies group's proprietary
rights, the complexity of international trade secret, copyright, trademark and
patent law, and common law, coupled with limited resources and the demands of
quick delivery of products and services to market, create risk that these
efforts will prove inadequate. For example, in our pending litigation against
certain television manufacturers alleging their infringement of Soundview
Technologies' V-chip patent, a motion for summary judgment filed by the
defendants was granted in September 2002. The court ruled that the defendants
did not infringe on Soundview Technologies' patent. If we are unsuccessful in
our intended appeal of this ruling, legal principles will preclude us from
claiming infringement of our patents by other parties. Accordingly, if we are
unsuccessful in this or other litigation to protect our intellectual property
rights, the future revenues of the Acacia Technologies group could be adversely
affected.
>From time to time, the Acacia Technologies group may be subject to third-party
claims in the ordinary course of business, including claims of alleged
infringement of proprietary rights. Any such claims may harm the Acacia
Technologies group by subjecting it to significant liability for damage and
invalidating its proprietary rights. These types of claims, with or without
merit, could subject the Acacia Technologies group to costly litigation and
diversion of its technical and management personnel. The Acacia Technologies
group depends largely on the protection of enforceable patent rights. The Acacia
Technologies group has applications on file with the U.S. Patent and Trademark
Office seeking patents on its core technologies and has patents or rights to
patents that have been issued. We cannot assure you that the pending patent
applications of the Acacia Technologies group will be issued, that third parties
will not violate, or attempt to invalidate these intellectual property rights,
or that certain aspects of those intellectual property will not be
reverse-engineered by third parties without violating the patent rights of the
Acacia Technologies group.
For Acacia Media Technologies and Soundview Technologies, proprietary rights
constitute their only significant assets. The Acacia Technologies group also
owns licenses from third parties and it is possible that it could become subject
to infringement actions based upon such licenses. The Acacia Technologies group
generally obtains representations as to the origin and ownership of such
licensed content. However, this may not adequately protect the Acacia
Technologies group. The Acacia Technologies group enters into confidentiality
agreements with third parties and generally limits access to information
relating to its proprietary rights. Despite these precautions, third parties may
be able to gain access to and use the Acacia Technologies group's proprietary
rights to develop competing technologies and products with similar or better
features and prices. Any substantial unauthorized use of the Acacia Technologies
group's proprietary rights could materially and adversely affect its business
and operational results.
RISKS RELATING TO OUR CAPITAL STRUCTURE
HOLDERS OF BOTH CLASSES OF OUR STOCK ARE STOCKHOLDERS OF ONE COMPANY, AND THE
FINANCIAL PERFORMANCE OF ONE GROUP COULD AFFECT THE OTHER, THUS EXPOSING THE
HOLDERS OF EACH GROUP'S STOCK TO THE RISKS OF AN INVESTMENT IN THE ENTIRE
COMPANY.
Holders of AR-CombiMatrix stock and AR-Acacia Technologies stock are
stockholders of a single company. The CombiMatrix group and the Acacia
Technologies group are not separate legal entities. As a result, stockholders
will continue to be subject to all of the risks of an investment in Acacia
Research Corporation and all of our businesses, assets and liabilities. The
issuance of our AR-CombiMatrix stock and our AR-Acacia Technologies stock and
the allocation of assets and liabilities and stockholders' equity between the
CombiMatrix group and the Acacia Technologies group did not result in a
distribution or spin-off to stockholders of any of our assets or liabilities and
did not affect ownership of our assets or responsibility for our liabilities or
those of our subsidiaries. The assets we attribute to one group could be subject
to the liabilities of the other group, whether such liabilities arise from
lawsuits, contracts or indebtedness that we attribute to the other group. If we
are unable to satisfy one group's liabilities out of the assets we attribute to
it, we may be required to satisfy those liabilities with assets we have
attributed to the other group.
14
Financial effects from one group that affect our consolidated results of
operations or financial condition could, if significant, affect the results of
operations or financial condition of the other group and the market price of the
common stock relating to the other group. In addition, net losses of either
group and dividends or distributions on, or repurchases of, either class of
common stock will reduce the funds we can pay as dividends on each class of
common stock under Delaware law. For these reasons, you should read our
consolidated financial information with the financial information we provide for
each group.
THE MARKET PRICE OF EITHER CLASS OF OUR COMMON STOCK MAY NOT REFLECT THE
SEPARATE PERFORMANCE OF THE GROUP RELATED TO THAT CLASS OF COMMON STOCK.
The market price of our AR-CombiMatrix stock or AR-Acacia Technologies stock may
not reflect the separate performance of the business of the group relating to
that class of common stock. The market price of either class of common stock
could simply reflect the performance of Acacia Research Corporation as a whole,
or the market price of either class of common stock could move independently of
the performance of the business of either group. Investors may discount the
value of either class of common stock because it is part of a common enterprise
rather than a stand-alone company.
THE MARKET PRICE OF EITHER CLASS OF OUR COMMON STOCK MAY BE AFFECTED BY FACTORS
THAT DO NOT AFFECT TRADITIONAL COMMON STOCK.
THE COMPLEX NATURE OF THE TERMS OF OUR AR-COMBIMATRIX STOCK AND
AR-ACACIA TECHNOLOGIES STOCK MAY ADVERSELY AFFECT THE MARKET PRICE OF
EITHER CLASS OF COMMON STOCK.
The complex nature of the terms of our two classes of common stock,
such as the convertibility of AR-CombiMatrix stock into AR-Acacia
Technologies stock, or vice versa, and the potential difficulties
investors may have understanding these terms, may adversely affect
the market price of either class of common stock.
THE MARKET PRICE OF OUR AR-COMBIMATRIX STOCK OR AR-ACACIA
TECHNOLOGIES STOCK MAY BE ADVERSELY AFFECTED BY THE FACT THAT HOLDERS
HAVE LIMITED LEGAL INTERESTS IN THE GROUP RELATING TO THE CLASS OF
COMMON STOCK HELD AS A SEPARATE LEGAL ENTITY.
For example, as described in greater detail in the subsequent risk
factors, holders of either class of common stock generally do not
have separate class voting rights with respect to significant matters
affecting either group. In addition, upon our liquidation or
dissolution, holders of either class of common stock will not have
specific rights to the assets of the group relating to the class of
common stock held and will not be entitled to receive proceeds that
are proportional to the relative performance of that group.
THE MARKET PRICE OF OUR AR-COMBIMATRIX STOCK OR AR-ACACIA
TECHNOLOGIES STOCK MAY BE ADVERSELY AFFECTED BY EVENTS INVOLVING THE
GROUP RELATING TO THE OTHER CLASS OF COMMON STOCK OR THE PERFORMANCE
OF THE CLASS OF COMMON STOCK RELATING TO THAT GROUP.
Events, such as earnings announcements or other developments
concerning one group that the market does not view favorably and
which thus adversely affect the market price of the class of common
stock relating to that group, may adversely affect the market price
of the class of common stock relating to the other group. Because
both classes of common stock are common stock of Acacia Research
Corporation, an adverse market reaction to one class of common stock
may, by association, cause an adverse reaction to the other class of
common stock. This reaction may occur even if the triggering event
was not material to us as a whole.
THE HOLDERS OF AR-COMBIMATRIX STOCK AND THE HOLDERS OF AR-ACACIA TECHNOLOGIES
STOCK HAVE ONLY LIMITED SEPARATE STOCKHOLDER RIGHTS.
Holders of AR-CombiMatrix stock and AR-Acacia Technologies stock have the rights
customarily held by common stockholders. They also have these specific rights
related to their corresponding group:
15
o certain rights with regard to dividends and liquidation;
o requirements for a mandatory dividend, redemption or conversion
upon the disposition of all or substantially all of the assets of
their corresponding group; and
o a right to vote on matters as a separate voting class in the
limited circumstances provided under Delaware law, by stock
exchange rules or as determined by our board of directors (such as
an amendment of our certificate of incorporation that changes the
rights, privileges or preferences of the class of stock held by
such stockholders).
We will not hold separate stockholder meetings for holders of AR-CombiMatrix
stock and AR-Acacia Technologies stock.
THE HOLDERS OF AR-COMBIMATRIX STOCK AND THE HOLDERS OF AR-ACACIA TECHNOLOGIES
STOCK WILL HAVE CERTAIN LIMITS ON THEIR RESPECTIVE VOTING POWERS.
GROUP COMMON STOCK WITH A MAJORITY OF VOTING POWER CAN CONTROL VOTING
OUTCOMES.
The holders of AR-CombiMatrix stock and AR-Acacia Technologies stock
will vote together as a single class, except in limited
circumstances. If a separate vote on a matter by the holders of
either our AR-CombiMatrix stock or our AR-Acacia Technologies stock
is not required under Delaware law or by stock exchange rules, and if
our board of directors does not require a separate vote, either class
of common stock that is entitled to more than the number of votes
required to approve such matter could control the outcome of such
vote - even if the matter involves a divergence or conflict of the
interests between the holders of our AR-CombiMatrix stock and our
AR-Acacia Technologies stock. In addition, if the holders of common
stock having a majority of the voting power of all shares of common
stock outstanding approve a merger, the terms of which did not
require separate class voting under stock exchange rules, then the
merger could be consummated - even if the holders of a majority of
either class of common stock were to vote against the merger.
GROUP COMMON STOCK WITH LESS THAN MAJORITY VOTING POWER CAN BLOCK
ACTION IF A CLASS VOTE IS REQUIRED.
If Delaware law, stock exchange rules or our board of directors
requires a separate vote on a matter by the holders of either our
AR-CombiMatrix stock or our AR-Acacia Technologies stock, such as a
proposal to amend the terms of one class of stock, those holders
could prevent approval of the matter, even if the holders of a
majority of the total number of votes cast or entitled to be cast,
voting together as a class, were to vote in favor of it.
HOLDERS OF ONLY ONE CLASS OF COMMON STOCK CANNOT ENSURE THAT THEIR
VOTING POWER WILL BE SUFFICIENT TO PROTECT THEIR INTERESTS.
Since the relative voting power per share of AR-CombiMatrix stock and
AR-Acacia Technologies stock will fluctuate based on the market
values of the two classes of common stock, the relative voting power
of a class of common stock could decrease. As a result, holders of
shares of only one of the two classes of common stock cannot ensure
that their voting power will be sufficient to protect their
interests.
OUR RESTATED CERTIFICATE OF INCORPORATION MAY BE AMENDED TO INCREASE OR DECREASE
THE AUTHORIZED SHARES OF EITHER CLASS OF COMMON STOCK WITHOUT THE APPROVAL OF
EACH CLASS VOTING SEPARATELY.
Our restated certificate of incorporation provides that an amendment to our
restated certificate to increase or decrease the number of authorized shares of
either class of common stock will require the approval of the holders of a
majority of the voting power of all shares of common stock, voting together as a
single class, and will not require the approval of each class of stock voting as
a separate class. Accordingly, if the holders of one class of common stock hold
a majority of the voting power of all shares of common stock, then that majority
could approve an amendment to our restated certificate to increase or decrease
the authorized shares of stock of either class without the approval of the
holders of the minority class of stock.
16
STOCKHOLDERS MAY NOT HAVE ANY REMEDIES FOR BREACH OF FIDUCIARY DUTIES IF ANY
ACTION BY OUR DIRECTORS OR OFFICERS HAS A DISADVANTAGEOUS EFFECT ON EITHER CLASS
OF COMMON STOCK.
Stockholders may not have any remedies if any action or decision of our
directors and officers has a disadvantageous effect on either class of common
stock compared to the other class of common stock. We are not aware of any legal
precedent under Delaware law involving the fiduciary duties of directors and
officers of corporations having two classes of common stock, or separate classes
or series of capital stock, the rights of which, like our AR-CombiMatrix stock
and AR-Acacia Technologies stock, are defined by reference to separate
businesses of the corporation.
Principles of Delaware law established in cases involving differing treatment of
two classes of capital stock or two groups of holders of the same class of
capital stock provide that a board of directors owes an equal duty to all
stockholders regardless of class or series. Under these principles of Delaware
law and the related principle known as the "business judgment rule," absent
abuse of discretion, a good faith business decision made by a disinterested and
adequately informed board of directors, board of directors' committee or officer
with respect to any matter having different effects on holders of AR-CombiMatrix
stock and holders of AR-Acacia Technologies stock would be a defense to any
challenge to such determination made by or on behalf of the holders of either
class of common stock.
NUMEROUS POTENTIAL CONFLICTS OF INTERESTS EXIST BETWEEN OUR AR-COMBIMATRIX STOCK
AND OUR AR-ACACIA TECHNOLOGIES STOCK WHICH MAY BE DIFFICULT TO RESOLVE BY OUR
BOARD OR WHICH MAY BE RESOLVED ADVERSELY TO ONE OF THE CLASSES.
The existence of separate classes of common stock could give rise to occasions
when the interests of the holders of AR-CombiMatrix stock and AR-Acacia
Technologies stock diverge or conflict. Examples include determinations by our
directors or officers to:
o pay or omit the payment of dividends on AR-CombiMatrix stock or
AR-Acacia Technologies stock;
o allocate consideration to be received by holders of each of the
classes of common stock in connection with a merger or
consolidation involving Acacia Research Corporation;
o convert one class of common stock into shares of the other;
o approve certain dispositions of the assets of either group;
o allocate the proceeds of future issuances of our stock either to
the Acacia Technologies group or the CombiMatrix group;
o allocate corporate opportunities between the groups; and
o make other operational and financial decisions with respect to one
group that could be considered detrimental to the other group.
When making decisions with regard to matters that create potential diverging or
conflicting interests, our directors and officers will act in accordance with
their fiduciary duties, the terms of our restated certificate of incorporation,
and, to the extent applicable, our management and allocation policies.
THE PERFORMANCE OF ONE GROUP OR THE DIVIDENDS PAID TO ONE GROUP MAY
ADVERSELY AFFECT THE DIVIDENDS AVAILABLE FOR THE OTHER GROUP.
Our board of directors currently has no intention to pay dividends on
our AR-CombiMatrix stock or our AR-Acacia Technologies stock.
Determinations as to future dividends on our AR-CombiMatrix stock and
our AR-Acacia Technologies stock will be based primarily on the
financial condition, results of operations and business requirements
of the relevant group and Acacia Research Corporation as a whole.
17
Subject to the limitations referred to below, our board of directors has the
authority to declare and pay dividends on our AR-CombiMatrix stock and our
AR-Acacia Technologies stock in any amount and could, in its sole discretion,
declare and pay dividends exclusively on our AR-CombiMatrix stock, exclusively
on our AR-Acacia Technologies stock, or on both, in equal or unequal amounts.
Our board of directors will not be required to consider the amount of dividends
previously declared on each class, the respective voting or liquidation rights
of each class or any other factor.
The performance of one group may cause our board of directors to pay more or
less dividends on the common stock relating to the other group than if that
other group was a stand-alone company. In addition, Delaware law and our
restated certificate of incorporation impose limitations on the amount of
dividends which may be paid on each class of common stock.
PROCEEDS OF MERGERS OR CONSOLIDATIONS MAY BE ALLOCATED UNFAVORABLY.
Our restated certificate of incorporation does not contain any
provisions governing how consideration to be received by holders of
common stock in connection with a merger or consolidation involving
Acacia Research Corporation is to be allocated among holders of each
class of common stock. Our board of directors will determine the
percentage of the consideration to be allocated to holders of each
class of common stock in any such transaction. Such percentage may be
materially more or less than that which might have been allocated to
such holders had our board of directors chosen a different method of
allocation.
HOLDERS OF EITHER CLASS OF COMMON STOCK MAY BE ADVERSELY AFFECTED BY
A CONVERSION OF GROUP COMMON STOCK.
Our board of directors could, in its sole discretion and without
stockholder approval, determine to convert shares of AR-Acacia
Technologies stock into shares of AR-CombiMatrix stock, or vice
versa, at a time when either or both classes of common stock may be
considered to be overvalued or undervalued. Any such conversion would
dilute the interests in Acacia Research Corporation of the holders of
the class of common stock being issued in the conversion. It could
also give holders of shares of the class of common stock converted a
greater or lesser premium than any premium that might be paid by a
third-party buyer of all or substantially all of the assets of the
group whose stock is converted.
HOLDERS OF EITHER CLASS OF COMMON STOCK COULD BE ADVERSELY AFFECTED
BY A DISPOSITION OF THE ASSETS ATTRIBUTED TO THEIR RESPECTIVE GROUPS.
Our board of directors could, in its sole discretion and without
stockholder approval, determine to dispose of all or substantially
all the assets of a group. If a disposition of group assets occurs at
a time when those assets are considered undervalued, then holders of
that group's stock would receive less consideration than they could
have received had the assets been disposed of at a time when they had
a higher value.
PROCEEDS OF FUTURE ISSUANCES OF OUR STOCK COULD BE ATTRIBUTED
UNFAVORABLY.
We may in the future issue a new class of stock, such as a class of
preferred stock, or additional shares of AR-CombiMatrix stock or
AR-Acacia Technologies stock. Proceeds from any future issuance of
any class of stock would be attributed among the CombiMatrix group or
the Acacia Technologies group as determined by our board of
directors. There is no requirement that the proceeds from an issuance
of AR-CombiMatrix stock or AR-Acacia Technologies stock be attributed
to the corresponding group. Such allocations might be materially more
or less for the respective groups than what might have been
attributed had our board of directors chosen a different allocation
method. Also, any designated preferred class may be designed to
reflect the performance of Acacia Research Corporation as a whole,
rather than the performance of the CombiMatrix group or the Acacia
Technologies group.
18
ALLOCATION OF CORPORATE OPPORTUNITIES COULD FAVOR ONE GROUP OVER
ANOTHER.
Our board of directors may be required to allocate corporate
opportunities between the groups. In some cases, our directors could
determine that a corporate opportunity, such as a business that we
are acquiring, should be shared by the groups. Any such decisions
could favor one group at the expense of the other.
OTHER OPERATIONAL AND FINANCIAL DECISIONS WHICH MAY FAVOR ONE GROUP
OVER THE OTHER.
Our board of directors or our senior officers will review other
operational and financial matters affecting the CombiMatrix group and
the Acacia Technologies group, including the allocation of financing
resources and capital, technology and know-how and corporate
overhead, taxes, debt, interest and other matters. Any decision of
our board of directors or our senior officers in these matters could
favor one group at the expense of the other.
OUR BOARD OF DIRECTORS MAY CHANGE OUR MANAGEMENT AND ALLOCATION POLICIES WITHOUT
STOCKHOLDER APPROVAL TO THE DETRIMENT OF EITHER GROUP.
Our board of directors may modify or rescind our policies with respect to the
allocation of corporate overhead, taxes, debt, interest and other matters, or
may adopt additional policies, in its sole discretion without stockholder
approval. A decision to modify or rescind these policies, or adopt additional
policies could have different effects on holders of either class of common stock
or could result in a benefit or detriment to one class of stockholders compared
to the other class. Our board of directors will make any such decision in
accordance with its good faith business judgment that the decision is in the
best interests of Acacia Research Corporation and all of our stockholders as a
whole.
EITHER GROUP MAY FINANCE THE OTHER GROUP ON TERMS UNFAVORABLE TO ONE OF THE
GROUPS.
We may transfer cash and other property between groups to finance their business
activities. The group providing the financing will be subject to the risks
relating to the group receiving the financing. We will account for those
transfers generally as a short-term or long-term loan between groups or as a
repayment of a previous borrowing.
THERE ARE LIMITS ON THE CONSIDERATION WHICH MAY BE RECEIVED BY THE STOCKHOLDERS
IN THE EVENT OF THE DISPOSITION OF ASSETS OF A GROUP.
Our restated certificate of incorporation provides that if a disposition of all
or substantially all of the properties and assets of either group occurs, we
must, subject to certain exceptions:
o distribute through a dividend or redemption to holders of the
class of common stock relating to such group an amount equal to
the net proceeds of such disposition; or
o convert at a 10% premium such common stock into shares of the
class of common stock relating to the other group.
If the group subject to the disposition were a separate, independent company and
its shares were acquired by another person, certain costs of that disposition,
including corporate level taxes, might not be payable in connection with that
acquisition. As a result, stockholders of the separate, independent company
might receive a greater amount than the net proceeds that would be received by
holders of the class of common stock relating to that group if the assets of
such group were sold. In addition, we cannot assure you that the net proceeds
per share of the common stock relating to that group will be equal to or more
than the market value per share of such common stock prior to or after
announcement of a disposition.
The term "substantially all of the properties and assets" of a group is subject
to potentially conflicting interpretations. Resolution of such a dispute could
adversely impact the holders of either the class of common stock related to the
assets being disposed or the holders of the other class because the
consideration, if any, to be received by the holders of the class related to the
disposed assets may depend on whether the disposition involved "substantially
all" of the properties and assets of that class.
19
HOLDERS OF EITHER CLASS OF COMMON STOCK MAY BE ADVERSELY AFFECTED BY A
REDEMPTION OF THEIR COMMON STOCK.
We are entitled to redeem the outstanding common stock relating to a group when
all or substantially all of that group's assets are sold. We can redeem the
assets for cash, securities, a combination of cash and securities or other
property at fair value. A disposition-related redemption could occur when the
assets being disposed of are considered undervalued. If that were the case, the
holders of our common stock related to that group would receive less
consideration for their shares than they may deem reasonable.
We can also redeem on a pro rata basis all of the outstanding shares of a
group's common stock for shares of the common stock of one or more of our wholly
owned subsidiaries. If this were to occur, the holders of the redeemed class of
common stock would no longer have stockholder voting rights in Acacia Research
Corporation or any other benefits to be derived from holding a class of stock in
Acacia Research Corporation. In addition, if the outstanding shares of a class
of our common stock are redeemed for shares that are not publicly traded, the
holders of such redeemed stock will no longer be able to publicly trade their
shares and accordingly their investment will be substantially less liquid.
OUR CAPITAL STRUCTURE AND THE VARIABLE VOTE PER SHARE COULD ENABLE A POTENTIAL
ACQUIRER TO TAKE CONTROL OF OUR COMPANY THROUGH THE ACQUISITION OF ONLY ONE OF
THE CLASSES OF OUR COMMON STOCK.
A potential acquirer could acquire control of Acacia Research Corporation by
acquiring shares of common stock having a majority of the voting power of all
shares of common stock outstanding. Such a majority could be obtained by
acquiring a sufficient number of shares of both classes of common stock or, if
one class of common stock has a majority of such voting power, only shares of
that class. Currently, our AR-CombiMatrix stock has a majority of the voting
power. As a result, currently, it might be possible for an acquirer to obtain
control of Acacia Research Corporation by purchasing only shares of
AR-CombiMatrix stock.
DECISIONS BY DIRECTORS AND OFFICERS THAT AFFECT DIFFERENTLY ONE CLASS OF OUR
COMMON STOCK COMPARED TO THE OTHER COULD ADVERSELY AFFECT THE MARKET VALUE OF
EITHER OR BOTH OF THE CLASSES OF OUR COMMON STOCK.
The relative voting power per share of our AR-CombiMatrix stock and our
AR-Acacia Technologies stock and the number of shares of one class of common
stock issuable upon the conversion of the other class of common stock will vary
depending upon the relative market values of our AR-CombiMatrix stock and our
AR-Acacia Technologies stock. The market value of either or both classes of
common stock could be affected by market reaction to decisions by our board of
directors or our management that investors perceive to affect differently one
class of common stock compared to the other. These decisions could involve
changes to our management and allocation policies, allocations of corporate
opportunities and financing resources between groups, and changes in dividend
policies.
INVESTORS MAY NOT VALUE OUR AR-COMBIMATRIX STOCK AND OUR AR-ACACIA TECHNOLOGIES
STOCK BASED ON GROUP FINANCIAL INFORMATION AND POLICIES.
We cannot assure you that investors will value our AR-CombiMatrix stock and our
AR-Acacia Technologies stock based on the reported financial results and
prospects of the separate groups or the dividend policies established by our
board of directors with respect to those groups. Holders of AR-CombiMatrix stock
and AR-Acacia Technologies stock will continue to be common stockholders of
Acacia Research Corporation subject to all the risks associated with an
investment in Acacia Research Corporation as a whole. Additionally, the separate
stockholder rights related to each group are limited and relate to events that
may never occur, such as dividend and liquidation rights and the disposition of
all or substantially all of the assets of a group. Accordingly, investors may
discount the value of AR-CombiMatrix stock and AR-Acacia Technologies stock
because both groups are part of a common enterprise rather than a stand-alone
entity and each class of stock has limited separate stockholder rights.
20
HOLDERS OF AR-COMBIMATRIX STOCK AND AR-ACACIA TECHNOLOGIES STOCK MAY NOT RECEIVE
A PREMIUM FROM AN INVESTOR ACQUIRING CONTROL OF THEIR RESPECTIVE CLASSES OF
STOCK.
Control of AR-CombiMatrix stock or AR-Acacia Technologies stock may not provide
control of Acacia Research Corporation as a whole. Accordingly, unlike many
acquisition transactions, holders of AR-CombiMatrix stock and AR-Technologies
stock may not receive a controlling interest premium from an investor acquiring
control of their respective classes of stock.
THERE ARE CERTAIN PROVISIONS IN OUR TWO-CLASS CAPITAL STRUCTURE THAT COULD HAVE
ANTITAKEOVER EFFECTS.
The existence of the two classes of common stock could, under certain
circumstances, prevent stockholders from profiting from an increase in the
market value of their shares as a result of a change in control of Acacia
Research Corporation by delaying or preventing such change in control. The
existence of two classes of common stock could present complexities and could,
in certain circumstances, pose obstacles, financial and otherwise, to an
acquiring person. We could, in the sole discretion of our board of directors and
without stockholder approval, exercise the right to convert the shares of one
class of common stock into shares of the other at a 10% premium over their
respective average market values. This conversion could result in additional
dilution to persons seeking control of Acacia Research Corporation.
Our board of directors could issue shares of preferred stock or common stock
that could be used to create voting or other impediments to discourage persons
seeking to gain control of Acacia Research Corporation, and preferred stock
could also be privately placed with purchasers favorable to our board of
directors in opposing such action.
21
FORWARD-LOOKING STATEMENTS
This prospectus contains forward-looking statements within the meaning of the
federal securities laws. Forward-looking statements are statements that predict
or describe future events or trends and that do not relate solely to historical
matters. You can generally identify forward-looking statements as statements
containing the words "may," "will," "expect," "believe," "estimate,"
"anticipate," "intend," "continue," and other similar expressions or the
negative of these terms. You should be aware that the matters described in our
forward-looking statements are subject to known and unknown risks, uncertainties
and other unpredictable factors, many of which are beyond our control.
Statements regarding the following subjects are forward-looking by their nature:
o our business strategies;
o market trends and risks;
o assumptions regarding economic conditions;
o circumstances affecting anticipated revenues and costs; and
o legislative, regulatory and competitive developments.
These forward-looking statements are subject to various risks and uncertainties,
including those related to:
o the recent slowdown affecting technology companies;
o our ability to successfully develop products;
o rapid technological change in our markets;
o anticipated sources of future revenues;
o changes in demand for our future products;
o our ability to raise capital in the future; and
o the adequacy of our capital resources to fund our operations.
Other risks, uncertainties and factors, including those discussed under "Risk
Factors" in this prospectus or described in reports that we file from time to
time with the Securities and Exchange Commission, such as our quarterly and
annual reports, could cause our actual results to differ materially from those
projected in any forward-looking statements we make. We are not obligated to
publicly update or revise any forward-looking statements, whether as a result of
new information, future events or otherwise.
USE OF PROCEEDS
Unless otherwise indicated in an accompanying prospectus supplement, we intend
to use the net proceeds from the sale of the securities offered by this
prospectus and the related accompanying prospectus supplement to provide working
capital for our business, including our subsidiaries.
22
DESCRIPTION OF OUR CAPITAL STOCK
Following is a summary of the material terms of the AR-CombiMatrix stock and the
AR-Acacia Technologies stock. The summary is not complete and should be read in
conjunction with our restated certificate of incorporation, or Restated
Certificate, filed as Appendix B to the proxy statement/prospectus which formed
a part of our Registration Statement on Form S-4 (SEC File No. 333-87654), which
became effective on November 8, 2002.
AUTHORIZED AND OUTSTANDING SHARES
The Restated Certificate authorizes us to issue 110,000,000 shares of stock as
follows: 50,000,000 shares of a class of common stock, designated as Acacia
Research-CombiMatrix Common Stock (the "AR-CombiMatrix stock"), 50,000,000
shares of a class of common stock, designated as Acacia Research-Acacia
Technologies Common Stock (the "AR-Acacia Technologies stock"), and 10,000,000
shares of preferred stock. Shares of each class of stock will have a par value
of $0.001 per share. We will be able to issue shares of preferred stock in
series, without stockholder approval.
As of March 4, 2004, a total of 27,639,201 shares of the AR-CombiMatrix stock
and 19,746,234 shares of the AR-Acacia Technologies stock were issued and
outstanding.
DIVIDENDS
Dividends on the AR-CombiMatrix stock and dividends on the AR-Acacia
Technologies stock will be limited to an amount not greater than the Available
Dividend Amount (as defined in the Restated Certificate) for the relevant group.
The Available Dividend Amount under our Restated Certificate is essentially the
same as legally available funds under Delaware law, both of which consist of
either the surplus (market value of assets less liabilities and par value) or,
if there is no surplus, the net profits for the fiscal year in which the
dividend is declared and/or the preceding fiscal year.
In addition, Delaware law limits the amount of distributions on capital stock to
legally available funds as defined under Delaware law, which are determined on
the basis of our entire company, and not only the respective groups. As a
result, the amount of legally available funds will reflect the amount of any net
losses of each group, any distributions on AR-CombiMatrix stock, AR-Acacia
Technologies stock or any preferred stock and any repurchases of AR-CombiMatrix
stock, AR-Acacia Technologies stock or certain preferred stock. Dividend
payments on the AR-CombiMatrix stock and on the AR-Acacia Technologies stock
could be precluded because legally available funds are not available under
Delaware law, even though the Available Dividend Amount test for the particular
relevant group was met. We cannot assure you that there will be an Available
Dividend Amount for either group.
Subject to the prior payment of dividends on any outstanding shares of preferred
stock and the limitations described above, our board of directors will be able,
in its sole discretion, to declare and pay dividends exclusively on the
AR-CombiMatrix stock, exclusively on the AR-Acacia Technologies stock or on
both, in equal or unequal amounts. In making its dividend decisions, our board
of directors will not be required to take into account the relative Available
Dividend Amounts for the two groups, the amount of prior dividends declared on
either class, the respective voting or liquidation rights of either class or any
other factor.
VOTING RIGHTS
Under our Restated Certificate the entire voting power of the stockholders of
Acacia Research is vested in the holders of common stock, who will be entitled
to vote on any matter on which the holders of our stock are, by law or by the
provisions of the Restated Certificate, entitled to vote, except as otherwise
provided by law, by the terms of any outstanding preferred stock or by any
provision of the new certificate of incorporation restricting the power to vote
on a specified matter to other stockholders.
23
Holders of common stock will vote as a single class on each matter on which
holders of common stock are generally entitled to vote.
On all matters as to which both classes of common stock will vote together as a
single class:
o each share of AR-CombiMatrix stock will have one vote; and
o each share of AR-Acacia Technologies stock will have a number of
votes equal to the quotient of the average market value of a share
of AR-Acacia Technologies stock over the 20-trading day period
ending on the 10th trading day prior to the record date for
determining the holders of common stock entitled to vote, divided
by the average market value of a share of AR-CombiMatrix stock
over the same period.
Accordingly, the relative per share voting rights of the AR-CombiMatrix stock
and the AR-Acacia Technologies stock will fluctuate depending on changes in the
relative market values of shares of such classes of common stock. The purpose of
the floating voting power is to link voting power to relative economic interests
in Acacia Research.
EXAMPLES OF THE CALCULATION OF THE NUMBER OF VOTES EACH SHARE OF
AR-ACACIA TECHNOLOGIES STOCK WOULD BE ENTITLED ON ALL MATTERS ON
WHICH HOLDERS OF AR-COMBIMATRIX STOCK AND AR-ACACIA TECHNOLOGIES
STOCK VOTE AS SINGLE CLASS
EXAMPLE #1: If the average market values for the 20-trading day
valuation period were $4 for the AR-Acacia Technologies stock and $6
for the AR-CombiMatrix stock, each share of AR-CombiMatrix stock
would have one vote and each share of AR-Acacia Technologies stock
would have 0.67 votes based on the following calculation:
$4
- ------ = 0.67 votes
$6
Based on the assumptions in this example, and assuming 20 million shares of
AR-CombiMatrix stock and 20 million shares of AR-Acacia Technologies stock were
outstanding, the shares of AR-CombiMatrix stock would represent approximately
60% of our total voting power and the shares of AR-Acacia Technologies stock
would represent approximately 40% of our total voting power.
EXAMPLE #2: If the average market values for the 20-trading day valuation period
were $5 for the AR-Acacia Technologies stock and $5 for the AR-CombiMatrix
stock, each share of AR-CombiMatrix stock would have one vote and each share of
AR-Acacia Technologies stock would have one (1) vote based on the following
calculation:
$5
- ------ = 1.0 votes
$5
Based on the assumptions in this example, and assuming 20 million shares of
AR-CombiMatrix stock and 20 million shares of AR-Acacia Technologies stock were
outstanding, the shares of AR-CombiMatrix stock would represent approximately
50% of our total voting power and the shares of AR-Acacia Technologies stock
would represent approximately 50% of our total voting power.
24
EXAMPLE #3: If the average market values for the 20-trading day valuation period
were $6 for the AR-Acacia Technologies stock and $4 for the AR-CombiMatrix
stock, each share of AR-CombiMatrix stock would have one vote and each share of
AR-Acacia Technologies stock would have 1.50 votes based on the following
calculation:
$6
- ------ = 1.50 votes
$4
Based on the assumptions in this example, and assuming 20 million shares of
AR-CombiMatrix stock and 20 million shares of AR-Acacia Technologies stock were
outstanding, the shares of AR-CombiMatrix stock would represent approximately
40% of our total voting power and the shares of AR-Acacia Technologies stock
would represent approximately 60% of our total voting power.
These examples, each of which is based on the assumption that the total number
of issued and outstanding shares of each class is 20,000,000, are summarized in
the table below:
ASSUMED RELATIVE
SHARE PRICE VOTING RIGHTS TOTAL VOTES VOTING POWER
----------- ------------- ----------- ------------
EXAMPLE #1:
AR-CombiMatrix $6 1.0 vote/share 20,000,000 60%
AR-Acacia Technologies $4 0.67 votes/share 13,333,333 40%
EXAMPLE #2:
AR-CombiMatrix $5 1.0 vote/share 20,000,000 50%
AR-Acacia Technologies $5 1.0 vote/share 20,000,000 50%
EXAMPLE #3:
AR-CombiMatrix $4 1.0 vote/share 20,000,000 40%
AR-Acacia Technologies $6 1.50 vote/share 30,000,000 60%
IN THESE EXAMPLES WE HAVE PROVIDED A BETTER UNDERSTANDING OF THE MECHANICS
SURROUNDING THE CALCULATION OF VOTING POWER. IT SHOULD NOT BE ASSUMED THAT THE
EXAMPLES USED ARE IN ANY WAY INDICATIVE OF THE RESPECTIVE COMMON STOCK TRADING
PRICES AT ANY TIME BEFORE OR AFTER THE DATE OF THIS PROSPECTUS.
We will set forth the number of outstanding shares of AR-CombiMatrix stock and
AR-Acacia Technologies stock in our Annual Reports on Form 10-K and our
Quarterly Reports on Form 10-Q filed under the Securities Exchange Act of 1934,
as amended (the "Exchange Act"). We will disclose in any proxy statement for a
stockholders' meeting the number of outstanding shares and per share voting
rights of the AR-CombiMatrix stock and the AR-Acacia Technologies stock.
If shares of only one class of common stock are outstanding, each share of that
class will have one vote. If either class of common stock is entitled to vote as
a separate class with respect to any matter, each share of that class will, for
purpose of such vote, have one vote on such matter.
Fluctuations in the relative voting rights of the AR-CombiMatrix stock and the
AR-Acacia Technologies stock could influence an investor interested in acquiring
and maintaining a fixed percentage of the voting power of Acacia Research to
acquire such percentage of both classes of common stock and would limit the
ability of investors in one class to acquire for the same consideration
relatively more or less votes per share than investors in the other class.
25
The holders of AR-CombiMatrix stock and AR-Acacia Technologies stock will not
have any rights to vote separately as a class on any matter coming before
stockholders of Acacia Research, except for certain limited class voting rights
provided under Delaware law. In addition to the approval of the holders of a
majority of the voting power of all shares of common stock voting together as a
single class, the approval of a majority of the outstanding shares of the
AR-CombiMatrix stock or the AR-Acacia Technologies stock, voting as a separate
class, would be required under Delaware law to approve any amendment to the
Restated Certificate that would change the par value of the shares of the class
or alter or change the powers, preferences or special rights of the shares of
such class so as to affect them adversely. As permitted by Delaware law, the
Restated Certificate provides that an amendment to the Restated Certificate that
increases or decreases the number of authorized shares of AR-CombiMatrix stock
or AR-Acacia Technologies stock will only require the approval of the holders of
a majority of the voting power of all shares of common stock, voting together as
a single class, and will not require the approval of the holders of the class of
common stock affected by such amendment, voting as a separate class.
CONVERSION AND REDEMPTION
Our Restated Certificate permits the conversion or redemption of the
AR-CombiMatrix stock and the AR-Acacia Technologies stock as described below.
MANDATORY DIVIDEND, REDEMPTION OR CONVERSION OF COMMON STOCK
IF DISPOSITION OF GROUP ASSETS OCCURS
If we sell, transfer, assign or otherwise dispose of, in one transaction or a
series of related transactions, all or substantially all of the properties and
assets attributed to either group (a "disposition"), we are required, except as
described below, to:
o pay a dividend in cash and/or securities or other property to the
holders of shares of the class of common stock relating to the
group subject to the disposition having a fair value equal to the
net proceeds of the disposition; or
o (A) if the disposition involves all, but not merely substantially
all, of such properties and assets, redeem all outstanding shares
of common stock relating to that group in exchange for cash and/or
securities or other property having a fair value equal to the net
proceeds of the disposition; or B) if the disposition involves
substantially all, but not all, of such properties and assets,
redeem that number of whole shares of the class of common stock
relating to that group as have in the aggregate an average market
value, during the period of ten consecutive trading days beginning
on the 26th trading day immediately succeeding the consummation
date, closest to the net proceeds of the disposition; and the
redemption price will be cash and/or securities or other property
having a fair value equal to such net proceeds; or
o convert each outstanding share of such class of common stock into
a number of shares of common stock relating to the other group
equal to 110% of the ratio of the average market value of one
share of common stock relating to the group subject to the
disposition to the average market value of one share of common
stock relating to the other group during the 10-trading day period
beginning on the 26th trading day following the disposition date.
The purpose of this provision is to provide holders of each class of stock with
an economic interest in the proceeds of the disposition of the assets of the
respective group.
Stockholder approval is typically required for the sale of all or substantially
all of a company's assets. However, we may dispose of all or substantially all
of the assets attributed to either group without stockholder approval provided
those assets do not constitute all or substantially all of the assets of Acacia
Research as a whole.
We may pay a dividend or redeem shares of common stock as set forth above only
if we have legally available funds under Delaware law and the amount to be paid
to holders is less than or equal to the Available Dividend Amount for the group.
We are required to pay such dividend or complete such redemption or conversion
on or prior to the 95th trading day following the disposition.
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For purposes of determining whether a disposition has occurred, "substantially
all of the properties and assets" attributed to either group means a portion of
such properties and assets:
o that represents at least 80% of the then fair value of the
properties and assets attributed to that group; or
o from which were derived at least 80% of the aggregate revenues of
that group for the immediately preceding twelve fiscal quarterly
periods.
The "net proceeds" of a disposition means an amount equal to what remains of the
gross proceeds of the disposition after any payment of, or reasonable provision
is made as determined by our board of directors for:
o any taxes payable by us, or which would have been payable but for
the utilization of tax benefits attributable to the group not
subject to the disposition, in respect of the disposition or in
respect of any resulting dividend or redemption;
o any transaction costs, including, without limitation, any legal,
investment banking and accounting fees and expenses; and
o any liabilities of or attributed to the group subject to the
disposition, including, without limitation, any liabilities for
deferred taxes, any indemnity or guarantee obligations incurred in
connection with the disposition or otherwise, any liabilities for
future purchase price adjustments and any preferential amounts
plus any accumulated and unpaid dividends in respect of the
preferred stock attributed to that group.
We may elect to pay the dividend or redemption price in connection with a
disposition either in the same form as the proceeds of the disposition were
received or in any other combination of cash, securities or other property that
our board of directors or, in the case of securities that have not been publicly
traded for a period of at least 15 months, an independent investment banking
firm, determines will have an aggregate market value of not less than the fair
value of the net proceeds.
EXAMPLE OF PROVISIONS REQUIRING A MANDATORY DIVIDEND,
REDEMPTION OR CONVERSION IF A DISPOSITION OCCURS
If (1) 20 million shares of AR-CombiMatrix stock and 20 million shares of
AR-Acacia Technologies stock were outstanding, (2) the net proceeds of the
disposition of substantially all, but not all, of the assets of the Acacia
Technologies group equals $80 million, (3) the average market value of the
AR-Acacia Technologies stock during the 10-trading day valuation period was $4
per share and (4) the average market value of the AR-CombiMatrix stock during
the same valuation period was $8 per share, then we could do any of the
following:
(1) pay a dividend to the holders of shares of AR-Acacia Technologies
stock equal to:
Net Proceeds
------------------------------------------------------------ = Number of Shares
Number of Outstanding Shares of AR-Acacia Technologies stock
$80 million
------------------------------------------------------------ = $4 per share
20 million shares
27
(2) redeem for $4 per share a number of shares of AR Acacia
Technologies stock equal to:
Net Proceeds
------------------------------------------------------------ = Number of Shares
Average Market Value of AR-Acacia Technologies stock
$80 million
------------------------------------------------------------ = 20,000,000 shares
$4 per share
(3) convert each outstanding share of AR-Acacia Technologies stock
into a number of shares of AR-CombiMatrix stock equal to:
1.1 X Average Market Value of AR-Acacia Technologies stock
---------------------------------------------------- = Number of Shares
Average Market Value of AR-CombiMatrix stock
1.1 X $4 per share
---------------------------------------------------- = 0.55 shares
$8 per share
IN THESE EXAMPLES WE HAVE PROVIDED A BETTER UNDERSTANDING OF THE MECHANICS
SURROUNDING THE CALCULATION OF VOTING POWER. IT SHOULD NOT BE ASSUMED THAT THE
EXAMPLES USED ARE IN ANY WAY INDICATIVE OF THE RESPECTIVE COMMON STOCK TRADING
PRICES AT ANY TIME BEFORE OR AFTER THE DATE OF THIS PROSPECTUS.
EXCEPTIONS TO THE DIVIDEND, REDEMPTION AND CONVERSION REQUIREMENT
IF A DISPOSITION OCCURS
We are not required to take any of the above actions for any disposition of all
or substantially all of the properties and assets attributed to either group in
a transaction or series of related transactions that results in our receiving
for such properties and assets primarily equity securities of any entity that:
(1) acquires such properties or assets, succeeds to the business
conducted with such properties or assets, or controls such acquirer
or successor; and
(2) engages primarily or proposes to engage primarily in one or more
businesses similar or complementary to the businesses conducted by
that group prior to the disposition, as determined by our board of
directors.
The purpose of the exception is to enable us technically to "dispose"
of properties or assets of a group to other entities engaging or
proposing to engage in businesses similar or complementary to those
of that group without requiring a dividend on, or a conversion or
redemption of, the class of common stock of that group, so long as we
hold an equity interest in that entity. A joint venture in which we
own a direct or indirect equity interest is an example of such an
acquirer. We are not required to control that entity, whether by
ownership or contract provisions.
We are also not required to effect a dividend, redemption or conversion if the
disposition is:
o of all or substantially all of our properties and assets in one
transaction or a series of related transactions in connection with
our dissolution, liquidation or winding up and the distribution of
our assets to stockholders;
o on a pro rata basis, such as in a spin-off, to the holders of all
outstanding shares of the class of common stock relating to the
group subject to the disposition; or
28
o made to any person or entity controlled by us, as determined by
our board of directors.
NOTICES IF A DISPOSITION OF GROUP ASSETS OCCURS
Not later than the 20th trading day after the consummation of a disposition, we
will announce publicly by press release:
o the estimated net proceeds of the disposition;
o the number of shares outstanding of the class of common stock
relating to the group subject to the disposition; and
o the number of shares of such class of common stock into or for
which convertible securities are then convertible, exchangeable or
exercisable and the conversion, exchange or exercise price
thereof.
Not earlier than the 36th trading day and not later than the 40th trading day
after the consummation of the disposition, we will announce publicly by press
release whether we will pay a dividend or redeem shares of common stock with the
net proceeds of the disposition or convert the shares of common stock of the
group subject to the disposition into the other class of common stock.
We are required to cause to be mailed to each holder of shares of the class of
common stock relating to the group subject to the disposition the additional
notices and other information required by the Restated Certificate.
DESCRIPTION OF WARRANTS
We have warrants to purchase 358,410 shares of our AR-CombiMatrix stock
outstanding and no warrants to purchase our AR-Acacia Technologies stock
outstanding, other than options issued under our 2002 CombiMatrix Stock
Incentive Plan and our 2002 Acacia Technologies Stock Incentive Plan, as
applicable. We may in the future issue warrants for the purchase of our
AR-CombiMatrix stock or our AR-Acacia Technologies stock. Warrants may be issued
independently, together with any other securities offered by any prospectus
supplement or through a dividend or other distribution to our stockholders and
may be attached to or separate from the related securities. Warrants may be
issued under a warrant agreement to be entered into between us and a warrant
agent specified in the applicable prospectus supplement. The warrant agent will
act solely as our agent in connection with the warrants of a particular series
and will not assume any obligation or relationship of agency or trust for or
with any holders or beneficial owners of warrants. The following sets forth
certain general terms and provisions of the warrants that may be offered under
this prospectus. The applicable warrant agreement and form of warrant
certificate will be filed as exhibits to or incorporated by reference in the
registration statement. Further terms of the warrants and the applicable warrant
agreement will be set forth in the applicable prospectus supplement.
The applicable prospectus supplement will describe the terms of the warrants in
respect of which this prospectus is being delivered, including, where
applicable, the following: (a) the title of the warrants; (b) the aggregate
number of the warrants; (c) the price or prices at which the warrants will be
issued; (d) the designation, number and terms of the shares of our
AR-CombiMatrix stock or our AR-Acacia Technologies stock purchasable upon
exercise of the warrants; (e) the designation and terms of the other securities,
if any, with which the warrants are issued and the number of the warrants issued
with each security; (f) the date, if any, on and after which the warrants and
the related AR-CombiMatrix stock or AR-Acacia Technologies stock, if any, will
be separately transferable; (g) the price at which each share of AR-CombiMatrix
stock or AR-Acacia Technologies stock purchasable upon exercise of the warrants
may be purchased; (h) the date on which the right to exercise the warrants will
commence and the date on which that right will expire; (i) the minimum or
maximum amount of the warrants which may be exercised at any one time; (j)
information with respect to book-entry procedures, if any; (k) a discussion of
federal income tax considerations; and (l) any other terms of the warrants,
including terms, procedures and limitations relating to the transferability,
exchange and exercise of the warrants.
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PLAN OF DISTRIBUTION
We may sell the securities offered pursuant to this prospectus and any
accompanying prospectus supplements to or through one or more underwriters or
dealers or we may sell the securities to investors directly or through agents.
Each prospectus supplement will describe the number and terms of the securities
to which such prospectus supplement relates, the name or names of any
underwriters or agents with whom we have entered into arrangements with respect
to the sale of such securities, the public offering or purchase price of such
securities and the net proceeds we will receive from such sale. Any underwriter
or agent involved in the offer and sale of the securities will be named in the
applicable prospectus supplement. We may sell securities directly to investors
on our own behalf in those jurisdictions where we are authorized to do so.
Underwriters may offer and sell the securities at a fixed price or prices, which
may be changed, at market prices prevailing at the time of sale, at prices
related to the prevailing market prices or at negotiated prices. We also may,
from time to time, authorize dealers or agents to offer and sell these
securities upon such terms and conditions as may be set forth in the applicable
prospectus supplement. In connection with the sale of any of these securities,
underwriters may receive compensation from us in the form of underwriting
discounts or commissions and may also receive commissions from purchasers of the
securities for whom they may act as agent. Underwriters may sell the securities
to or through dealers, and such dealers may receive compensation in the form of
discounts, concessions or commissions from the underwriters or commissions from
the purchasers for which they may act as agents. The maximum compensation or
discount to be received by any member of the National Association of Securities
Dealers or any independent broker-dealer will not be greater than 8% for the
sale of any securities registered pursuant Rule 415 under the Securities Act of
1933.
Shares may also be sold in one or more of the following transactions: (a) block
transactions (which may involve crosses) in which a broker-dealer may sell all
or a portion of the shares as agent but may position and resell all or a portion
of the block as principal to facilitate the transaction; (b) purchases by a
broker-dealer as principal and resale by the broker-dealer for its own account
pursuant to a prospectus supplement; (c) a special offering, an exchange
distribution or a secondary distribution in accordance with applicable Nasdaq
National Market or other stock exchange rules; (d) ordinary brokerage
transactions and transactions in which a broker-dealer solicits purchasers; (e)
sales "at the market" to or through a market maker or into an existing trading
market, on an exchange or otherwise, for shares; and (f) sales in other ways not
involving market makers or established trading markets, including direct sales
to purchasers. Broker-dealers may also receive compensation from purchasers of
the shares which is not expected to exceed that customary in the types of
transactions involved.
Any underwriting compensation paid by us to underwriters or agents in connection
with the offering of these securities, and any discounts or concessions or
commissions allowed by underwriters to participating dealers, will be set forth
in the applicable prospectus supplement. Dealers and agents participating in the
distribution of the securities may be deemed to be underwriters, and any
discounts and commissions received by them and any profit realized by them on
resale of the securities may be deemed to be underwriting discounts and
commissions.
Underwriters, dealers and agents may be entitled, under agreements entered into
with us, to indemnification against and contribution toward certain civil
liabilities, including liabilities under the Securities Act of 1933. Unless
otherwise set forth in the accompanying prospectus supplement, the obligations
of any underwriters to purchase any of these securities will be subject to
certain conditions precedent, and the underwriters will be obligated to purchase
all of the series of securities, if any are purchased.
Underwriters, dealers and agents may engage in transactions with, or perform
services for, us and our affiliates in the ordinary course of business.
In connection with offering securities pursuant to this prospectus, certain
underwriters, and selling group members and their respective affiliates, may
engage in transactions that stabilize, maintain or otherwise affect the market
price of the applicable securities. These transactions may include stabilization
transactions effected in accordance with Rule 104 of Regulation M promulgated by
the SEC pursuant to which these persons may bid for or purchase securities for
the purpose of stabilizing their market price.
30
The underwriters in an offering of securities may also create a "short position"
for their account by selling more securities in connection with the offering
than they are committed to purchase from us. In that case, the underwriters
could cover all or a portion of the short position by either purchasing
securities in the open market following completion of the offering of these
securities or by exercising any over-allotment option granted to them by us. In
addition, the managing underwriter may impose "penalty bids" under contractual
arrangements with other underwriters, which means that they can reclaim from an
underwriter (or any selling group member participating in the offering) for the
account of the other underwriters, the selling concession for the securities
that are distributed in the offering but subsequently purchased for the account
of the underwriters in the open market. Any of the transactions described in
this paragraph or comparable transactions that are described in any accompanying
prospectus supplement may result in the maintenance of the price of the
securities at a level above that which might otherwise prevail in the open
market. None of the transactions described in this paragraph or in an
accompanying prospectus supplement are required to be taken by any underwriters
and, if they are undertaken, may be discontinued at any time.
The AR-CombiMatrix stock is listed on the Nasdaq National Market under the
symbol "CBMX". The AR-Acacia Technologies stock is listed on the Nasdaq National
Market under the symbol "ACTG". Any underwriters or agents to or through which
securities are sold by us may make a market in the securities, but these
underwriters or agents will not be obligated to do so and any of them may
discontinue any market making at any time without notice. No assurance can be
given as to the liquidity of or trading market for any securities sold by us.
EXPERTS
The financial statements incorporated in this prospectus by reference to the
Annual Report on Form 10-K of Acacia Research Corporation for the year ended
December 31, 2003, have been so incorporated in reliance on the report of
PricewaterhouseCoopers LLP, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
LEGAL MATTERS
The validity of our securities offered in this prospectus will be passed upon
for us by Allen Matkins Leck Gamble & Mallory LLP, Century City, California.
WHERE YOU CAN FIND MORE INFORMATION
We file annual, quarterly and special reports, proxy statements and other
information with the SEC. You may read and copy the materials we file at the
SEC's Public Reference Room at 450 Fifth Street, N.W., Washington D.C. 20549.
Please call the SEC at 1-800-SEC-0330 for further information on the operation
of the Public Reference Rooms. Our SEC filings are also available to the public
from the SEC's World Wide Web site on the Internet at http://www.sec.gov. This
site contains reports, proxy and information statements and other information
regarding issuers that file electronically with the SEC. You may also read and
copy this information at the National Association of Securities Dealers, Inc.,
1735 K Street, N.W., Washington D.C. 20006.
We maintain a site on the Internet at http://www.acaciaresearch.com. The
information contained in our website is not part of this prospectus and you
should not rely on it in deciding whether to invest in our common stock.
We have filed a registration statement, of which this prospectus is a part,
covering the offered securities. As allowed by SEC rules, this prospectus does
not include all of the information contained in the registration statement and
the included exhibits, financial statements and schedules. We refer you to the
registration statement, the included exhibits, financial statements and
schedules for further information. This prospectus is qualified in its entirety
by such other information.
31
INFORMATION INCORPORATED BY REFERENCE
The SEC allows us to "incorporate by reference" the information that we file
with the SEC. This means that we can disclose important information to you by
referring you to another document filed separately with the SEC under the
Exchange Act. The information incorporated by reference is deemed to be part of
this prospectus, except for any information superseded by information in this
prospectus. We have filed with the SEC and incorporate by reference:
o our annual report on Form 10-K for the fiscal year ended December
31, 2003;
o the description of the AR-CombiMatrix stock and the AR-Acacia
Technologies stock included in our registration statement on Form
8-A.
Any documents we file pursuant to Section 13(a), 13(c), 14 or 15(d) of the
Exchange Act after the date of this prospectus and prior to the termination of
the offering of the securities to which this prospectus relates will
automatically be deemed to be incorporated by reference in this prospectus and
to be part hereof from the date of filing those documents. Any statement
contained in this prospectus or in a document incorporated by reference shall be
deemed to be modified or superseded for all purposes to the extent that a
statement contained in this prospectus or in any other document which is also
incorporated by reference modifies or supersedes that statement.
We will provide without charge to each person to whom a copy of this prospectus
is delivered, upon such person's written or oral request, a copy of any and all
of the information incorporated by reference in this prospectus, other than
exhibits to such documents, unless such exhibits are specifically incorporated
by reference into the information that this prospectus incorporates. Requests
should be directed to the Secretary at Acacia Research Corporation, 500 Newport
Center Drive, 7th Floor, Newport Beach, California 92660, telephone: (949)
480-8300.
32
6,385,907 SHARES
WARRANTS TO PURCHASE 1,596,478 SHARES
ACACIA RESEARCH CORPORATION
ACACIA RESEARCH - COMBIMATRIX COMMON STOCK
[LOGO]
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PROSPECTUS SUPPLEMENT
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PIPER JAFFRAY
SEPTEMBER 15, 2005