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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2003
COMMISSION FILE NUMBER 0-26068
ACACIA RESEARCH CORPORATION
---------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 95-4405754
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(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
500 NEWPORT CENTER DRIVE, NEWPORT BEACH, CA 92660
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(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (949) 480-8300
--------------
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
filing requirements for the past 90 days. Yes |X| No [ ]
Indicate by check mark whether the registrant is an accelerated filer
(as defined in Rule 12b-2 of the Exchange Act). Yes |X| No [ ]
As of May 7, 2003, 19,640,808 shares of Acacia Research-Acacia
Technologies common stock were issued and outstanding. As of May 7, 2003,
22,985,186 shares of Acacia Research-CombiMatrix common stock were issued and
outstanding.
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ACACIA RESEARCH CORPORATION
TABLE OF CONTENTS
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Acacia Research Corporation Consolidated Financial Statements
Consolidated Balance Sheets as of March 31, 2003 and
December 31, 2002 (Unaudited).......................................... 4
Consolidated Statements of Operations and Comprehensive Loss for the
Three Months Ended March 31, 2003 and 2002 (Unaudited)................. 5
Consolidated Statements of Cash Flows for the Three Months Ended
March 31, 2003 and 2002 (Unaudited).................................... 6
Notes to Consolidated Financial Statements............................. 7
*CombiMatrix Group Financial Statements
Balance Sheets as of March 31, 2003 and December 31, 2002 (Unaudited).. 19
Statements of Operations for the Three Months Ended
March 31, 2003 and 2002 (Unaudited).................................... 20
Statements of Cash Flows for the Three Months Ended
March 31, 2003 and 2002 (Unaudited).................................... 21
Notes to Financial Statements.......................................... 22
*Acacia Technologies Group Financial Statements
Balance Sheets as of March 31, 2003 and December 31, 2002 (Unaudited).. 25
Statements of Operations for the Three Months Ended
March 31, 2003 and 2002 (Unaudited).................................... 26
Statements of Cash Flows for the Three Months Ended
March 31, 2003 and 2002 (Unaudited).................................... 27
Notes to Financial Statements.......................................... 28
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations.................................................. 31
Item 3. Quantitative and Qualitative Disclosures About Market Risk............. 60
Item 4. Controls and Procedures................................................ 60
2
PART II. OTHER INFORMATION
Item 1. Legal Proceedings...................................................... 61
Item 6. Exhibits and Reports on Form 8-K....................................... 61
SIGNATURES............................................................................ 62
CERTIFICATIONS........................................................................ 63
EXHIBIT INDEX ........................................................................ 65
*NOTE: We are presenting the Acacia Research Corporation consolidated unaudited
interim financial statements and the separate unaudited interim financial
statements for the CombiMatrix group and the Acacia Technologies group. The
separate financial statements and accompanying notes of the two groups are being
provided as additional disclosure regarding the financial performance of the two
divisions and to provide investors with information regarding the potential
value and operating results of the respective businesses, which may affect the
respective share values. The separate financial statements should be reviewed in
conjunction with Acacia Research Corporation's consolidated financial statements
and accompanying notes. The presentation of separate financial statements is not
intended to indicate that we have changed the title to any of our assets or
changed the responsibility for any of our liabilities, nor is it intended to
indicate that the rights of our creditors have been changed. Acacia Research
Corporation, and not the individual groups, is the issuer of the securities.
Holders of the two securities are stockholders of Acacia Research Corporation
and do not have a separate and exclusive interest in the respective groups.
3
ACACIA RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share information)
(Unaudited)
MARCH 31, DECEMBER 31,
2003 2002
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 40,062 $ 43,083
Short-term investments ................................. 9,605 11,605
Accounts receivable .................................... 277 578
Prepaid expenses, other receivables and other assets ... 1,618 1,221
---------- ----------
Total current assets .......................... 51,562 56,487
Property and equipment, net of accumulated depreciation ..... 3,612 4,075
Investment in affiliate, at cost ............................ 252 252
Patents, net of accumulated amortization .................... 14,880 15,280
Goodwill, net of accumulated amortization ................... 20,693 20,693
Other assets ................................................ 284 284
---------- ----------
$ 91,283 $ 97,071
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued expenses and other ........... $ 4,490 $ 4,826
Deferred revenues ...................................... 12,183 10,675
---------- ----------
Total current liabilities ..................... 16,673 15,501
Deferred income taxes ....................................... 3,469 3,540
---------- ----------
Total liabilities ............................. 20,142 19,041
---------- ----------
Minority interests .......................................... 1,819 2,171
---------- ----------
Stockholders' equity:
Preferred stock
Acacia Research Corporation, par value $0.001 per
share; 10,000,000 shares authorized; no
shares issued or outstanding ...................... -- --
Common stock
Acacia Research - Acacia Technologies stock, par
value $0.001 per share; 50,000,000 shares
authorized; 19,640,808 shares issued and
outstanding as of March 31, 2003 and
December 31, 2002 ................................. 20 20
Acacia Research - CombiMatrix stock, par value
$0.001 per share; 50,000,000 shares authorized;
22,985,186 and 22,964,779 shares issued and
outstanding as of March 31, 2003 and December
31, 2002, respectively ............................ 23 23
Additional paid-in capital ............................. 237,542 238,627
Deferred stock compensation ............................ (2,793) (4,023)
Warrants to purchase common stock ...................... 199 199
Comprehensive loss ..................................... (17) (2)
Accumulated deficit .................................... (165,652) (158,985)
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Total stockholders' equity .................... 69,322 75,859
---------- ----------
$ 91,283 $ 97,071
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
4
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share information)
(Unaudited)
FOR THE THREE MONTHS ENDED
-----------------------------
MARCH 31, 2003 MARCH 31, 2002
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Revenues:
License fee income ...................................... $ 6 $ --
Product revenue ......................................... 209 --
Grant and contract revenue .............................. 7 249
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Total revenues ...................................... 222 249
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Operating expenses:
Cost of sales ........................................... 77 --
Research and development expenses ....................... 2,335 2,668
Non-cash stock compensation expense - research and
development ........................................... 2 421
Marketing, general and administrative expenses .......... 4,255 4,072
Non-cash stock compensation expense - marketing, general
and administrative .................................... 138 1,001
Amortization of patents ................................. 400 564
------------- -------------
Total operating expenses ............................ 7,207 8,726
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Operating loss ...................................... (6,985) (8,477)
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Other income (expense):
Interest and other income (net) ......................... 215 421
Realized gains (losses) on short-term investments ....... 37 (553)
Unrealized losses on short-term investments ............. -- (322)
------------- -------------
Total other income (expense) ........................ 252 (454)
------------- -------------
Loss from continuing operations before income taxes and
minority interests ...................................... (6,733) (8,931)
Benefit for income taxes .................................... 60 69
------------- -------------
Loss from continuing operations before minority interests ... (6,673) (8,862)
Minority interests .......................................... 6 2,435
------------- -------------
Net loss .................................................... (6,667) (6,427)
Unrealized losses on short-term investments ............. (8) (95)
Unrealized losses on foreign currency translation ....... (7) (9)
------------- -------------
Comprehensive loss .......................................... $ (6,682) $ (6,531)
============= =============
Loss per common share:
Attributable to the Acacia Technologies group:
Net loss .................................................. $ (1,494) $ (2,841)
Basic and diluted per share ............................. (0.08) (0.14)
Attributable to the CombiMatrix group:
Net loss .................................................. $ (5,173) $ (3,586)
Basic and diluted per share ............................. (0.23) (0.16)
Weighted average shares - basic and diluted:
Acacia Research - Acacia Technologies stock ............... 19,640,808 19,640,808
============= =============
Acacia Research - CombiMatrix stock ....................... 22,983,278 22,950,551
============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
5
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
FOR THE THREE MONTHS ENDED
---------------------
MARCH 31, MARCH 31,
2003 2002
--------- ---------
Cash flows from operating activities:
Net loss from continuing operations ............................................ $ (6,667) $ (6,427)
Adjustments to reconcile net loss from continuing
operations to net cash used in operating activities:
Depreciation and amortization ............................................... 767 933
Minority interests .......................................................... (6) (2,435)
Non-cash stock compensation ................................................. 140 1,422
Deferred tax benefit ........................................................ (70) (75)
Net purchases of trading securities ......................................... -- (3,358)
Unrealized losses on short-term investments ................................. -- 322
Other ....................................................................... 121 45
Changes in assets and liabilities:
Accounts receivable, prepaid expenses, other receivables and other assets ... (96) (1,322)
Accounts payable, accrued expenses and other ................................ (250) (1,085)
Deferred revenues ........................................................... 1,508 531
--------- ---------
Net cash used in operating activities from continuing operations ............ (4,553) (11,449)
Net cash used in operating activities from discontinued operations .......... (86) (254)
--------- ---------
Net cash used in operating activities ....................................... (4,639) (11,703)
--------- ---------
Cash flows from investing activities:
Purchase of property and equipment, net ..................................... (24) (134)
Purchase of available-for-sale investments .................................. (469) (4,540)
Sale of available-for-sale investments ...................................... 2,462 6,878
Other ....................................................................... -- (101)
--------- ---------
Net cash provided by investing activities from continuing operations ........ 1,969 2,103
Net cash used in investing activities from discontinued operations .......... (344) --
--------- ---------
Net cash provided by investing activities ................................... 1,625 2,103
--------- ---------
Cash flows from financing activities:
Proceeds from the exercise of stock options and warrants .................... -- 214
Capital contributions from minority shareholders of subsidiaries,
net of issuance costs ..................................................... -- 300
Repayment of capital lease obligation ....................................... -- (226)
--------- ---------
Net cash provided by financing activities ................................... -- 288
--------- ---------
Decrease in cash and cash equivalents ............................................ (3,014) (9,312)
--------- ---------
Cash and cash equivalents, beginning ............................................. 43,083 59,451
Effect of exchange rate on cash .................................................. (7) (16)
--------- ---------
Cash and cash equivalents, ending ................................................ $ 40,062 $ 50,123
========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
6
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. BASIS OF PRESENTATION AND DESCRIPTION OF BUSINESS
BASIS OF PRESENTATION. The accompanying unaudited consolidated
financial statements have been prepared in accordance with generally accepted
accounting principles for interim financial information and with the
instructions to Form 10-Q and Rule 10-01 of Regulation S-X. Accordingly, certain
information and footnotes required by generally accepted accounting principles
in annual financial statements have been omitted or condensed in accordance with
quarterly reporting requirements of the Securities and Exchange Commission.
These interim consolidated financial statements should be read in conjunction
with the consolidated financial statements and notes thereto for the year ended
December 31, 2002, as reported by us in our Annual Report on Form 10-K.
The accompanying consolidated financial statements include the accounts
of Acacia Research Corporation, and its wholly owned and majority-owned
subsidiaries. Material intercompany transactions and balances have been
eliminated in consolidation.
The consolidated financial statements of Acacia Research Corporation
include all adjustments of a normal recurring nature which, in the opinion of
management, are necessary for a fair presentation of our financial position as
of March 31, 2003 and results of operations and cash flows for the interim
periods presented. The results of operations for the three months ended March
31, 2003 are not necessarily indicative of the results to be expected for the
entire year.
Acacia Research Corporation develops, acquires and licenses enabling
technologies for the life sciences and media technologies sectors, which
comprise the two business groups of Acacia Research Corporation.
Our life sciences business, referred to as the "CombiMatrix group," is
comprised of our wholly owned subsidiary, CombiMatrix Corporation and
CombiMatrix Corporation's majority-owned subsidiaries, Advanced Material
Sciences, Inc. ("Advanced Material Sciences") and CombiMatrix KK. Our core
technology opportunity in the life sciences sector has been developed by
CombiMatrix Corporation. 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 significant applications relating to genomic and proteomic
research. Advanced Material Sciences, a development stage company, holds the
exclusive license for CombiMatrix Corporation's biological array processor
technology in certain fields of material sciences. CombiMatrix KK, a
majority-owned Japanese corporation located in Tokyo, is exploring opportunities
for CombiMatrix Corporation's active biochip system with academic,
pharmaceutical and biotechnology organizations in the Asian market.
Our media technologies business, referred to as "Acacia Technologies
group," owns patented intellectual property in the media technologies sector.
The Acacia Technologies group owns patented digital media transmission ("DMT")
technology enabling the digitization, encryption, storage, transmission, receipt
and playback of digital content. The DMT technology is protected by five U.S.
and seventeen international 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 U.S. DMT patents expire in
2011 and its international DMT patents expire in 2012. The Acacia Technologies
group also owns patented technology known as the V-chip. The V-chip was adopted
by manufacturers of televisions sold in the U.S. to provide blocking of certain
programming based upon its content rating code, in compliance with the
Telecommunications Act of 1996. The V-chip technology is protected by U.S.
Patent No. 4,554,584, which expires in July 2003.
RECAPITALIZATION TRANSACTION
On December 11, 2002, our stockholders voted in favor of a
recapitalization transaction, which became effective on December 13, 2002,
whereby we created two new classes of common stock called Acacia
Research-CombiMatrix stock ("AR-CombiMatrix stock") and Acacia Research-Acacia
Technologies stock ("AR-Acacia Technologies stock"), and divided our existing
Acacia Research Corporation common stock into shares of the two new classes of
common stock. AR-CombiMatrix stock is intended to reflect separately the
performance of Acacia Research Corporation's CombiMatrix group. AR-Acacia
Technologies stock is intended to reflect separately the performance of Acacia
Research Corporation's Acacia Technologies group. Although the AR-CombiMatrix
stock and the AR-Acacia Technologies stock are intended to reflect the
7
performance of our different business groups, they are both classes of common
stock of Acacia Research Corporation and are not stock issued by the respective
groups.
All share and per share information in the consolidated financial
statements and accompanying notes to the consolidated financial statements,
unless otherwise noted, give effect to the recapitalization as of January 1,
2002.
STOCK-BASED COMPENSATION. At March 31, 2003, Acacia Research
Corporation has two stock-based employee compensation plans. Compensation cost
of stock options issued to employees is accounted for in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB No. 25") and related interpretations. Compensation cost
attributable to such options is recognized based on the difference, if any,
between the closing market price of the stock on the date of grant and the
exercise price of the option. Compensation cost is generally deferred and
amortized on an accelerated basis over the vesting period of the individual
option awards using the amortization method prescribed in Financial Accounting
Standards Board ("FASB") Interpretation No. 28, "Accounting for Stock
Appreciation Rights and Other Variable Stock Option or Award Plans" ("FIN No.
28"). We have adopted the disclosure only requirements of Statement of Financial
Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation"
("SFAS No. 123") with respect to options issued to employees. Compensation cost
of stock options and warrants issued to non-employee service providers is
accounted for under the fair value method required by SFAS No. 123 and related
interpretations.
The following table illustrates the effect on net loss and loss per
share if Acacia Research Corporation had applied the fair value recognition
provisions of SFAS No. 123 (in thousands, except per share data):
AR-ACACIA
TECHNOLOGIES STOCK AR-COMBIMATRIX STOCK
----------------------- -----------------------
THREE MONTHS ENDED THREE MONTHS ENDED
----------------------- -----------------------
MARCH 31, MARCH 31, MARCH 31, MARCH 31,
2003 2002 2003 2002
---------- ---------- ---------- ----------
Loss from continuing operations as reported .................... $ (1,494) $ (2,841) $ (5,173) $ (3,586)
Add: Stock-based compensation, intrinsic value method
reported in net income, net of tax .......................... -- 10 69 1,412
Deduct: Pro forma stock-based compensation fair value
method, net of tax .......................................... (1,078) (1,237) (2,782) (1,795)
Loss from continuing operations, pro forma ..................... (2,572) (4,068) (7,886) (3,969)
Basic loss per share from continuing operations as reported .... (0.08) (0.14) (0.23) (0.16)
Basic loss per share from continuing operations, pro forma ..... (0.13) (0.21) (0.34) (0.17)
Diluted loss per share from continuing operations as
reported .................................................... (0.08) (0.14) (0.23) (0.16)
Diluted loss per share from continuing operations, pro forma ... (0.13) (0.21) (0.34) (0.17)
Weighted average risk free interest rate........................ 4.75% 5.36% 4.80% 5.51%
- -----------------------
Note: The stock-based compensation information above gives effect to the
recapitalization as of January 1, 2002. As a result, stock-based compensation
information related to the predecessor Acacia Research Corporation common stock
for 2002 has been omitted from the table above.
The fair value of AR-Acacia Technologies stock options and
AR-CombiMatrix stock options was determined using the Black-Scholes
option-pricing model, assuming volatility of approximately 100%, with expected
lives of approximately five years and no expected dividends.
RECLASSIFICATIONS. Certain immaterial reclassifications of prior period
amounts have been made to conform to the 2003 presentation.
2. LOSS PER SHARE
LOSS PER SHARE. Basic loss per share for each class of common stock is
computed by dividing the earnings allocated to each class of common stock by the
weighted average number of outstanding shares of that class of common stock.
Diluted earnings per share is computed by dividing the loss allocated to each
class of common stock by the weighted average number of outstanding shares of
that class of common stock including the dilutive effect of common stock
equivalents. Potentially dilutive common stock equivalents primarily consist of
employee stock options.
The earnings or losses allocated to each class of common stock are
determined by Acacia Research Corporation's board of directors. This
determination is generally based on the net income or loss amounts of the
corresponding group determined in accordance with accounting principles
generally accepted in the United States of America, consistently applied. Acacia
Research Corporation believes this method of allocation is systematic and
reasonable. The Acacia Research Corporation board of directors can, at its
8
discretion, change the method of allocating earnings or losses to each class of
common stock at any time. Management currently has no plans to change allocation
methods.
The following table presents a reconciliation of basic and diluted loss per
share:
FOR THE THREE MONTHS ENDED
------------------------
MARCH 31, MARCH 31,
2003 2002
----------- -----------
Acacia Research - Acacia Technologies stock
- -------------------------------------------
Basic weighted average number of common shares outstanding ...... 19,640,808 19,640,808
Dilutive effect of outstanding stock options and warrants (a) ... -- --
----------- -----------
Diluted weighted average number of common and
potential common shares outstanding ........................... 19,640,808 19,640,808
=========== ===========
Acacia Research - CombiMatrix stock
- -----------------------------------
Basic weighted average number of common shares outstanding ...... 22,983,278 22,950,551
Dilutive effect of outstanding stock options and warrants (b) ... -- --
----------- -----------
Diluted weighted average number of common and
potential common shares outstanding ........................... 22,983,278 22,950,551
=========== ===========
- -----------------------
(a) Potential AR - Acacia Technologies common shares of 786 and
46,857 at March 31, 2003 and 2002, respectively, have been
excluded from the per share calculation because the effect of
their inclusion would be anti-dilutive.
(b) Potential AR - CombiMatrix common shares of 441,750 and
305,256 at March 31, 2003 and 2002, respectively, have been
excluded from the per share calculation because the effect of
their inclusion would be anti-dilutive.
3. GOODWILL AND INTANGIBLES
Goodwill is evaluated for impairment in accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142"), which provides that
goodwill is no longer subject to amortization. Instead, goodwill is subject to a
periodic review for potential impairment that must occur at least annually at a
reporting unit level. As of January 1, 2002, the date of adoption of the
standard, we had unamortized goodwill in the amount of $4,627,000. In 2002, we
performed a transitional goodwill impairment assessment and a year end goodwill
impairment assessment and determined that there was no impairment of goodwill.
The fair values of our two reporting units were estimated using a discounted
cash flow analysis. There can be no assurance that future goodwill impairment
tests will not result in a charge to earnings.
The Acacia Technologies group had $1,834,000 of goodwill at March 31,
2003 and December 31, 2002 (net of $2,258,000 of accumulated amortization). The
CombiMatrix group had $18,859,000 of goodwill at March 31, 2003 and December 31,
2002 (net of $1,312,000 of accumulated amortization).
Acacia Research Corporation's only identifiable intangible assets at
March 31, 2003 and December 31, 2002 are patents totaling $14,880,000 (net of
$8,013,000 of accumulated amortization) and $15,280,000 (net of $7,613,000 of
accumulated amortization), respectively. Patent amortization expense for the
three months ended March 31, 2003 and 2002 was $400,000 and $564,000,
respectively. The gross carrying amounts and accumulated amortization as of
March 31, 2003 and December 31, 2002 and amortization expense for the three
months ended March 31, 2003 and 2002, related to patents, by segment, are as
follows (in thousands):
9
ACACIA TECHNOLOGIES GROUP COMBIMATRIX GROUP
------------------------------- -------------------------------
MARCH 31, 2003 DECEMBER 31, 2002 MARCH 31, 2003 DECEMBER 31, 2002
-------------- -------------- -------------- --------------
Gross carrying amount - patents .... $ 10,798 $ 10,798 $ 12,095 $ 12,095
Accumulated amortization ........... (6,856) (6,730) (1,157) (883)
-------------- -------------- -------------- --------------
Patents, net ....................... $ 3,942 $ 4,068 $ 10,938 $ 11,212
============== ============== ============== ==============
FOR THE THREE MONTHS ENDED FOR THE THREE MONTHS ENDED
------------------------------- -------------------------------
MARCH 31, 2003 MARCH 31, 2002 MARCH 31, 2003 MARCH 31, 2002
-------------- -------------- -------------- --------------
Patent amortization expense......... $ 126 $ 465 $ 274 $ 99
============== ============== ============== ==============
Annual aggregate amortization expense for each of the next five years
through December 31, 2007 is estimated to be $1,595,000 per year ($500,000 for
the Acacia Technologies group and $1,095,000 for the CombiMatrix group).
At March 31, 2003 and December 31, 2002, all of our acquired intangible
assets other than goodwill were subject to amortization.
4. RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2003, we adopted SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities" ("SFAS No. 146"). SFAS No. 146
nullifies Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability
Recognition for Certain Employee Termination Benefits and Other Costs to Exit an
Activity," under which a liability for an exit cost was recognized at the date
of an entity's commitment to an exit plan. SFAS No. 146 requires that a
liability for a cost associated with an exit or disposal activity be recognized
at fair value when the liability is incurred. The provisions of this statement
are effective for exit or disposal activities that are initiated after December
31, 2002. The adoption of SFAS No. 146 did not have a significant impact on our
financial position or results of operations.
In December 2002, we adopted SFAS No. 148, "Accounting for Stock-Based
Compensation--Transition and Disclosure--an amendment of SFAS No. 123" ("SFAS
No. 148"). This statement amends SFAS No. 123 to provide alternative methods of
transition for a voluntary change to the fair value based method of accounting
for stock-based employee compensation. In addition, this statement amends the
disclosure requirements of SFAS No. 123 to require prominent disclosures in both
annual and interim financial statements about the method of accounting for
stock-based employee compensation and the effect of the method used on reported
results. Acacia Research Corporation has chosen to continue to account for
stock-based compensation using the intrinsic value method prescribed in APB No.
25 and related interpretations. Accordingly, compensation expense for stock
options is measured as the excess, if any, of the estimate of the market value
of our stock at the date of the grant over the amount an employee must pay to
acquire the stock. We adopted the interim disclosure provisions for our
financial report for the quarter ended March 31, 2003 (see Note 1, "Stock-based
Compensation"). The adoption of SFAS No. 148 did not have a material effect on
our consolidated results of operations or financial position.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's
Accounting and Disclosure Requirements for Guarantees, Including Indirect
Guarantees of Indebtedness to Others," ("FIN 45") an interpretation of FASB
Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. FIN
45 elaborates on the disclosures to be made by a guarantor in its interim and
annual financial statements about its obligations under guarantees issued. FIN
45 also clarifies that a guarantor is required to recognize, at inception of a
guarantee, a liability for the fair value of the obligation undertaken. The
initial recognition and measurement provisions of FIN 45 are applicable to
guarantees issued or modified after December 31, 2002. The adoption of FIN 45
did not have a significant impact on Acacia Research Corporation's financial
position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 requires
consolidation of variable interest entities by the entity's primary beneficiary
if the equity investors in the entity do not have the characteristics of a
controlling financial interest or sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
10
other parties. FIN 46 is effective for all new variable interest entities
created or acquired after January 31, 2003. FIN 46 must be applied beginning
July 1, 2003 to variable entities existing prior to February 1, 2003. The
adoption of FIN 46 will not have a material impact on Acacia Research
Corporation's results of operations or financial condition.
5. SEGMENT INFORMATION
Acacia Research Corporation has adopted the provisions of SFAS No. 131,
"Disclosures about Segments of an Enterprise and Related Information." Our chief
operating decision maker is considered to be Acacia Research Corporation's CEO.
The CEO reviews and evaluates financial information presented on a group basis
as described below. Management evaluates performance based on the profit or loss
from continuing operations and financial position of its segments. Acacia
Research Corporation has two reportable segments as described earlier in Note 1.
Material intercompany transactions and transfers have been eliminated
in consolidation. The accounting policies of the segments are the same as those
described in the summary of significant accounting policies. On December 13,
2002, our reporting segments were modified to reflect the attribution of assets
and liabilities and the allocation of expenditures consistent with the
management and allocation policies used in the preparation of the separate
Acacia Technologies group and CombiMatrix group financial statements. Segment
information has been adjusted for all periods presented.
The tables below present information about our reportable segments in
continuing operations for the three months ended March 31, 2003 and 2002 (in
thousands):
ACACIA
TECHNOLOGIES COMBIMATRIX
Three Months Ended March 31, 2003 GROUP GROUP TOTAL
- --------------------------------- ---------- ---------- ----------
Revenue ............................................................ $ 6 $ 216 $ 222
Amortization of patents ............................................ 126 274 400
Interest income .................................................... 148 67 215
Realized gain on investments ....................................... 37 -- 37
Loss from operations before income taxes and minority interests .... 1,520 5,213 6,733
Non-cash stock compensation charges ................................ -- 140 140
Segment assets ..................................................... 42,098 46,810 88,908
Investment in affiliate, at cost ................................... 252 -- 252
Purchase of property and equipment ................................. 2 22 24
11
ACACIA
TECHNOLOGIES COMBIMATRIX
Three Months Ended March 31, 2002 GROUP GROUP TOTAL
- --------------------------------- ---------- ---------- ----------
Revenue ............................................................ $ -- $ 249 $ 249
Amortization of patents ............................................ 465 99 564
Other income ....................................................... 78 -- 78
Interest income .................................................... 153 250 403
Interest expense ................................................... -- 60 60
Realized losses on investments ..................................... 553 -- 553
Unrealized losses on investments ................................... 322 -- 322
Loss from operations before income taxes and minority interests .... 2,907 6,024 8,931
Non-cash stock compensation charges ................................ 10 1,412 1,422
Segment assets ..................................................... 55,772 42,936 98,708
Investment in affiliate, at cost ................................... 3,000 -- 3,000
Purchase of property and equipment ................................. 101 83 184
Segment information excludes discontinued operations related to
Soundbreak.com as of and for the three months ended March 31, 2003 and 2002.
Total assets related to discontinued operations totaled $2,600,000 and
$3,940,000 at March 31, 2003 and 2002, respectively.
6. CONSOLIDATING FINANCIAL INFORMATION
Presented below is consolidating financial information reflecting the
businesses of the CombiMatrix group and the Acacia Technologies group. Earnings
attributable to each group has been determined in accordance with accounting
principles generally accepted in the United States.
AR-CombiMatrix stock and AR-Acacia Technologies stock are intended to
reflect the separate performance of the respective division of Acacia Research
Corporation. The CombiMatrix group and the Acacia Technologies group are not
separate legal entities. Holders of AR-CombiMatrix stock and AR-Acacia
Technologies stock are stockholders of Acacia Research Corporation. As a result,
holders of AR-CombiMatrix stock and AR-Acacia Technologies stock continue to be
subject to all of the risks of an investment in Acacia Research Corporation and
all of its businesses, assets and liabilities. The assets that Acacia Research
Corporation attributes to one of the groups could be subject to the liabilities
of the other group. The group financial statements have been prepared in
accordance with generally accepted accounting principles in the United States of
America, and taken together, comprise all the accounts included in the
corresponding consolidated financial statements of Acacia Research Corporation.
The financial statements of the groups reflect the financial condition, results
of operations, and cash flows of the businesses included therein. The financial
statements of the groups include the accounts or assets of Acacia Research
Corporation specifically attributed to the groups and were prepared using
amounts included in Acacia Research Corporation's consolidated financial
statements.
Minority interests represent participation of other stockholders in the
net equity and in the division earnings and losses of the groups and are
reflected in the caption "Minority interests" in the group financial statements.
Minority interests adjust group net results of operations to reflect only the
group's share of the division earnings or losses of non-wholly owned investees.
Financial effects arising from one group that affect Acacia Research
Corporation's 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 class of common stock relating to the
other group. Any division net losses of the CombiMatrix group or of the Acacia
Technologies group, and dividends or distributions on, or repurchases of,
AR-CombiMatrix stock or AR-Acacia Technologies stock, will reduce the assets of
Acacia Research Corporation legally available for payment of dividends on
AR-CombiMatrix stock or AR-Acacia Technologies stock.
12
CONSOLIDATING STATEMENT OF FINANCIAL POSITION AT MARCH 31, 2003 (IN THOUSANDS)
ACACIA
TECHNOLOGIES COMBIMATRIX
GROUP GROUP ELIMINATIONS CONSOLIDATED
-------------- -------------- -------------- --------------
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 37,097 $ 2,965 $ -- $ 40,062
Short-term investments ................................... -- 9,605 -- 9,605
Accounts receivable ...................................... 11 266 -- 277
Prepaid expenses, other receivables and other assets ..... 993 625 -- 1,618
Receivable from CombiMatrix group ........................ 225 -- (225) --
-------------- -------------- -------------- --------------
Total current assets .............................. 38,326 13,461 (225) 51,562
Property and equipment, net of accumulated depreciation ....... 147 3,465 -- 3,612
Investment in affiliate, at cost .............................. 252 -- -- 252
Patents, net of accumulated amortization ...................... 3,942 10,938 -- 14,880
Goodwill, net of accumulated amortization ..................... 1,834 18,859 -- 20,693
Other assets .................................................. 197 87 -- 284
-------------- -------------- -------------- --------------
$ 44,698 $ 46,810 $ (225) $ 91,283
============== ============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued expenses and other ............. $ 2,129 $ 2,361 $ -- $ 4,490
Current portion of deferred revenues ..................... 1,536 10,647 -- 12,183
Payable to Acacia Technologies group ..................... -- 225 (225) --
-------------- -------------- -------------- --------------
Total current liabilities ......................... 3,665 13,233 (225) 16,673
Deferred income taxes ......................................... 1,119 2,350 -- 3,469
-------------- -------------- -------------- --------------
Total liabilities ................................. 4,784 15,583 (225) 20,142
-------------- -------------- -------------- --------------
Minority interests ............................................ 1,142 677 -- 1,819
-------------- -------------- -------------- --------------
Stockholders' equity:
AR - Acacia Technologies stock ........................... 38,772 -- -- 38,772
AR - CombiMatrix stock ................................... -- 30,550 -- 30,550
-------------- -------------- -------------- --------------
Total stockholders' equity ........................ 38,772 30,550 -- 69,322
-------------- -------------- -------------- --------------
$ 44,698 $ 46,810 $ (225) $ 91,283
============== ============== ============== ==============
13
CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2003 (IN THOUSANDS)
ACACIA
TECHNOLOGIES COMBIMATRIX ELIMINATIONS/
GROUP GROUP RECLASSIFICATIONS CONSOLIDATED
-------------- -------------- -------------- --------------
Revenues:
License fee income ........................................ $ 6 $ -- $ -- $ 6
Product revenue ........................................... -- 209 -- 209
Grant revenue ............................................. -- 7 -- 7
-------------- -------------- -------------- --------------
Total revenues ............................................ 6 216 -- 222
-------------- -------------- -------------- --------------
Operating expenses:
Cost of sales ............................................. -- 77 -- 77
Research and development expenses ......................... -- 2,335 -- 2,335
Non-cash stock compensation expense - research and
development ............................................. -- 2 -- 2
Marketing, general and administrative expenses ............ 1,323 2,670 262 4,255
Non-cash stock compensation expense - marketing,
general and administrative .............................. -- 138 -- 138
Legal expenses - patents .................................. 262 -- (262) --
Amortization of patents ................................... 126 274 -- 400
-------------- -------------- -------------- --------------
Total operating expenses .................................. 1,711 5,496 -- 7,207
-------------- -------------- -------------- --------------
Operating loss ............................................ (1,705) (5,280) -- (6,985)
-------------- -------------- -------------- --------------
Other (expense) income:
Interest income ........................................... 148 67 -- 215
Realized gains on short-term investments .................. 37 -- -- 37
-------------- -------------- -------------- --------------
Total other income ........................................ 185 67 -- 252
-------------- -------------- -------------- --------------
Loss from continuing operations
before income taxes and minority interests ................ (1,520) (5,213) -- (6,733)
Benefit for income taxes ...................................... 26 34 -- 60
-------------- -------------- -------------- --------------
Loss from continuing operations before minority interests ..... (1,494) (5,179) -- (6,673)
Minority interests ............................................ -- 6 -- 6
-------------- -------------- -------------- --------------
Net loss ...................................................... $ (1,494) $ (5,173) $ -- $ (6,667)
============== ============== ============== ==============
14
CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2003 (IN THOUSANDS)
ACACIA
TECHNOLOGIES COMBIMATRIX
GROUP GROUP ELIMINATIONS CONSOLIDATED
-------------- -------------- -------------- --------------
Cash flows from operating activities:
Net loss from continuing operations ........................ $ (1,494) $ (5,173) $ -- $ (6,667)
Adjustments to reconcile net loss from continuing
operations to net cash used in operating activities:
Depreciation and amortization .......................... 161 606 -- 767
Minority interests ..................................... -- (6) -- (6)
Non-cash stock compensation ............................ -- 140 -- 140
Deferred tax benefit ................................... (36) (34) -- (70)
Other .................................................. (3) 124 -- 121
Changes in assets and liabilities:
Accounts receivable, prepaid expenses, other
receivables and other assets ......................... (229) 133 -- (96)
Accounts payable, accrued expenses and other ........... (420) 170 -- (250)
Deferred revenue ....................................... 33 1,475 -- 1,508
-------------- -------------- -------------- --------------
Net cash used in operating activities from
continuing operations ................................ (1,988) (2,565) -- (4,553)
Net cash used in operating activities from
discontinued operations .............................. (86) -- -- (86)
-------------- -------------- -------------- --------------
Net cash used in operating activities .................. (2,074) (2,565) -- (4,639)
-------------- -------------- -------------- --------------
Cash flows from investing activities:
Purchase of property and equipment ..................... (2) (22) -- (24)
Purchase of available-for-sale investments ............. -- (469) -- (469)
Sale of available-for-sale investments ................. -- 2,462 -- 2,462
-------------- -------------- -------------- --------------
Net cash (used in) provided by investing activities from
continuing operations ................................ (2) 1,971 -- 1,969
Net cash used in investing activities from
discontinued operations .............................. (344) -- -- (344)
-------------- -------------- -------------- --------------
Net cash (used in) provided by investing activities .... (346) 1,971 -- 1,625
-------------- -------------- -------------- --------------
Cash flows from financing activities:
Net cash attributed to the Acacia Technologies group ... (275) -- -- (275)
Net cash attributed to the CombiMatrix group ........... -- 275 -- 275
-------------- -------------- -------------- --------------
Net cash (used in) provided by financing activities .... (275) 275 -- --
-------------- -------------- -------------- --------------
Decrease in cash and cash equivalents ......................... (2,695) (319) -- (3,014)
-------------- -------------- -------------- --------------
Cash and cash equivalents, beginning .......................... 39,792 3,291 -- 43,083
Effect of exchange rate on cash ............................... -- (7) -- (7)
-------------- -------------- -------------- --------------
Cash and cash equivalents, ending ............................. $ 37,097 $ 2,965 $ -- $ 40,062
============== ============== ============== ==============
15
CONSOLIDATING STATEMENT OF FINANCIAL POSITION AT DECEMBER 31, 2002 (IN THOUSANDS)
ACACIA
TECHNOLOGIES COMBIMATRIX
GROUP GROUP ELIMINATIONS CONSOLIDATED
-------------- -------------- -------------- --------------
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 39,792 $ 3,291 $ -- $ 43,083
Short-term investments ................................... -- 11,605 -- 11,605
Accounts receivable ...................................... -- 578 -- 578
Prepaid expenses, other receivables and other assets ..... 775 446 -- 1,221
Receivable from CombiMatrix group ........................ 114 -- (114) --
-------------- -------------- -------------- --------------
Total current assets .............................. 40,681 15,920 (114) 56,487
Property and equipment, net of accumulated depreciation ....... 180 3,895 -- 4,075
Investment in affiliate, at cost .............................. 252 -- -- 252
Patents, net of accumulated amortization ...................... 4,068 11,212 -- 15,280
Goodwill, net of accumulated amortization ..................... 1,834 18,859 -- 20,693
Other assets .................................................. 197 87 -- 284
-------------- -------------- -------------- --------------
$ 47,212 $ 49,973 $ (114) $ 97,071
============== ============== ============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued expenses and other ............. $ 2,524 $ 2,302 $ -- $ 4,826
Current portion of deferred revenues ..................... 1,503 9,172 -- 10,675
Payable to Acacia Technologies group ..................... -- 114 (114) --
-------------- -------------- -------------- --------------
Total current liabilities ......................... 4,027 11,588 (114) 15,501
Deferred income taxes ......................................... 1,156 2,384 -- 3,540
-------------- -------------- -------------- --------------
Total liabilities ................................. 5,183 13,972 (114) 19,041
-------------- -------------- -------------- --------------
Minority interests ............................................ 1,487 684 -- 2,171
-------------- -------------- -------------- --------------
Stockholders' equity:
AR - Acacia Technologies stock ........................... 40,542 -- -- 40,542
AR - CombiMatrix stock ................................... -- 35,317 -- 35,317
-------------- -------------- -------------- --------------
Total stockholders' equity ........................ 40,542 35,317 -- 75,859
-------------- -------------- -------------- --------------
$ 47,212 $ 49,973 $ (114) $ 97,071
============== ============== ============== ==============
16
CONSOLIDATING STATEMENT OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2002 (IN THOUSANDS)
ACACIA
TECHNOLOGIES COMBIMATRIX
GROUP GROUP ELIMINATIONS CONSOLIDATED
-------------- -------------- -------------- --------------
Revenues:
Grant revenue ............................................. $ -- $ 249 $ -- $ 249
-------------- -------------- -------------- --------------
Total revenues ........................................ -- 249 -- 249
-------------- -------------- -------------- --------------
Operating expenses:
Research and development expenses .......................... -- 2,668 -- 2,668
Non-cash compensation expense - research and development ... -- 421 -- 421
Marketing, general and administrative expenses ............. 1,577 2,284 211 4,072
Non-cash compensation expense - marketing,
general and administrative ............................... 10 991 -- 1,001
Legal expenses - patents ................................... 211 -- (211) --
Amortization of patents and goodwill ....................... 465 99 -- 564
-------------- -------------- -------------- --------------
Total operating expenses .................................... 2,263 6,463 -- 8,726
-------------- -------------- -------------- --------------
Operating loss .............................................. (2,263) (6,214) -- (8,477)
-------------- -------------- -------------- --------------
Other income (expense):
Interest income ........................................... 153 250 -- 403
Realized losses on short-term investments ................. (553) -- -- (553)
Unrealized losses on short-term investments ............... (322) -- -- (322)
Interest expense .......................................... -- (60) -- (60)
Other income .............................................. 78 -- -- 78
-------------- -------------- -------------- --------------
Total other income (expense) .......................... (644) 190 -- (454)
-------------- -------------- -------------- --------------
Loss from continuing operations before income
taxes and minority interests ................................ (2,907) (6,024) -- (8,931)
Benefit for income taxes ...................................... 29 40 -- 69
-------------- -------------- -------------- --------------
Loss from continuing operations before minority interests ..... (2,878) (5,984) -- (8,862)
Minority interests ............................................ 37 2,398 -- 2,435
-------------- -------------- -------------- --------------
Net loss ...................................................... $ (2,841) $ (3,586) $ -- $ (6,427)
============== ============== ============== ==============
17
CONSOLIDATING STATEMENT OF CASH FLOWS FOR THE THREE MONTHS ENDED MARCH 31, 2002 (IN THOUSANDS)
ACACIA
TECHNOLOGIES COMBIMATRIX
GROUP GROUP ELIMINATIONS CONSOLIDATED
-------------- -------------- -------------- --------------
Cash flows from operating activities:
Net loss from continuing operations ........................... $ (2,841) $ (3,586) $ -- $ (6,427)
Adjustments to reconcile net loss from continuing
operations to net cash used in operating activities:
Depreciation and amortization ............................. 502 431 -- 933
Minority interests ........................................ (37) (2,398) -- (2,435)
Non-cash stock compensation expense ....................... 10 1,412 -- 1,422
Deferred tax benefit ...................................... (35) (40) -- (75)
Net purchases of trading securities ....................... (3,358) -- -- (3,358)
Unrealized loss on short-term investments ................. 322 -- -- 322
Other ..................................................... (35) 80 -- 45
Changes in assets and liabilities:
Prepaid expenses, other receivables and other assets ...... (673) (639) (10) (1,322)
Accounts payable, accrued expenses and other .............. (125) (970) 10 (1,085)
Deferred revenues ......................................... -- 531 -- 531
-------------- -------------- -------------- --------------
Net cash used in operating activities from continuing
operations .................................................. (6,270) (5,179) -- (11,449)
Net cash used in operating activities from discontinued
operations .................................................. (254) -- -- (254)
-------------- -------------- -------------- --------------
Net cash used in operating activities ......................... (6,524) (5,179) -- (11,703)
-------------- -------------- -------------- --------------
Cash flows from investing activities:
Purchase of property and equipment .......................... (51) (83) -- (134)
Purchase of available-for-sale investments .................. -- (4,540) -- (4,540)
Sale of available-for-sale investments ...................... -- 6,878 -- 6,878
Other ....................................................... (101) -- -- (101)
-------------- -------------- -------------- --------------
Net cash (used in) provided by investing activities ........... (152) 2,255 -- 2,103
-------------- -------------- -------------- --------------
Cash flows from financing activities:
Net cash attributed to the Acacia Technologies group .......... 153 -- -- 153
Net cash attributed to the CombiMatrix group .................. -- 135 -- 135
-------------- -------------- -------------- --------------
Net cash provided by financing activities ..................... 153 135 -- 288
-------------- -------------- -------------- --------------
Decrease in cash and cash equivalents ......................... (6,523) (2,789) -- (9,312)
Cash and cash equivalents, beginning .......................... 46,859 12,592 -- 59,451
Effect of exchange rate on cash ............................... -- (16) -- (16)
-------------- -------------- -------------- --------------
Cash and cash equivalents, ending ............................. $ 40,336 $ 9,787 $ -- $ 50,123
============== ============== ============== ==============
18
COMBIMATRIX GROUP
(A Division of Acacia Research Corporation)
BALANCE SHEETS
(In thousands)
(Unaudited)
MARCH 31, DECEMBER 31,
2003 2002
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 2,965 $ 3,291
Short-term investments .................................................... 9,605 11,605
Accounts receivable ....................................................... 266 578
Inventories, prepaid expenses and other assets ............................ 625 446
------------- -------------
Total current assets ................................................... 13,461 15,920
Property and equipment, net of accumulated depreciation and amortization .... 3,465 3,895
Patents, net of accumulated amortization .................................... 10,938 11,212
Goodwill, net of accumulated amortization ................................... 18,859 18,859
Other assets ................................................................ 87 87
------------- -------------
$ 46,810 $ 49,973
============= =============
LIABILITIES AND ALLOCATED NET WORTH
Current liabilities:
Accounts payable, accrued expenses and other .............................. $ 2,361 $ 2,302
Deferred revenues ......................................................... 10,647 9,172
Payable to Acacia Technologies group ...................................... 225 114
------------- -------------
Total current liabilities .............................................. 13,233 11,588
Deferred income taxes ....................................................... 2,350 2,384
------------- -------------
Total liabilities ...................................................... 15,583 13,972
------------- -------------
Minority interests .......................................................... 677 684
------------- -------------
Allocated net worth:
Funds allocated by Acacia Research Corporation ............................ 129,692 129,286
Accumulated net losses .................................................... (99,142) (93,969)
------------- -------------
Total allocated net worth .............................................. 30,550 35,317
------------- -------------
$ 46,810 $ 49,973
============= =============
The accompanying notes are an integral part of these financial statements.
19
COMBIMATRIX GROUP
(A Division of Acacia Research Corporation)
STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
FOR THE THREE MONTHS ENDED
-----------------------------------
MARCH 31, 2003 MARCH 31, 2002
---------------- ----------------
Revenues:
Product revenue ............................................. $ 209 $ --
Grant and contract revenue .................................. 7 249
---------------- ----------------
Total revenues ........................................... 216 249
---------------- ----------------
Operating expenses:
Cost of sales ............................................... 77 --
Research and development expenses ........................... 2,335 2,668
Non-cash compensation expense - research and development .... 2 421
Marketing, general and administrative expenses .............. 2,670 2,284
Non-cash compensation expense - marketing, general
and administrative ........................................ 138 991
Amortization of patents ..................................... 274 99
---------------- ----------------
Total operating expenses ................................. 5,496 6,463
---------------- ----------------
Operating loss ........................................... (5,280) (6,214)
---------------- ----------------
Other income (expense):
Interest income ............................................. 67 250
Interest expense ............................................ -- (60)
---------------- ----------------
Total other income ....................................... 67 190
---------------- ----------------
Loss from operations before income taxes
and minority interests ...................................... (5,213) (6,024)
Benefit for income taxes ...................................... 34 40
---------------- ----------------
Loss from operations before minority interests ................ (5,179) (5,984)
Minority interests ............................................ 6 2,398
---------------- ----------------
Division net loss ............................................. $ (5,173) $ (3,586)
================ ================
The accompanying notes are an integral part of these financial statements.
20
COMBIMATRIX GROUP
(A Division of Acacia Research Corporation)
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
FOR THE THREE MONTHS ENDED
-----------------------------------
MARCH 31, 2003 MARCH 31, 2002
---------------- ----------------
Cash flows from operating activities:
Division net loss from continuing operations ........................ $ (5,173) $ (3,586)
Adjustments to reconcile division net loss from continuing
operations to net cash used in operating activities:
Depreciation and amortization ................................... 606 431
Minority interests .............................................. (6) (2,398)
Non-cash stock compensation expense ............................. 140 1,412
Deferred tax benefit ............................................ (34) (40)
Other ........................................................... 124 80
Changes in assets and liabilities:
Accounts receivable, prepaid expenses, other receivables and
other assets .................................................. 133 (639)
Accounts payable, accrued expenses and other .................... 170 (970)
Deferred revenues ............................................... 1,475 531
---------------- ----------------
Net cash used in operating activities of continuing operations .. (2,565) (5,179)
---------------- ----------------
Cash flows from investing activities:
Purchase of property and equipment .............................. (22) (83)
Purchase of available-for-sale investments ...................... (469) (4,540)
Sale of available-for-sale investments .......................... 2,462 6,878
---------------- ----------------
Net cash provided by investing activities ....................... 1,971 2,255
---------------- ----------------
Cash flows from financing activities:
Net cash flows attributed to the CombiMatrix group .............. 275 135
---------------- ----------------
Decrease in cash and cash equivalents .............................. (319) (2,789)
---------------- ----------------
Cash and cash equivalents, beginning ............................... 3,291 12,592
Effect of exchange rate on cash .................................... (7) (16)
---------------- ----------------
Cash and cash equivalents, ending .................................. $ 2,965 $ 9,787
================ ================
The accompanying notes are an integral part of these financial statements.
21
COMBIMATRIX GROUP
(A DIVISION OF ACACIA RESEARCH CORPORATION)
NOTES TO FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS. The CombiMatrix group, a division of Acacia
Research Corporation, is intended to reflect the performance of Acacia Research
Corporation's wholly owned subsidiary, CombiMatrix Corporation, and CombiMatrix
Corporation's majority-owned subsidiaries, Advanced Material Sciences, Inc.
("Advanced Material Sciences") and CombiMatrix K.K. (the "KK"), as well as the
assets, liabilities and related transactions of Acacia Research Corporation
attributed to the CombiMatrix group. The CombiMatrix group's core technology
opportunity in the life sciences sector has been primarily developed through
CombiMatrix Corporation which 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 (referred to as active biochips
or microarrays). This proprietary technology has applications relating to
genomic and proteomic research, biological and chemical detection and
combinatorial chemistry markets. CombiMatrix Corporation's majority-owned
subsidiary, Advanced Material Sciences, holds the exclusive license for
CombiMatrix Corporation's biological array processor technology in certain
fields of material sciences.
On December 11, 2002, Acacia Research Corporation's stockholders voted
in favor of a recapitalization transaction, which became effective on December
13, 2002, whereby Acacia Research Corporation created two new classes of common
stock called Acacia Research-CombiMatrix stock ("AR-CombiMatrix stock") and
Acacia Research-Acacia Technologies stock ("AR-Acacia Technologies stock"), and
divided Acacia Research Corporation's existing Acacia Research Corporation
common stock into shares of the two new classes of common stock. AR-Acacia
Technologies stock is intended to reflect separately the performance of Acacia
Research Corporation's Acacia Technologies group. AR-CombiMatrix stock is
intended to reflect separately the performance of Acacia Research Corporation's
CombiMatrix group.
BASIS OF PRESENTATION. The unaudited interim CombiMatrix group
financial statements as of March 31, 2003, and for the three months ended March
31, 2003 and 2002 have been prepared in accordance with generally accepted
accounting principles for interim financial information. These interim financial
statements should be read in conjunction with the CombiMatrix group financial
statements and Acacia Research Corporation's consolidated financial statements
and notes thereto for the year ended December 31, 2002.
The CombiMatrix group financial statements include all adjustments of a
normal recurring nature which, in the opinion of management, are necessary for a
fair presentation of its financial position as of March 31, 2003, and the
results of its operations and its cash flows for the three months ended March
31, 2003 and 2002. The results of operations for the three months ended March
31, 2003 are not necessarily indicative of the results to be expected for the
entire year.
AR-CombiMatrix stock is intended to reflect the separate performance of
the respective division of Acacia Research Corporation. The CombiMatrix group is
not a separate legal entity. Holders of AR-CombiMatrix stock are stockholders of
Acacia Research Corporation. As a result, holders of AR-CombiMatrix stock are
subject to all of the risks of an investment in Acacia Research Corporation and
all of its businesses, assets and liabilities. The assets that Acacia Research
Corporation attributes to the CombiMatrix group could be subject to the
liabilities of the Acacia Technologies group.
The CombiMatrix group financial statements have been prepared in
accordance with generally accepted accounting principles in the United States of
America, and taken together with the Acacia Technologies group financial
statements, comprise all the accounts included in the corresponding consolidated
financial statements of Acacia Research Corporation. The financial statements of
the CombiMatrix group reflect the financial condition, results of operations,
and cash flows of the businesses included therein. The financial statements of
the CombiMatrix group include the accounts or assets of Acacia Research
Corporation specifically attributed to the CombiMatrix group and were prepared
using amounts included in Acacia Research Corporation's consolidated financial
statements.
Financial effects arising from one group that affect Acacia Research
Corporation's 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 class of common stock relating to the
other group. Any division net losses of the CombiMatrix group or the Acacia
Technologies group and dividends or distributions on, or repurchases of,
AR-CombiMatrix stock or AR-Acacia Technologies stock or repurchases of preferred
stock of Acacia Research Corporation will reduce the assets of Acacia Research
Corporation legally available for payment of dividends on AR-CombiMatrix stock
or AR-Acacia Technologies stock.
22
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
STOCK-BASED COMPENSATION. Compensation cost of stock options issued to
employees of Acacia Research Corporation is accounted for in accordance with
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees" ("APB No. 25") and related interpretations. Compensation cost
attributable to such options is recognized based on the difference, if any,
between the closing market price of the stock on the date of grant and the
exercise price of the option. Compensation cost is deferred and amortized on an
accelerated basis over the vesting period of the individual option awards using
the amortization method prescribed in Financial Accounting Standards Board
("FASB") Interpretation No. 28, "Accounting for Stock Appreciation Rights and
Other Variable Stock Option or Award Plans" ("FIN No. 28"). Compensation cost of
stock options and warrants issued to non-employee service providers is accounted
for under the fair value method required Statement of Financial Accounting
Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation" ("SFAS No.
123") and related interpretations. As a result of the recapitalization
transaction discussed earlier, in future periods, stock compensation expense, if
any, resulting from the issuance of AR-CombiMatrix stock will generally be
allocated to the CombiMatrix group.
Stock option and related option plan information is omitted from the
CombiMatrix group footnotes because AR-CombiMatrix stock is part of the capital
structure of Acacia Research Corporation. The CombiMatrix group is not a
separate legal entity. Holders of AR-CombiMatrix stock continue to be
stockholders of Acacia Research Corporation. This presentation reflects the fact
that the CombiMatrix group does not have legally issued common or preferred
stock and Acacia Research Corporation AR-CombiMatrix stock transactions are not
legal transactions of the CombiMatrix group. Refer to the Acacia Research
Corporation consolidated financial statements for disclosures regarding Acacia
Research Corporation's stock option plans.
EARNINGS PER SHARE. Earnings per share information is omitted from the
CombiMatrix group statements of operations because AR-CombiMatrix stock is part
of the capital structure of Acacia Research Corporation. The CombiMatrix group
is not a separate legal entity. Holders of AR-CombiMatrix stock continue to be
stockholders of Acacia Research Corporation. This presentation reflects the fact
that the CombiMatrix group does not have legally issued common or preferred
stock and Acacia Research Corporation AR-CombiMatrix stock transactions are not
legal transactions of the CombiMatrix group. Refer to the Acacia Research
Corporation consolidated financial statements for earnings per share information
for Acacia Research Corporation's classes of stock, computed using the two-class
method in accordance with SFAS No. 128 "Earnings per Share."
3. RECENT ACCOUNTING PRONOUNCEMENTS
On January 1, 2003, the CombiMatrix group adopted SFAS No. 146,
"Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS No.
146"). SFAS No. 146 nullifies Emerging Issues Task Force ("EITF") Issue No.
94-3, "Liability Recognition for Certain Employee Termination Benefits and Other
Costs to Exit an Activity," under which a liability for an exit cost was
recognized at the date of an entity's commitment to an exit plan. SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized at fair value when the liability is incurred. The
provisions of this statement are effective for exit or disposal activities that
are initiated after December 31, 2002. The adoption of SFAS No. 146 did not have
a significant impact on the CombiMatrix group's financial position or results of
operations.
On January 1, 2003, the CombiMatrix group adopted FASB Interpretation
No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness to Others," ("FIN 45") an
interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB
Interpretation No. 34. FIN 45 elaborates on the disclosures to be made by a
guarantor in its interim and annual financial statements about its obligations
under guarantees issued. FIN 45 also clarifies that a guarantor is required to
recognize, at inception of a guarantee, a liability for the fair value of the
obligation undertaken. The initial recognition and measurement provisions of FIN
45 are applicable to guarantees issued or modified after December 31, 2002. The
adoption of FIN 45 did not have a significant impact on the CombiMatrix group's
financial position or results of operations.
In January 2003, the FASB issued FASB Interpretation No. 46,
"Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 requires
consolidation of variable interest entities by the entity's primary beneficiary
if the equity investors in the entity do not have the characteristics of a
controlling financial interest or sufficient equity at risk for the entity to
finance its activities without additional subordinated financial support from
other parties. FIN 46 is effective for all new variable interest entities
created or acquired after January 31, 2003. FIN 46 must be applied beginning
23
July 1, 2003 to variable entities existing prior to February 1, 2003. The
adoption of FIN 46 will not have a material impact on the CombiMatrix group's
results of operations or financial condition.
4. GOODWILL AND INTANGIBLES
Goodwill is evaluated for impairment in accordance with SFAS No. 142,
"Goodwill and Other Intangible Assets" ("SFAS No. 142"), which provides that
goodwill is no longer subject to amortization. Instead, goodwill is subject to a
periodic review for potential impairment that must occur at least annually at a
reporting unit level. As of January 1, 2002, the date of adoption of the
standard, the CombiMatrix group had unamortized goodwill in the amount of
$2,851,000. In 2002, the CombiMatrix group performed a transitional goodwill
impairment assessment and a year end goodwill impairment assessment and
determined that there was no impairment of goodwill. The fair value of the
CombiMatrix group reporting unit was estimated using a discounted cash flow
analysis. There can be no assurance that future goodwill impairment tests will
not result in a charge to earnings.
The CombiMatrix group had $18,859,000 of goodwill at March 31, 2003 and
December 31, 2002 (net of $1,312,000 of accumulated amortization).
The CombiMatrix group's only identifiable intangible assets are
patents. The gross carrying amount and accumulated amortization related to
acquired intangible assets as of March 31, 2003 and December 31, 2002 and
related patent amortization expense for the three months ended March 31, 2003
and 2002 are as follows (in thousands):
MARCH 31, 2003 DECEMBER 31, 2002
-------------- --------------
Gross carrying amount - patents ... $ 12,095 $ 12,095
Accumulated amortization .......... (1,157) (883)
-------------- --------------
Patents, net ...................... $ 10,938 $ 11,212
============== ==============
FOR THE THREE MONTHS ENDED
-------------------------------
MARCH 31, 2003 MARCH 31, 2002
-------------- --------------
Patent amortization expense ....... $ 274 $ 99
============== ==============
Annual aggregate amortization expense for each of the next five years
through December 31, 2007 is estimated to be $1,095,000 per year.
At March 31, 2003 and December 31, 2002, all of the CombiMatrix group's
acquired intangible assets other than goodwill were subject to amortization.
5. SUBSEQUENT EVENTS
In the second quarter of 2003, CombiMatrix Corporation entered into a
multi-year strategic alliance with Toppan Printing Corporation to develop and
manufacture microarrays utilizing the CombiMatrix group's proprietary
electrochemical detection approach. Under the terms of the agreement, Toppan
will pay CombiMatrix Corporation an upfront fee of $1,000,000 and additional
development and milestones payments. CombiMatrix Corporation and Toppan will
co-develop semiconductor microarrays for applications in life science research
and development as well as diagnostics.
24
ACACIA TECHNOLOGIES GROUP
(A Division of Acacia Research Corporation)
BALANCE SHEETS
(In thousands)
(Unaudited)
MARCH 31, DECEMBER 31,
2003 2002
------------- -------------
ASSETS
Current assets:
Cash and cash equivalents ................................ $ 37,097 $ 39,792
Prepaid expenses, other receivables and other assets ..... 1,004 775
Receivable from CombiMatrix group ........................ 225 114
------------- -------------
Total current assets .................................. 38,326 40,681
Property and equipment, net of accumulated depreciation .... 147 180
Investment in affiliate, at cost ........................... 252 252
Patents, net of accumulated amortization ................... 3,942 4,068
Goodwill, net of accumulated amortization .................. 1,834 1,834
Other assets ............................................... 197 197
------------- -------------
$ 44,698 $ 47,212
============= =============
LIABILITIES AND ALLOCATED NET WORTH
Current liabilities:
Accounts payable, accrued expenses and other ............. $ 2,129 $ 2,524
Deferred revenues ........................................ 1,536 1,503
------------- -------------
Total current liabilities ............................. 3,665 4,027
Deferred income taxes ...................................... 1,119 1,156
------------- -------------
Total liabilities ..................................... 4,784 5,183
------------- -------------
Minority interests ......................................... 1,142 1,487
------------- -------------
Allocated net worth:
Funds allocated by Acacia Research Corporation ........... 105,281 105,557
Accumulated net losses ................................... (66,509) (65,015)
------------- -------------
Total allocated net worth ............................. 38,772 40,542
------------- -------------
$ 44,698 $ 47,212
============= =============
The accompanying notes are an integral part of these financial statements.
25
ACACIA TECHNOLOGIES GROUP
(A Division of Acacia Research Corporation)
STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
FOR THE THREE MONTHS ENDED
-----------------------------------
MARCH 31, 2003 MARCH 31, 2002
---------------- ----------------
Revenues:
License fee income ................................. $ 6 $ --
---------------- ----------------
Total revenues .................................. 6 --
---------------- ----------------
Operating expenses:
Marketing, general and administrative expenses ..... 1,323 1,577
Non-cash stock compensation - marketing, general and
administrative .................................. -- 10
Legal expenses - patents ........................... 262 211
Amortization of patents ............................ 126 465
---------------- ----------------
Total operating expenses ........................ 1,711 2,263
---------------- ----------------
Operating loss .................................. (1,705) (2,263)
---------------- ----------------
Other income (expense):
Interest income ............................... 148 153
Realized gains (losses) on short-term
investments.................................. 37 (553)
Unrealized losses on short-term investments ... -- (322)
Other income .................................. -- 78
---------------- ----------------
Total other income (expenses) ................... 185 (644)
---------------- ----------------
Loss from continuing operations before
income taxes and minority interests ................ (1,520) (2,907)
Benefit for income taxes ............................. 26 29
---------------- ----------------
Loss from continuing operations before
minority interests ................................. (1,494) (2,878)
Minority interests ................................... -- 37
---------------- ----------------
Division net loss .................................... $ (1,494) $ (2,841)
================ ================
The accompanying notes are an integral part of these financial statements.
26
ACACIA TECHNOLOGIES GROUP
(A Division of Acacia Research Corporation)
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
FOR THE THREE MONTHS ENDED
-------------------------------------
MARCH 31, 2003 MARCH 31, 2002
----------------- -----------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Division net loss from continuing operations ...................... $ (1,494) $ (2,841)
Adjustments to reconcile division net loss from continuing
operations to net cash used in operating activities:
Depreciation and amortization ................................. 161 502
Minority interests ............................................ -- (37)
Non-cash stock compensation ................................... -- 10
Deferred tax benefit .......................................... (36) (35)
Net purchases of trading securities ........................... -- (3,358)
Unrealized losses on short-term investments ................... -- 322
Other ......................................................... (3) (35)
Changes in assets and liabilities:
Prepaid expenses, other receivables and other assets .......... (229) (673)
Accounts payable, accrued expenses and other .................. (420) (125)
Deferred revenues ............................................. 33 --
----------------- -----------------
Net cash used in operating activities from
continuing operations ....................................... (1,988) (6,270)
Net cash used in operating activities from
discontinued operations ..................................... (86) (254)
----------------- -----------------
Net cash used in operating activities ......................... (2,074) (6,524)
----------------- -----------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and equipment ............................ (2) (51)
Other ......................................................... -- (101)
----------------- -----------------
Net cash used in investing activities from