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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 JUNE 30, 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
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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 August 8, 2003, 19,640,808 shares of Acacia Research-Acacia
Technologies common stock were issued and outstanding. As of August 8, 2003,
25,911,402 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 June 30, 2003 and
December 31, 2002 (Unaudited).............................. 1
Consolidated Statements of Operations and Comprehensive
Loss for the Three Months and Six Months Ended June
30, 2003 and 2002 (Unaudited).............................. 2
Consolidated Statements of Cash Flows for the Six
Months Ended June 30, 2003 and 2002 (Unaudited)............ 3
Notes to Consolidated Financial Statements................. 4
*CombiMatrix Group Financial Statements
Balance Sheets as of June 30, 2003 and December
31, 2002 (Unaudited)....................................... 14
Statements of Operations for the Three Months and Six
Months Ended June 30, 2003 and 2002 (Unaudited)............ 15
Statements of Cash Flows for the Six Months Ended
June 30, 2003 and 2002 (Unaudited)......................... 16
Notes to Financial Statements.............................. 17
*Acacia Technologies Group Financial Statements
Balance Sheets as of June 30, 2003 and December 31, 2002
(Unaudited)................................................ 21
Statements of Operations for the Three Months and Six
Months Ended June 30, 2003 and 2002 (Unaudited)............ 22
Statements of Cash Flows for the Six Months Ended
June 30, 2003 and 2002 (Unaudited)......................... 23
Notes to Financial Statements.............................. 24
Item 2. Management's Discussion and Analysis of Financial
Condition and Results of Operations........................ 27
Item 3. Quantitative and Qualitative Disclosures About Market
Risk....................................................... 61
Item 4. Controls and Procedures.................................... 61
i
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.......................................... 62
Item 2. Changes in Securities and Use of Proceeds.................. 62
Item 4. Submission of Matters to a Vote of Security Holders........ 63
Item 5. Other Matters.............................................. 63
Item 6. Exhibits and Reports on Form 8-K........................... 65
SIGNATURES.................................................................. 66
EXHIBIT INDEX .............................................................. 67
*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.
ii
ACACIA RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share information)
(Unaudited)
JUNE 30, DECEMBER 31,
2003 2002
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents ................................................. $ 41,138 $ 43,083
Short-term investments .................................................... 13,965 11,605
Accounts receivable ....................................................... 334 578
Prepaid expenses, inventory, and other assets ............................. 1,445 1,221
---------- ----------
Total current assets ............................................. 56,882 56,487
Property and equipment, net of accumulated depreciation ........................ 3,310 4,075
Patents, net of accumulated amortization of $8,412 (2003) and $7,613 (2002) ... 14,481 15,280
Goodwill, net of accumulated amortization of $3,570 (2003) and (2002) .......... 20,635 20,693
Other assets ................................................................... 331 536
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$ 95,639 $ 97,071
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LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued expenses and other .............................. $ 4,149 $ 4,826
Current portion of deferred revenues ...................................... 17,360 10,675
---------- ----------
Total current liabilities ........................................ 21,509 15,501
Deferred income taxes .......................................................... 3,399 3,540
Deferred revenues, net of current portion ...................................... 750 --
---------- ----------
Total liabilities ................................................ 25,658 19,041
---------- ----------
Minority interests ............................................................. 1,784 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 June
30, 2003 and December 31, 2002 ..................................... 20 20
Acacia Research - CombiMatrix stock, par value $0.001 per
share; 50,000,000 shares authorized; 25,401,688 and
22,964,779 shares issued and outstanding as of June
30, 2003 and December 31, 2002, respectively ....................... 25 23
Additional paid-in capital ................................................ 242,615 238,826
Deferred stock compensation ............................................... (2,016) (4,023)
Accumulated comprehensive loss ............................................ (21) (2)
Accumulated deficit ....................................................... (172,426) (158,985)
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Total stockholders' equity ....................................... 68,197 75,859
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$ 95,639 $ 97,071
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
1
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
(In thousands, except share and per share information)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
----------------------------- -----------------------------
JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002
------------- ------------- ------------- -------------
Revenues:
License fee income .......................................... $ 19 $ -- $ 25 $ --
Product revenue ............................................. -- 274 209 274
Grant and contract revenue .................................. 6 164 13 413
------------- ------------- ------------- -------------
Total revenues .......................................... 25 438 247 687
------------- ------------- ------------- -------------
Operating expenses:
Cost of sales ............................................... -- 253 77 253
Research and development expenses ........................... 2,158 5,026 4,493 7,694
Non-cash stock compensation expense - research
and development ........................................... 280 692 282 1,113
Marketing, general and administrative expenses .............. 3,552 5,516 7,807 9,587
Non-cash stock compensation expense - marketing,
general and administrative ................................ 496 1,451 634 2,453
Amortization of patents ..................................... 399 564 799 1,128
------------- ------------- ------------- -------------
Total operating expenses ............................... 6,885 13,502 14,092 22,228
------------- ------------- ------------- -------------
Operating loss ......................................... (6,860) (13,064) (13,845) (21,541)
------------- ------------- ------------- -------------
Other (expense) income :
Interest income ............................................. 177 293 392 700
Realized gains (losses) on short-term investments ........... 25 (930) 62 (1,483)
Unrealized losses on short-term investments ................. -- (156) -- (477)
Interest expense ............................................ -- (57) -- (121)
Other (expense) income ...................................... (206) 34 (206) 112
------------- ------------- ------------- -------------
Total other (expense) income ........................... (4) (816) 248 (1,269)
------------- ------------- ------------- -------------
Loss from operations before income taxes and minority interests .. (6,864) (13,880) (13,597) (22,810)
Benefit for income taxes ......................................... 66 75 126 144
------------- ------------- ------------- -------------
Loss from operations before minority interests ................... (6,798) (13,805) (13,471) (22,666)
Minority interests ............................................... 24 4,104 30 6,539
------------- ------------- ------------- -------------
Net loss ......................................................... (6,774) (9,701) (13,441) (16,127)
Unrealized (losses) gains on short-term investments ......... (7) 47 (15) (48)
Unrealized gains (losses) on foreign currency translation ... 3 62 (4) 53
------------- ------------- ------------- -------------
Comprehensive loss ............................................... $ (6,778) $ (9,592) $ (13,460) $ (16,122)
============= ============= ============= =============
Loss per common share:
Attributable to the Acacia Technologies group:
Net loss .................................................... $ (1,577) $ (3,806) $ (3,071) $ (6,645)
Basic and diluted per share ............................ (0.08) (0.19) (0.16) (0.34)
Attributable to the CombiMatrix group:
Net loss .................................................... $ (5,197) $ (5,895) $ (10,370) $ (9,482)
Basic and diluted per share ............................ (0.21) (0.26) (0.44) (0.41)
Weighted average shares - basic and diluted:
Acacia Research - Acacia Technologies stock ................. 19,640,808 19,640,808 19,640,808 19,640,808
============= ============= ============= =============
Acacia Research - CombiMatrix stock ......................... 24,183,340 22,950,551 23,586,624 22,950,551
============= ============= ============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
2
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED
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JUNE 30, 2003 JUNE 30, 2002
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Cash flows from operating activities:
Net loss from operations ......................................... $ (13,441) $ (16,127)
Adjustments to reconcile net loss from operations
to net cash used in operating activities:
Depreciation and amortization ............................... 1,540 1,873
Minority interests .......................................... (30) (6,539)
Non-cash stock compensation ................................. 916 3,566
Deferred tax benefit ........................................ (141) (150)
Net sales of trading securities ............................. -- 3,133
Unrealized losses on short-term investments ................. -- 477
Other ....................................................... 306 113
Changes in assets and liabilities:
Accounts receivable ......................................... 244 (946)
Prepaid expenses, inventory, and other assets ............... (168) (618)
Accounts payable, accrued expenses and other ................ (448) 360
Deferred revenues ........................................... 7,435 1,648
-------------- --------------
Net cash used in operating activities from
continuing operations ..................................... (3,787) (13,210)
Net cash used in operating activities from
discontinued operations ................................... (229) (415)
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Net cash used in operating activities ....................... (4,016) (13,625)
-------------- --------------
Cash flows from investing activities:
Purchase of property and equipment, net ..................... (72) (437)
Purchase of available-for-sale investments .................. (11,383) (5,158)
Sale of available-for-sale investments ...................... 9,011 9,877
Other ....................................................... -- (100)
-------------- --------------
Net cash (used in) provided by investing activities
from continuing operations ................................ (2,444) 4,182
Net cash used in investing activities from
discontinued operations ................................... (356) (4)
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Net cash (used in) provided by investing activities ......... (2,800) 4,178
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Cash flows from financing activities:
Proceeds from sale of common stock, net of issuance costs ... 4,875 --
Proceeds from the exercise of stock options and warrants .... -- 214
Capital contributions from minority shareholders
of subsidiaries, net of issuance costs .................... -- 300
Capital distributions to minority shareholders of
subsidiaries, net of issuance costs ...................... -- (430)
Repayment of capital lease obligation ....................... -- (456)
Other ....................................................... -- (11)
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Net cash provided by (used in) financing activities ......... 4,875 (383)
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Effect of exchange rate on cash ....................................... (4) 91
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Decrease in cash and cash equivalents ................................. (1,945) (9,739)
Cash and cash equivalents, beginning .................................. 43,083 59,451
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Cash and cash equivalents, ending ..................................... $ 41,138 $ 49,712
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THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
3
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 June 30, 2003 and results of operations and cash flows for the interim
periods presented. The results of operations for the three and six months ended
June 30, 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 subsidiaries, Advanced Material Sciences, Inc.
("Advanced Material Sciences") and CombiMatrix K.K. 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. This
technology also enables the design and synthesis of nucleic acids as potential
therapeutics. 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 K.K., an indirect
wholly-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," is primarily comprised of Acacia Research Corporation's interests in two
wholly owned media technologies subsidiaries: (1) Acacia Media Technologies
Corporation and (2) Soundview Technologies, Inc. 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 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.
RECAPITALIZATION AND MERGER TRANSACTIONS
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
4
Research Corporation's Acacia Technologies group. Although the AR-CombiMatrix
stock and the AR-Acacia Technologies stock are intended to reflect the
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.
On December 11, 2002 Acacia Research Corporation stockholders and
CombiMatrix Corporation stockholders voted in favor of a merger transaction
pursuant to which we acquired the stockholder interests in CombiMatrix
Corporation not already owned by us (52% of the total stockholder interests in
CombiMatrix Corporation). The acquisition was accomplished through a merger,
effective December 13, 2002, in which stockholders of CombiMatrix Corporation
other than Acacia Research Corporation received one share of the new
AR-CombiMatrix stock in exchange for each share of CombiMatrix Corporation
common stock that they owned immediately prior to the merger.
SEPARATE GROUP FINANCIAL STATEMENT PRESENTATION. 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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION. We recognize revenue in accordance with Staff
Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB
No. 101") and related authoritative pronouncements.
License fee income is recognized as revenue when (i) persuasive
evidence of an arrangement exists, (ii) all obligations have been performed
pursuant to the terms of the license agreement, (iii) amounts are fixed or
determinable and (iv) collectibility of amounts is reasonably assured.
Generally, under the terms of the respective DMT license agreements with
individual licensees, the Acacia Technologies group grants a one-year
non-exclusive license for the use of its patented DMT technology in exchange for
an annual license fee. Prepaid license fee payments received at the inception of
the license term are deferred and amortized to revenue over the license term.
Revenues from government grants and contracts are recognized as the
related services are performed, when the services have been accepted by the
grantor and collectibility is reasonably assured. Amounts recognized are limited
to amounts due from the grantor based upon the contract or grant terms
Revenue from the sale of products and services is recognized when (i)
persuasive evidence of an arrangement exists, (ii) delivery has occurred or
services have been rendered, (iii) the fees are fixed or determinable and (iv)
collectibility is reasonably assured.
5
Revenues from multiple-element arrangements involving license fees,
up-front payments and milestone payments, which are received or billable by us
in connection with other rights and services that represent continuing
obligations of ours, are deferred until all of the elements have been delivered
or until we have established objective and verifiable evidence of the fair value
of the undelivered elements.
Deferred revenue arises from payments received in advance of the
culmination of the earnings process. Deferred revenue expected to be recognized
within the next twelve months is classified as a current liability. Deferred
revenues related to payments received under multiple element arrangements,
prepaid license fees and other advances totaled $18,110,000 at June 30, 2003.
Deferred revenues will be recognized as revenue in future periods when the
applicable revenue recognition criteria as described above are met.
STOCK-BASED COMPENSATION. At June 30, 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 tables illustrate 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
----------------------------- -------------------------------
JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002
------------- ------------- -------------- --------------
Loss from continuing operations as reported .................... $ (1,577) $ (3,806) $ (5,197) $ (5,895)
Add: Stock-based compensation, intrinsic value method
reported in net income, net of tax and minority interests ... -- 8 752 1,228
Deduct: Pro forma stock-based compensation fair value
method, net of tax and minority interests ................... (945) (1,212) (2,363) (1,888)
Loss from continuing operations, pro forma ..................... (2,522) (5,010) (6,808) (6,555)
Basic loss per share from continuing operations as reported .... (0.08) (0.19) (0.21) (0.26)
Basic loss per share from continuing operations, pro forma ..... (0.13) (0.26) (0.28) (0.29)
Diluted loss per share from continuing operations as
reported .................................................... (0.08) (0.19) (0.21) (0.26)
Diluted loss per share from continuing operations, pro forma ... (0.13) (0.26) (0.28) (0.29)
AR-ACACIA TECHNOLOGIES STOCK AR-COMBIMATRIX STOCK
----------------------------- -------------------------------
SIX MONTHS ENDED SIX MONTHS ENDED
----------------------------- -------------------------------
JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002
------------- ------------- -------------- --------------
Loss from continuing operations as reported .................... $ (3,071) $ (6,645) $ (10,370) $ (9,482)
Add: Stock-based compensation, intrinsic value method
reported in net income, net of tax and minority interests ... -- 19 821 2,040
Deduct: Pro forma stock-based compensation fair value
method, net of tax and minority interests ................... (2,023) (2,449) (5,145) (3,683)
Loss from continuing operations, pro forma ..................... (5,094) (9,075) (14,694) (11,125)
Basic loss per share from continuing operations as reported .... (0.16) (0.34) (0.44) (0.41)
Basic loss per share from continuing operations, pro forma ..... (0.26) (0.46) (0.62) (0.48)
Diluted loss per share from continuing operations as
reported .................................................... (0.16) (0.34) (0.44) (0.41)
Diluted loss per share from continuing operations, pro forma ... (0.26) (0.46) (0.62) (0.48)
- -----------------------------
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.
6
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 reclassifications of prior period amounts
have been made to conform to the 2003 presentation.
3. 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
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:
THREE MONTHS ENDED SIX MONTHS ENDED
---------------------------- ----------------------------
JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002
------------- ------------- ------------- -------------
ACACIA RESEARCH - ACACIA TECHNOLOGIES STOCK
- -------------------------------------------
Basic weighted average number of common shares outstanding .... 19,640,808 19,640,808 19,640,808 19,640,808
Dilutive effect of outstanding stock options and warrants ..... -- -- -- --
------------- ------------- ------------- -------------
Diluted weighted average number of common and
potential common shares outstanding ......................... 19,640,808 19,640,808 19,640,808 19,640,808
============= ============= ============= =============
Potential AR-Acacia Technologies stock common shares
excluded from the per share calculation because the
effect of their inclusion would be anti-dilutive ............ -- 46,857 -- 46,857
============= ============= ============= =============
ACACIA RESEARCH - COMBIMATRIX STOCK
- -----------------------------------
Basic weighted average number of common shares outstanding .... 24,183,340 22,950,551 23,586,624 22,950,551
Dilutive effect of outstanding stock options and warrants ..... -- -- -- --
------------- ------------- ------------- -------------
Diluted weighted average number of common and
potential common shares outstanding ......................... 24,183,340 22,950,551 23,586,624 22,950,551
============= ============= ============= =============
Potential AR-CombiMatrix stock common shares excluded
from the per share calculation because the effect
of their inclusion would be anti-dilutive ................... 297,313 305,256 366,474 305,256
============= ============= ============= =============
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 at a reporting unit level. Reviews for
potential impairment must occur at least annually and may be performed earlier,
if circumstances indicate that an impairment may have occurred. Our reporting
units are: 1) Acacia Media Technologies and 2) Soundview Technologies, which are
the primary components of the Acacia Technologies group, and 3) the CombiMatrix
group. 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.
7
The Acacia Technologies group had $1,776,000 and $1,834,000 of goodwill
at June 30, 2003 and December 31, 2002, respectively (net of $2,258,000 of
accumulated amortization). The CombiMatrix group had $18,859,000 of goodwill at
June 30, 2003 and December 31, 2002 (net of $1,312,000 of accumulated
amortization).
Acacia Research Corporation's only identifiable intangible assets at
June 30, 2003 and December 31, 2002 are patents. The gross carrying amounts and
accumulated amortization as of June 30, 2003 and December 31, 2002 and
amortization expense for the three and six months ended June 30, 2003 and 2002,
related to patents, by segment, are as follows (in thousands):
ACACIA TECHNOLOGIES GROUP COMBIMATRIX GROUP
--------------------------------- ---------------------------------
JUNE 30, 2003 DECEMBER 31, 2002 JUNE 30, 2003 DECEMBER 31, 2002
--------------- --------------- --------------- ---------------
Gross carrying amount - patents ... $ 10,798 $ 10,798 $ 12,095 $ 12,095
Accumulated amortization .......... (6,981) (6,730) (1,431) (883)
--------------- --------------- --------------- ---------------
Patents, net ...................... $ 3,817 $ 4,068 $ 10,664 $ 11,212
=============== =============== =============== ===============
Patent Amortization Expense:
ACACIA TECHNOLOGIES GROUP COMBIMATRIX GROUP
--------------------------------- ---------------------------------
JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002
--------------- --------------- --------------- ---------------
Three Months Ended ................ $ 125 $ 465 $ 274 $ 99
=============== =============== =============== ===============
Six Months Ended .................. $ 251 $ 930 $ 548 $ 198
=============== =============== =============== ===============
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 June 30, 2003 and December 31, 2002, all of our acquired intangible
assets other than goodwill were subject to amortization.
5. EQUITY FINANCING
In May 2003, Acacia Research Corporation completed a private equity
financing raising gross proceeds of $5,247,000 through the issuance of 2,417,000
units. Each unit consists of one share of AR-CombiMatrix common stock and
one-half, five-year callable common stock purchase warrant. Each full common
stock purchase warrant entitles the holder to purchase a share of AR-CombiMatrix
stock at a price of $2.75 per share and is callable by Acacia Research
Corporation once the daily average of the high and low prices of Acacia Research
Corporation's AR-CombiMatrix stock on the Nasdaq SmallCap Market is equal to or
above $4.50 for 20 consecutive trading days. Acacia Research Corporation issued
an additional 31,502 shares of AR-CombiMatrix stock in lieu of cash payments in
conjunction with the private placement for finder's fees. Net proceeds raised
from the private equity financing of $4,875,000 have been attributed to the
CombiMatrix Group.
6. 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.
8
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. Acacia Research Corporation must
apply FIN 46 to variable entities existing prior to February 1, 2003 beginning
on July 1, 2003. Acacia Research Corporation does not expect the adoption of FIN
46 to have a material impact on its financial condition or results of
operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS 133 on
Derivative Instruments and Hedging Activities" ("SFAS No. 149"). SFAS No. 149
amends and clarifies financial accounting and reporting for derivative
instruments, including certain derivative instruments embedded in other
contracts and for hedging activities under SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities." SFAS No. 149 is effective for
contracts entered into or modified after June 30, 2003 and hedging relationships
designated after June 30, 2003. Acacia Research Corporation does not expect the
adoption of SFAS No. 149 to have a material impact on its financial condition or
results of operations.
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain
Instruments with Characteristics of Both Liabilities and Equity" ("SFAS No.
150"). This standard requires that certain financial instruments embodying an
obligation to transfer assets or to issue equity securities be classified as
liabilities. It is effective for financial instruments entered into or modified
after May 31, 2003, and otherwise is effective for Acacia Research Corporation
on July 1, 2003. Acacia Research Corporation does not expect the adoption of
SFAS No. 150 to have a material impact on its financial condition or results of
operations.
7. SUBSEQUENT EVENTS
In July 2003, Acacia Research Corporation purchased 95% of the
outstanding 13% minority interests in Advanced Material Sciences from existing
minority shareholders. Acacia Research Corporation issued 295,790 shares of its
AR-CombiMatrix stock in exchange for the 12% ownership interest in Advanced
Material Sciences acquired. Also in July 2003, Acacia Research Corporation
purchased the outstanding minority interests in CombiMatrix K.K. from Marubeni
Corporation ("Marubeni"). Acacia Research Corporation issued 200,000 shares of
its AR-CombiMatrix stock to Marubeni in exchange for Marubeni's minority
interest in CombiMatrix K.K. Acacia Research Corporation's interests in Advanced
Material Sciences and CombiMatrix K.K. have been attributed to the CombiMatrix
group.
8. CONSOLIDATING 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.
Presented below is consolidating financial information for our
reportable segments 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.
9
CONSOLIDATING STATEMENTS OF FINANCIAL POSITION
(IN THOUSANDS)
AT JUNE 30, 2003
------------------------------------------------------------
ACACIA
TECHNOLOGIES COMBIMATRIX
GROUP GROUP ELIMINATIONS CONSOLIDATED
------------- ------------- ------------- -------------
ASSETS
Current assets:
Cash and cash equivalents .............................. $ 33,787 $ 7,351 $ -- $ 41,138
Short-term investments ................................. 2,053 11,912 -- 13,965
Accounts receivable .................................... 8 326 -- 334
Prepaid expenses, inventories and other assets ......... 928 517 -- 1,445
Receivable from CombiMatrix group ...................... 189 -- (189) --
------------- ------------- ------------- -------------
Total current assets ............................ 36,965 20,106 (189) 56,882
Property and equipment, net of accumulated depreciation ..... 118 3,192 -- 3,310
Patents, net of accumulated amortization .................... 3,817 10,664 -- 14,481
Goodwill, net of accumulated amortization ................... 1,776 18,859 -- 20,635
Other assets ................................................ 243 88 -- 331
------------- ------------- ------------- -------------
$ 42,919 $ 52,909 $ (189) $ 95,639
============= ============= ============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued expenses and other ........... $ 2,115 $ 2,034 $ -- $ 4,149
Current portion of deferred revenues ................... 1,552 15,808 -- 17,360
Payable to Acacia Technologies group ................... -- 189 (189) --
------------- ------------- ------------- -------------
Total current liabilities ....................... 3,667 18,031 (189) 21,509
Deferred income taxes ....................................... 1,083 2,316 -- 3,399
Deferred revenues, net of current portion ................... -- 750 -- 750
------------- ------------- ------------- -------------
Total liabilities ............................... 4,750 21,097 (189) 25,658
------------- ------------- ------------- -------------
Minority interests .......................................... 1,130 654 -- 1,784
------------- ------------- ------------- -------------
Stockholders' equity:
AR - Acacia Technologies stock ......................... 37,039 -- -- 37,039
AR - CombiMatrix stock ................................. -- 31,158 -- 31,158
------------- ------------- ------------- -------------
Total stockholders' equity ...................... 37,039 31,158 -- 68,197
------------- ------------- ------------- -------------
$ 42,919 $ 52,909 $ (189) $ 95,639
============= ============= ============= =============
(CONTINUED)
NOTE: Segment information for the Acacia Technologies group includes discontinued operations related to Soundbreak.com.
Total assets related to discontinued operations totaled $2,445,000 and $3,282,000 at June 30, 2003 and December 31, 2002,
respectively. Total liabilities related to discontinued operations totaled $689,000 and $918,000 at June 30, 2003 and
December 31, 2002, respectively.
10a
AT DECEMBER 31, 2002
------------------------------------------------------------
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, inventories 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
Patents, net of accumulated amortization .................... 4,068 11,212 -- 15,280
Goodwill, net of accumulated amortization ................... 1,834 18,859 -- 20,693
Other assets ................................................ 449 87 -- 536
------------- ------------- ------------- -------------
$ 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
Deferred revenues, net of current portion ................... -- -- -- --
------------- ------------- ------------- -------------
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
============= ============= ============= =============
10b
CONSOLIDATING STATEMENTS OF OPERATIONS
(IN THOUSANDS)
THREE MONTHS ENDED JUNE 30, 2003
----------------------------------------------------------
ACACIA ELIMINATIONS/
TECHNOLOGIES COMBIMATRIX RECLASSIFI-
GROUP GROUP CATIONS CONSOLIDATED
------------- ------------- ----------- -------------
Revenues:
License fee income ............................... $ 19 $ -- $ -- $ 19
Product revenue .................................. -- -- -- --
Contract revenue ................................. -- 6 -- 6
------------- ------------- ----------- -------------
Total revenues .............................. 19 6 -- 25
------------- ------------- ----------- -------------
Operating expenses:
Cost of sales .................................... -- -- -- --
Research and development expenses ................ -- 2,158 -- 2,158
Non-cash stock compensation expense -
research and development ....................... -- 280 -- 280
Marketing, general and administrative expenses ... 878 2,099 -- 2,977
Non-cash stock compensation expense -
marketing, general and administrative .......... -- 496 -- 496
Legal expenses - patents ......................... 575 -- -- 575
Amortization of patents .......................... 125 274 -- 399
------------- ------------- ----------- -------------
Total operating expenses .................... 1,578 5,307 -- 6,885
------------- ------------- ----------- -------------
Operating loss .............................. (1,559) (5,301) -- (6,860)
------------- ------------- ----------- -------------
Other (expense) income:
Interest income .................................. 132 45 -- 177
Realized gains on short-term investments ......... 25 -- -- 25
Other expenses ................................... (206) -- -- (206)
------------- ------------- ----------- -------------
Total other (expense) income ................ (49) 45 -- (4)
------------- ------------- ----------- -------------
Loss from operations before
income taxes and minority interests ................. (1,608) (5,256) -- (6,864)
Benefit for income taxes .............................. 31 35 -- 66
------------- ------------- ----------- -------------
Loss from operations before minority interests ........ (1,577) (5,221) -- (6,798)
Minority interests .................................... -- 24 -- 24
------------- ------------- ----------- -------------
Net loss .............................................. $ (1,577) $ (5,197) $ -- $ (6,774)
============= ============= =========== =============
(CONTINUED)
11a
SIX MONTHS ENDED JUNE 30, 2003
----------------------------------------------------------
ACACIA ELIMINATIONS/
TECHNOLOGIES COMBIMATRIX RECLASSIFI-
GROUP GROUP CATIONS CONSOLIDATED
------------- ------------- ----------- -------------
Revenues:
License fee income ............................... $ 25 $ -- $ -- $ 25
Product revenue .................................. -- 209 -- 209
Contract revenue ................................. -- 13 -- 13
------------- ------------- ----------- -------------
Total revenues .............................. 25 222 -- 247
------------- ------------- ----------- -------------
Operating expenses:
Cost of sales .................................... -- 77 -- 77
Research and development expenses ................ -- 4,493 -- 4,493
Non-cash stock compensation expense -
research and development ....................... -- 282 -- 282
Marketing, general and administrative expenses ... 2,202 4,768 -- 6,970
Non-cash stock compensation expense -
marketing, general and administrative .......... -- 634 -- 634
Legal expenses - patents ......................... 837 -- -- 837
Amortization of patents .......................... 251 548 -- 799
------------- ------------- ----------- -------------
Total operating expenses .................... 3,290 10,802 -- 14,092
------------- ------------- ----------- -------------
Operating loss .............................. (3,265) (10,580) -- (13,845)
------------- ------------- ----------- -------------
Other (expense) income:
Interest income .................................. 280 112 -- 392
Realized gains on short-term investments ......... 62 -- -- 62
Other expenses ................................... (206) -- -- (206)
------------- ------------- ----------- -------------
Total other (expense) income ................ 136 112 -- 248
------------- ------------- ----------- -------------
Loss from operations before
income taxes and minority interests ................. (3,129) (10,468) -- (13,597)
Benefit for income taxes .............................. 58 68 -- 126
------------- ------------- ----------- -------------
Loss from operations before minority interests ........ (3,071) (10,400) -- (13,471)
Minority interests .................................... -- 30 -- 30
------------- ------------- ----------- -------------
Net loss .............................................. $ (3,071) $ (10,370) $ -- $ (13,441)
============= ============= =========== =============
11b
CONSOLIDATING STATEMENTS OF OPERATIONS (CONTINUED)
(IN THOUSANDS)
THREE MONTHS ENDED JUNE 30, 2002
----------------------------------------------------------------
ACACIA
TECHNOLOGIES COMBIMATRIX ELIMINATIONS/
GROUP GROUP RECLASSIFICATIONS CONSOLIDATED
-------------- -------------- -------------- --------------
Revenues:
Product revenue ................................. $ -- $ 274 $ -- $ 274
Grant and contract revenue ...................... -- 164 -- 164
-------------- -------------- -------------- --------------
Total revenues ............................. -- 438 -- 438
-------------- -------------- -------------- --------------
Operating expenses:
Cost of sales ................................... -- 253 -- 253
Research and development expenses ............... -- 5,026 -- 5,026
Non-cash stock compensation expense - research
and development .............................. -- 692 -- 692
Marketing, general and administrative expenses .. 2,349 2,927 -- 5,276
Non-cash stock compensation expense - marketing,
general and administrative ................... 8 1,443 -- 1,451
Legal expenses - patents ........................ 240 -- -- 240
Amortization of patents ......................... 465 99 -- 564
-------------- -------------- -------------- --------------
Total operating expenses ................... 3,062 10,440 -- 13,502
-------------- -------------- -------------- --------------
Operating loss ............................. (3,062) (10,002) -- (13,064)
-------------- -------------- -------------- --------------
Other (expense) income:
Interest income ................................. 147 146 -- 293
Realized losses on short-term investments ....... (930) -- -- (930)
Unrealized losses on short-term investments ..... (156) -- -- (156)
Interest expense ................................ -- (57) -- (57)
Other income .................................... 34 -- -- 34
-------------- -------------- -------------- --------------
Total other (expense) income ............... (905) 89 -- (816)
-------------- -------------- -------------- --------------
Loss from operations before income taxes and
minority interests ................................ (3,967) (9,913) -- (13,880)
Benefit for income taxes ............................. 36 39 -- 75
-------------- -------------- -------------- --------------
Loss from operations before minority interests ....... (3,931) (9,874) -- (13,805)
Minority interests ................................... 125 3,979 -- 4,104
-------------- -------------- -------------- --------------
Net loss ............................................. $ (3,806) $ (5,895) $ -- $ (9,701)
============== ============== ============== ==============
(CONTINUED)
12a
SIX MONTHS ENDED JUNE 30, 2002
----------------------------------------------------------------
ACACIA
TECHNOLOGIES COMBIMATRIX ELIMINATIONS/
GROUP GROUP RECLASSIFICATIONS CONSOLIDATED
-------------- -------------- -------------- --------------
Revenues:
Product revenue ................................. $ -- $ 274 $ -- $ 274
Grant and contract revenue ...................... -- 413 -- 413
-------------- -------------- -------------- --------------
Total revenues ............................. -- 687 -- 687
-------------- -------------- -------------- --------------
Operating expenses:
Cost of sales ................................... -- 253 -- 253
Research and development expenses ............... -- 7,694 -- 7,694
Non-cash stock compensation expense - research
and development .............................. -- 1,113 -- 1,113
Marketing, general and administrative expenses .. 3,925 5,211 -- 9,136
Non-cash stock compensation expense - marketing,
general and administrative ................... 19 2,434 -- 2,453
Legal expenses - patents ........................ 451 -- -- 451
Amortization of patents ......................... 930 198 -- 1,128
-------------- -------------- -------------- --------------
Total operating expenses ................... 5,325 16,903 -- 22,228
-------------- -------------- -------------- --------------
Operating loss ............................. (5,325) (16,216) -- (21,541)
-------------- -------------- -------------- --------------
Other (expense) income:
Interest income ................................. 301 399 -- 700
Realized losses on short-term investments ....... (1,483) -- -- (1,483)
Unrealized losses on short-term investments ..... (477) -- -- (477)
Interest expense ................................ -- (121) -- (121)
Other income .................................... 112 -- -- 112
-------------- -------------- -------------- --------------
Total other (expense) income ............... (1,547) 278 -- (1,269)
-------------- -------------- -------------- --------------
Loss from operations before income taxes and
minority interests ................................ (6,872) (15,938) -- (22,810)
Benefit for income taxes ............................. 65 79 -- 144
-------------- -------------- -------------- --------------
Loss from operations before minority interests ....... (6,807) (15,859) -- (22,666)
Minority interests ................................... 162 6,377 -- 6,539
-------------- -------------- -------------- --------------
Net loss ............................................. $ (6,645) $ (9,482) $ -- $ (16,127)
============== ============== ============== ==============
12b
CONSOLIDATING STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
SIX MONTHS ENDED JUNE 30, 2003
----------------------------------------------------------------
ACACIA
TECHNOLOGIES COMBIMATRIX
GROUP GROUP ELIMINATIONS CONSOLIDATED
-------------- -------------- -------------- --------------
Cash flows from operating activities:
Net loss from operations .................................... $ (3,071) $ (10,370) $ -- $ (13,441)
Adjustments to reconcile net loss from operations
to net cash used in operating activities:
Depreciation and amortization .......................... 317 1,223 -- 1,540
Minority interests ..................................... -- (30) -- (30)
Non-cash stock compensation expense .................... -- 916 -- 916
Deferred tax benefit ................................... (73) (68) -- (141)
Net sales of trading securities ........................ -- -- -- --
Unrealized losses on short-term investments ............ -- -- -- --
Other .................................................. 205 101 -- 306
Changes in assets and liabilities:
Accounts receivable .................................... (8) 252 -- 244
Prepaid expenses, inventory, and other assets .......... (97) (71) -- (168)
Accounts payable, accrued expenses and other ........... (255) (193) -- (448)
Deferred revenue ....................................... 49 7,386 -- 7,435
-------------- -------------- -------------- --------------
Net cash used in operating activities from
continuing operations ................................ (2,933) (854) -- (3,787)
Net cash used in operating activities from
discontinued operations .............................. (229) -- -- (229)
-------------- -------------- -------------- --------------
Net cash used in operating activities .................. (3,162) (854) -- (4,016)
-------------- -------------- -------------- --------------
Cash flows from investing activities:
Purchase of property and equipment, net ................ (5) (67) -- (72)
Purchase of available-for-sale investments ............. (2,053) (9,330) -- (11,383)
Sale of available-for-sale investments ................. -- 9,011 -- 9,011
Other .................................................. -- -- -- --
-------------- -------------- -------------- --------------
Net cash (used in) provided by investing activities
from continuing operations ........................... (2,058) (386) -- (2,444)
Net cash used in investing activities from
discontinued operations .............................. (356) -- -- (356)
-------------- -------------- -------------- --------------
Net cash (used in) provided by investing activities .... (2,414) (386) -- (2,800)
-------------- -------------- -------------- --------------
Cash flows from financing activities:
Net cash attributed to the Acacia Technologies group ... (429) -- -- (429)
Net cash attributed to the CombiMatrix group ........... -- 5,304 -- 5,304
-------------- -------------- -------------- --------------
Net cash (used in) provided by financing activities .... (429) 5,304 -- 4,875
-------------- -------------- -------------- --------------
Effect of exchange rate on cash .................................. -- (4) -- (4)
-------------- -------------- -------------- --------------
(Increase) decrease in cash and cash equivalents ................. (6,005) 4,060 -- (1,945)
Cash and cash equivalents, beginning ............................. 39,792 3,291 -- 43,083
-------------- -------------- -------------- --------------
Cash and cash equivalents, ending ................................ $ 33,787 $ 7,351 $ -- $ 41,138
============== ============== ============== ==============
(CONTINUED)
SIX MONTHS ENDED JUNE 30, 2002
----------------------------------------------------------------
ACACIA
TECHNOLOGIES COMBIMATRIX
GROUP GROUP ELIMINATIONS CONSOLIDATED
-------------- -------------- -------------- --------------
Cash flows from operating activities:
Net loss from operations .................................... $ (6,645) $ (9,482) $ -- $ (16,127)
Adjustments to reconcile net loss from operations
to net cash used in operating activities:
Depreciation and amortization .......................... 1,007 866 -- 1,873
Minority interests ..................................... (162) (6,377) -- (6,539)
Non-cash stock compensation expense .................... 19 3,547 -- 3,566
Deferred tax benefit ................................... (71) (79) -- (150)
Net sales of trading securities ........................ 3,133 -- -- 3,133
Unrealized losses on short-term investments ............ 477 -- -- 477
Other .................................................. 87 26 -- 113
Changes in assets and liabilities:
Accounts receivable .................................... -- (946) -- (946)
Prepaid expenses, inventory, and other assets .......... (867) 249 -- (618)
Accounts payable, accrued expenses and other ........... 180 180 -- 360
Deferred revenue ....................................... -- 1,648 -- 1,648
-------------- -------------- -------------- --------------
Net cash used in operating activities from
continuing operations ................................ (2,842) (10,368) -- (13,210)
Net cash used in operating activities from
discontinued operations .............................. (415) -- -- (415)
-------------- -------------- -------------- --------------
Net cash used in operating activities .................. (3,257) (10,368) -- (13,625)
-------------- -------------- -------------- --------------
Cash flows from investing activities:
Purchase of property and equipment, net ................ (70) (367) -- (437)
Purchase of available-for-sale investments ............. -- (5,158) -- (5,158)
Sale of available-for-sale investments ................. -- 9,877 -- 9,877
Other .................................................. (100) -- -- (100)
-------------- -------------- -------------- --------------
Net cash (used in) provided by investing activities
from continuing operations ........................... (170) 4,352 -- 4,182
Net cash used in investing activities from
discontinued operations .............................. (4) -- -- (4)
-------------- -------------- -------------- --------------
Net cash (used in) provided by investing activities .... (174) 4,352 -- 4,178
-------------- -------------- -------------- --------------
Cash flows from financing activities:
Net cash attributed to the Acacia Technologies group ... (554) -- -- (554)
Net cash attributed to the CombiMatrix group ........... -- 171 -- 171
-------------- -------------- -------------- --------------
Net cash (used in) provided by financing activities .... (554) 171 -- (383)
-------------- -------------- -------------- --------------
Effect of exchange rate on cash .................................. -- 91 -- 91
-------------- -------------- -------------- --------------
(Increase) decrease in cash and cash equivalents ................. (3,985) (5,754) -- (9,739)
Cash and cash equivalents, beginning ............................. 46,859 12,592 -- 59,451
-------------- -------------- -------------- --------------
Cash and cash equivalents, ending ................................ $ 42,874 $ 6,838 $ -- $ 49,712
============== ============== ============== ==============
13
COMBIMATRIX GROUP
(A Division of Acacia Research Corporation)
BALANCE SHEETS
(In thousands)
(Unaudited)
JUNE 30, DECEMBER 31,
2003 2002
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents ............................................. $ 7,351 $ 3,291
Short-term investments ................................................ 11,912 11,605
Accounts receivable ................................................... 326 578
Inventories, prepaid expenses and other assets ........................ 517 446
---------- ----------
Total current assets ............................................. 20,106 15,920
Property and equipment, net of accumulated depreciation and amortization ... 3,192 3,895
Patents, net of accumulated amortization of $1,431 (2003) and $883 (2002) .. 10,664 11,212
Goodwill, net of accumulated amortization of $1,312 (2003) and (2002) ...... 18,859 18,859
Other assets ............................................................... 88 87
---------- ----------
$ 52,909 $ 49,973
========== ==========
LIABILITIES AND ALLOCATED NET WORTH
Current liabilities:
Accounts payable, accrued expenses and other .......................... $ 2,034 $ 2,302
Current portion of deferred revenues .................................. 15,808 9,172
Payable to Acacia Technologies group .................................. 189 114
---------- ----------
Total current liabilities ........................................ 18,031 11,588
Deferred income taxes ...................................................... 2,316 2,384
Deferred revenues, net of current portion .................................. 750 --
---------- ----------
Total liabilities ................................................ 21,097 13,972
---------- ----------
Minority interests ......................................................... 654 684
---------- ----------
Allocated net worth:
Funds allocated by Acacia Research Corporation ........................ 135,497 129,286
Accumulated net losses ................................................ (104,339) (93,969)
---------- ----------
Total allocated net worth ........................................ 31,158 35,317
---------- ----------
$ 52,909 $ 49,973
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
14
COMBIMATRIX GROUP
(A Division of Acacia Research Corporation)
STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
THREE MONTHS ENDED SIX MONTHS ENDED
------------------------------- -------------------------------
JUNE 30, 2003 JUNE 30, 2002 JUNE 30, 2003 JUNE 30, 2002
-------------- -------------- -------------- --------------
Revenues:
Product revenue ............................................ $ -- $ 274 $ 209 $ 274
Grant and contract revenue ................................. 6 164 13 413
-------------- -------------- -------------- --------------
Total revenues ........................................ 6 438 222 687
-------------- -------------- -------------- --------------
Operating expenses:
Cost of sales .............................................. -- 253 77 253
Research and development expenses .......................... 2,158 5,026 4,493 7,694
Non-cash compensation expense - research and development ... 280 692 282 1,113
Marketing, general and administrative expenses ............. 2,099 2,927 4,768 5,211
Non-cash compensation expense - marketing, general
and administrative ....................................... 496 1,443 634 2,434
Amortization of patents .................................... 274 99 548 198
-------------- -------------- -------------- --------------
Total operating expenses .............................. 5,307 10,440 10,802 16,903
-------------- -------------- -------------- --------------
Operating loss ........................................ (5,301) (10,002) (10,580) (16,216)
-------------- -------------- -------------- --------------
Other income (expense):
Interest income ............................................ 45 146 112 399
Interest expense ........................................... -- (57) -- (121)
-------------- -------------- -------------- --------------
Total other income .............................................. 45 89 112 278
-------------- -------------- -------------- --------------
Loss from operations before income taxes
and minority interests ........................................ (5,256) (9,913) (10,468) (15,938)
Benefit for income taxes ........................................ 35 39 68 79
-------------- -------------- -------------- --------------
Loss from operations before minority interests .................. (5,221) (9,874) (10,400) (15,859)
Minority interests .............................................. 24 3,979 30 6,377
-------------- -------------- -------------- --------------
Division net loss ............................................... $ (5,197) $ (5,895) $ (10,370) $ (9,482)
============== ============== ============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
15
COMBIMATRIX GROUP
(A Division of Acacia Research Corporation)
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
SIX MONTHS ENDED
-------------------------------
JUNE 30, 2003 JUNE 30, 2002
-------------- --------------
Cash flows from operating activities:
Division net loss from operations .......................... $ (10,370) $ (9,482)
Adjustments to reconcile division net loss from
operations to net cash used in operating activities:
Depreciation and amortization ......................... 1,223 866
Minority interests .................................... (30) (6,377)
Non-cash stock compensation expense ................... 916 3,547
Deferred tax benefit .................................. (68) (79)
Other ................................................. 101 26
Changes in assets and liabilities:
Accounts receivable ................................... 252 (946)
Inventories, prepaid expenses and other assets ........ (71) 249
Accounts payable, accrued expenses and other .......... (193) 180
Deferred revenues ..................................... 7,386 1,648
-------------- --------------
Net cash used in operating activities ................. (854) (10,368)
-------------- --------------
Cash flows from investing activities:
Purchase of property and equipment, net ............... (67) (367)
Purchase of available-for-sale investments ............ (9,330) (5,158)
Sale of available-for-sale investments ................ 9,011 9,877
-------------- --------------
Net cash (used in) provided by investing activities ... (386) 4,352
-------------- --------------
Cash flows from financing activities:
Net cash flows attributed to the CombiMatrix group .... 5,304 171
-------------- --------------
Effect of exchange rate on cash ................................. (4) 91
-------------- --------------
Increase (decrease) in cash and cash equivalents ................ 4,060 (5,754)
Cash and cash equivalents, beginning ............................ 3,291 12,592
-------------- --------------
Cash and cash equivalents, ending ............................... $ 7,351 $ 6,838
============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
16
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 subsidiaries, Advanced Material Sciences, Inc. ("Advanced Material
Sciences") and CombiMatrix K.K., 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. This
technology also enables the design and synthesis of nucleic acids as potential
therapeutics. 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 June 30, 2003, and for the three and six months ended
June 30, 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 June 30, 2003, and the results
of its operations and its cash flows for the interim periods presented. The
results of operations for the three and six months ended June 30, 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
17
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.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
REVENUE RECOGNITION. The CombiMatrix group recognizes revenue in
accordance with Staff Accounting Bulletin No. 101, "Revenue Recognition in
Financial Statements" ("SAB No. 101") and related authoritative pronouncements.
Revenue from government grant and contract activities are recognized as the
related services are performed and when the services have been approved by the
grantor and collectibility is reasonably assured. Amounts recognized are limited
to amounts due from customers based on contract or grant terms.
Revenue from the sale of products and services is recognized when (i)
persuasive evidence of an arrangement exists, (ii) delivery has occurred or
services have been rendered, (iii) the fees are fixed or determinable, and (iv)
collectibility is reasonably assured.
Revenues from multiple-element arrangements involving license fees,
up-front payments and milestone payments, which are received or billable by the
CombiMatrix group in connection with other rights and services that represent
continuing obligations are deferred until all of the elements have been
delivered or until the CombiMatrix group has established objective and
verifiable evidence of the fair value of the undelivered elements.
Deferred revenue arises from payments received in advance of the
culmination of the earnings process. Deferred revenue expected to be recognized
within the next twelve months is classified as a current liability. At June 30,
2003, the CombiMatrix group recorded $16,558,000 as defe