Back to GetFilings.com
================================================================================
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
-------------------
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003
COMMISSION FILE NUMBER 0-26068
ACACIA RESEARCH CORPORATION
---------------------------
(Exact Name of Registrant as Specified in Its Charter)
DELAWARE 95-4405754
-------- ----------
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation or Organization) Identification No.)
500 NEWPORT CENTER DRIVE, NEWPORT BEACH, CA 92660
------------------------------------------- -----
(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 November 7, 2003, 19,723,752 shares of Acacia Research-Acacia
Technologies common stock were issued and outstanding. As of November 7, 2003,
26,184,771 shares of Acacia Research-CombiMatrix common stock were issued and
outstanding.
================================================================================
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 September 30, 2003 and
December 31, 2002 (Unaudited)....................................................... 1
Consolidated Statements of Operations and Comprehensive Loss for the
Three Months and Nine Months Ended September 30, 2003 and 2002 (Unaudited).......... 2
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2003 and 2002 (Unaudited)............................................. 3
Notes to Consolidated Financial Statements (Unaudited).............................. 4
*CombiMatrix Group Financial Statements
Balance Sheets as of September 30, 2003 and December 31, 2002 (Unaudited)........... 15
Statements of Operations for the Three Months and Nine Months Ended
September 30, 2003 and 2002 (Unaudited)............................................. 16
Statements of Cash Flows for the Nine Months Ended
September 30, 2003 and 2002 (Unaudited)............................................. 17
Notes to Financial Statements (Unaudited)........................................... 18
*Acacia Technologies Group Financial Statements
Balance Sheets as of September 30, 2003 and December 31, 2002 (Unaudited)........... 22
Statements of Operations for the Three Months and Nine Months Ended
September 30, 2003 and 2002 (Unaudited)............................................. 23
Statements of Cash Flows for the Nine Months Ended
September 30, 2003 and 2002 (Unaudited)............................................. 24
Notes to Financial Statements (Unaudited)........................................... 25
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................... 28
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................... 62
Item 4. Controls and Procedures............................................................. 62
i
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................... 63
Item 2. Changes in Securities and Use of Proceeds........................................... 64
Item 6. Exhibits and Reports on Form 8-K.................................................... 64
SIGNATURES........................................................................................... 65
EXHIBIT INDEX ....................................................................................... 66
*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)
SEPTEMBER 30, DECEMBER 31,
2003 2002
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents ......................................... $ 34,302 $ 43,083
Short-term investments ............................................ 19,257 11,605
Accounts receivable ............................................... 444 578
Prepaid expenses, inventory, and other assets ..................... 1,445 1,221
---------- ----------
Total current assets ..................................... 55,448 56,487
Property and equipment, net of accumulated depreciation ................ 3,024 4,075
Patents, net of accumulated amortization of $8,811 (2003)
and $7,613 (2002) ................................................. 14,082 15,280
Goodwill, net of accumulated amortization of $3,570 (2003)
and (2002) ........................................................ 21,201 20,693
Other assets ........................................................... 339 536
---------- ----------
$ 94,094 $ 97,071
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued expenses and other ...................... $ 3,862 $ 4,826
Current portion of deferred revenues .............................. 20,308 10,675
---------- ----------
Total current liabilities ................................ 24,170 15,501
Deferred income taxes .................................................. 3,330 3,540
Deferred revenues, net of current portion .............................. 474 --
---------- ----------
Total liabilities ........................................ 27,974 19,041
---------- ----------
Minority interests ..................................................... 1,130 2,171
---------- ----------
Commitments and contingencies (Note 7)
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;
19,688,730 and 19,640,808 shares issued and
outstanding as of September 30, 2003 and December
31, 2002, respectively ................................... 20 20
Acacia Research - CombiMatrix stock, par value $0.001 per
share; 50,000,000 shares authorized; 26,162,994 and
22,964,779 shares issued and outstanding as of
September 30, 2003 and December 31, 2002, respectively ... 26 23
Additional paid-in capital ........................................ 244,432 238,826
Deferred stock compensation ....................................... (1,225) (4,023)
Accumulated comprehensive loss .................................... (5) (2)
Accumulated deficit ............................................... (178,258) (158,985)
---------- ----------
Total stockholders' equity ............................... 64,990 75,859
---------- ----------
$ 94,094 $ 97,071
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
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 SEPTEMBER 30, NINE MONTHS ENDED SEPTEMBER 30,
----------------------------- -----------------------------
2003 2002 2003 2002
------------- ------------- ------------- -------------
Revenues:
License fee income ........................................... $ 186 $ 43 $ 211 $ 43
Product revenue .............................................. 171 23 380 297
Grant and contract revenue ................................... 10 113 23 526
------------- ------------- ------------- -------------
Total revenues .......................................... 367 179 614 866
------------- ------------- ------------- -------------
Operating expenses:
Cost of sales ................................................ 17 6 94 259
Research and development expenses ............................ 1,726 6,449 6,219 14,143
Non-cash stock compensation expense - research
and development ............................................ 243 753 525 1,867
Marketing, general and administrative expenses ............... 3,675 4,727 11,482 14,253
Non-cash stock compensation expense - marketing,
general and administrative ................................. 421 1,263 1,055 3,716
Amortization of patents ...................................... 399 550 1,198 1,678
Legal settlement charges ..................................... -- 18,471 -- 18,471
------------- ------------- ------------- -------------
Total operating expenses ................................ 6,481 32,219 20,573 54,387
------------- ------------- ------------- -------------
Operating loss .......................................... (6,114) (32,040) (19,959) (53,521)
------------- ------------- ------------- -------------
Other income (expense) :
Impairment of cost method investment ......................... -- (2,748) (207) (2,748)
Interest income .............................................. 180 266 572 966
Realized gains (losses) on short-term investments ............ 32 -- 94 (1,483)
Unrealized losses on short-term investments .................. -- (213) -- (690)
Interest expense ............................................. -- (49) -- (171)
Other (expense) income ....................................... -- (5) 1 47
------------- ------------- ------------- -------------
Total other income (expenses) ........................... 212 (2,749) 460 (4,079)
------------- ------------- ------------- -------------
Loss from operations before income taxes and minority interests .. (5,902) (34,789) (19,499) (57,600)
Benefit for income taxes ......................................... 70 287 196 431
------------- ------------- ------------- -------------
Loss from operations before minority interests ................... (5,832) (34,502) (19,303) (57,169)
Minority interests ............................................... -- 14,080 30 20,620
------------- ------------- ------------- -------------
Loss from continuing operations .................................. (5,832) (20,422) (19,273) (36,549)
Discontinued operations:
Estimated loss on disposal of Soundbreak.com ................. -- (200) -- (200)
------------- ------------- ------------- -------------
Net loss ......................................................... (5,832) (20,622) (19,273) (36,749)
Unrealized losses on short-term investments .................. (9) (1) (24) (49)
Unrealized gains (losses) on foreign currency translation .... 25 (12) 21 41
------------- ------------- ------------- -------------
Comprehensive loss ............................................... $ (5,816) $ (20,635) $ (19,276) $ (36,757)
============= ============= ============= =============
Loss per common share:
Attributable to the Acacia Technologies group:
Net loss ..................................................... $ (1,296) $ (5,275) $ (4,368) $ (11,920)
Basic and diluted per share ............................. (0.07) (0.27) (0.22) (0.61)
Attributable to the CombiMatrix group:
Net loss ..................................................... $ (4,536) $ (15,347) $ (14,905) $ (24,829)
Basic and diluted per share ............................. (0.18) (0.67) (0.64) (1.08)
Weighted average shares - basic and diluted:
Acacia Research - Acacia Technologies stock .................. 19,645,949 19,640,808 19,642,541 19,640,808
============= ============= ============= =============
Acacia Research - CombiMatrix stock .......................... 25,890,408 22,950,551 23,129,476 22,950,551
============= ============= ============= =============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
2
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
NINE MONTHS ENDED
---------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2003 2002
-------------- --------------
Cash flows from operating activities:
Net loss from continuing operations ..................................... $ (19,273) $ (36,549)
Adjustments to reconcile net loss from continuing operations to
net cash used in operating activities:
Depreciation and amortization ........................................ 2,293 2,852
Minority interests ................................................... (30) (20,620)
Non-cash stock compensation expense .................................. 1,580 5,583
Deferred tax benefit ................................................. (210) (220)
Net sales of trading securities ...................................... -- 2,688
Unrealized losses on short-term investments .......................... -- 690
Minority interests distributions ..................................... -- 430
Issuance of common stock by subsidiary - legal settlement ............ -- 17,471
Impairment of cost method investment ................................. 207 2,748
Other ................................................................ 69 87
Changes in assets and liabilities:
Accounts receivable .................................................. 134 (2,409)
Prepaid expenses, inventory, and other assets ........................ (173) (990)
Accounts payable, accrued expenses and other ......................... (618) 2,350
Deferred revenues .................................................... 10,107 5,180
-------------- --------------
Net cash used in operating activities from continuing operations ..... (5,914) (20,709)
Net cash used in operating activities from discontinued operations ... (350) (812)
-------------- --------------
Net cash used in operating activities ................................ (6,264) (21,521)
-------------- --------------
Cash flows from investing activities:
Purchase of property and equipment, net .............................. (77) (717)
Sale of property and equipment ....................................... -- 103
Purchase of available-for-sale investments ........................... (26,561) (12,772)
Sale of available-for-sale investments ............................... 18,887 14,292
Purchase of common stock from minority stockholders of subsidiaries .. -- (57)
Other ................................................................ -- (100)
-------------- --------------
Net cash (used in) provided by investing activities from
continuing operations .............................................. (7,751) 749
Net cash used in investing activities from discontinued operations ... (356) (3)
-------------- --------------
Net cash (used in) provided by investing activities .................. (8,107) 746
-------------- --------------
Cash flows from financing activities:
Proceeds from sale of common stock, net of issuance costs ............ 4,862 --
Proceeds from the exercise of stock options and warrants ............. 741 214
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 ................................ -- (694)
Other ................................................................ -- (11)
-------------- --------------
Net cash provided by (used in) financing activities .................. 5,603 (621)
-------------- --------------
Effect of exchange rate on cash ........................................... (13) 71
-------------- --------------
Decrease in cash and cash equivalents ..................................... (8,781) (21,325)
Cash and cash equivalents, beginning ...................................... 43,083 59,451
-------------- --------------
Cash and cash equivalents, ending ......................................... $ 34,302 $ 38,126
============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED
FINANCIAL STATEMENTS.
3
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
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
year-end consolidated balance sheet data was derived from audited financial
statements but does not include all disclosures required by accounting
principles generally accepted in the United States of America.
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 September 30, 2003 and results of operations and cash flows for the interim
periods presented. The results of operations for the three and nine months ended
September 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 that
is developing a platform technology to rapidly produce customizable active
biochips, which are semiconductor-based tools for use in identifying and
determining the roles of genes, gene mutations and proteins. CombiMatrix
Corporation's technology has a wide range of potential applications including
DNA synthesis/diagnostics, drug discovery, and immunochemical detection.
CombiMatrix Corporation's Express Track(sm) drug discovery program is a systems
biology approach, using its technology, to target common viral diseases with
siRNA compounds. 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,
4
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
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. License
fees due from licensees for which collectibility is not reasonably assured,
primarily due to lack of credit and/or payment history, are recognized as
revenues in the period in which the license fee payments are received from the
respective licensee. Generally, under the terms of the respective DMT license
agreements with individual licensees, the Acacia Technologies group grants a
one-year or a multi-year, non-exclusive license for the use of its patented DMT
technology in exchange for an annual license fee. License agreements with an
initial one-year term provide for the automatic renewal of the annual license
each year, upon receipt by the Acacia Technologies group of the renewal license
fee payment in accordance with the terms of the agreement. Prepaid license fee
payments received at the inception of the license term are deferred and
amortized to revenue over the license term.
5
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.
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 $20,782,000 at September 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 September 30, 2003, Acacia Research
Corporation had 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
--------------------------- ---------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Loss from continuing operations as reported .............. $ (1,296) $ (5,275) $ (4,536) $ (15,347)
Add: Stock-based compensation, intrinsic value method
reported in net income, net of tax and minority
interests ............................................. -- -- 612 1,159
Deduct: Pro forma stock-based compensation fair value
method, net of tax and minority interests ............. (662) (1,312) (2,157) (1,904)
Loss from continuing operations, pro forma ............... (1,958) (6,587) (6,081) (16,092)
Basic and diluted loss per share from continuing
operations as reported ................................ (0.07) (0.27) (0.18) (0.67)
Basic and diluted loss per share from continuing
operations, pro forma ................................. (0.10) (0.34) (0.23) (0.70)
AR-ACACIA TECHNOLOGIES STOCK AR-COMBIMATRIX STOCK
--------------------------- ---------------------------
NINE MONTHS ENDED NINE MONTHS ENDED
--------------------------- ---------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
Loss from continuing operations as reported .............. $ (4,368) $ (11,920) $ (14,905) $ (24,829)
Add: Stock-based compensation, intrinsic value method
reported in net income, net of tax and minority
interests ............................................. -- 19 1,433 3,199
Deduct: Pro forma stock-based compensation fair value
method, net of tax and minority interests ............. (2,685) (3,761) (7,302) (5,587)
Loss from continuing operations, pro forma ............... (7,053) (15,662) (20,774) (27,217)
Basic and diluted loss per share from continuing
operations as reported ................................ (0.22) (0.61) (0.64) (1.08)
Basic and diluted loss per share from continuing
operations, pro forma ................................. (0.36) (0.80) (0.90) (1.19)
- -----------------------
6
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.
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 and warrants.
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 NINE MONTHS ENDED
-------------------------- --------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2003 2002 2003 2002
------------ ------------ ------------ ------------
ACACIA RESEARCH - ACACIA TECHNOLOGIES STOCK
- -------------------------------------------
Basic weighted average number of common shares outstanding ... 19,645,949 19,640,808 19,642,541 19,640,808
Dilutive effect of outstanding stock options and warrants .... -- -- -- --
------------ ------------ ------------ ------------
Diluted weighted average number of common and
potential common shares outstanding ........................ 19,645,949 19,640,808 19,642,541 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 ........... 317,000 46,857 3,173 46,857
============ ============ ============ ============
ACACIA RESEARCH - COMBIMATRIX STOCK
- -----------------------------------
Basic weighted average number of common shares outstanding ... 25,890,408 22,950,551 23,129,476 22,950,551
Dilutive effect of outstanding stock options and warrants .... -- -- -- --
------------ ------------ ------------ ------------
Diluted weighted average number of common and
potential common shares outstanding ........................ 25,890,408 22,950,551 23,129,476 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 ..................... 1,167,778 305,256 587,180 305,256
============ ============ ============ ============
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. Acacia Research
Corporation has elected to perform its annual tests for indications of goodwill
impairment as of December 31 of each year. Our reporting units are: 1) Acacia
Media Technologies Corporation and 2) Soundview Technologies, Inc., 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 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 $1,776,000 and $1,834,000 of goodwill
at September 30, 2003 and December 31, 2002, respectively (net of $2,258,000 of
7
accumulated amortization). The CombiMatrix group had $19,425,000 and $18,859,000
of goodwill at September 30, 2003 and December 31, 2002, respectively (net of
$1,312,000 of accumulated amortization).
On July 2, 2003, Acacia Research Corporation increased its consolidated
ownership interest in Advanced Material Sciences to 99% by acquiring 1,774,750
shares of Advanced Material Sciences common stock in exchange for 295,790 shares
of AR-CombiMatrix stock. The transaction was accounted for as a step acquisition
using the purchase method of accounting. The fair value of the Acacia Research
shares issued in the transaction was based on the quoted market price of
AR-CombiMatrix stock on the exchange date. The total purchase price of $769,000
was allocated to the fair value of assets acquired and liabilities assumed. The
amount attributable to goodwill was $172,000.
On July 11, 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 10% minority interest in CombiMatrix K.K.
The transaction was accounted for as a step acquisition using the purchase
method of accounting. The fair value of the AR- CombiMatrix stock issued in the
transaction was based on the quoted market price of AR-CombiMatrix stock on the
exchange date. The total purchase price of $450,000 was allocated to the fair
value of assets acquired and liabilities assumed. The amount attributable to
goodwill was $393,000.
Acacia Research Corporation's interests in Advanced Material Sciences
and CombiMatrix K.K. have been attributed to the CombiMatrix group.
Acacia Research Corporation's only identifiable intangible assets at
September 30, 2003 and December 31, 2002 are patents. The gross carrying amounts
and accumulated amortization as of September 30, 2003 and December 31, 2002 and
amortization expense for the three and nine months ended September 30, 2003 and
2002, related to patents, by segment, are as follows (in thousands):
ACACIA TECHNOLOGIES GROUP COMBIMATRIX GROUP
--------------------------------------- ---------------------------------------
SEPTEMBER 30, 2003 DECEMBER 31, 2002 SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------ ------------------ ------------------ ------------------
Gross carrying amount - patents ... $ 10,798 $ 10,798 $ 12,095 $ 12,095
Accumulated amortization .......... (7,107) (6,730) (1,704) (883)
------------------ ------------------ ------------------ ------------------
Patents, net ...................... $ 3,691 $ 4,068 $ 10,391 $ 11,212
================== ================== ================== ==================
Patent Amortization Expense:
ACACIA TECHNOLOGIES GROUP COMBIMATRIX GROUP
--------------------------------------- ---------------------------------------
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002 SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------ ------------------ ------------------
Three Months Ended ................ $ 125 $ 465 $ 274 $ 85
================== ================== ================== ==================
Nine Months Ended ................. $ 377 $ 1,395 $ 821 $ 283
================== ================== ================== ==================
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 September 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
2,385,000 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 beginning in May 2004 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
$4,862,000 were attributed to the CombiMatrix Group. In September 2003, proceeds
of $450,000 were received from the issuance of 164,000 shares of AR-CombiMatrix
8
stock related to the exercise of certain warrants issued in connection with the
May 2003 private equity financing. The proceeds from the warrants exercised were
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
Acacia Research Corporation's, the CombiMatrix group's or the Acacia
Technologies group's financial position or results of operations.
In January 2003, the FASB issued 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, as amended by FASB Staff Position No. 46-6, is effective immediately for
all new variable interest entities created or acquired after January 31, 2003.
Acacia Research Corporation must apply FIN 46 to variable interest entities
existing prior to February 1, 2003, effective December 31, 2003. We do not
expect the adoption of FIN 46 to have a material impact on Acacia Research
Corporation's, the CombiMatrix group's or the Acacia Technologies group's
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. We do not expect the adoption of SFAS No. 149 to
have a material impact on Acacia Research Corporation's, the CombiMatrix group's
or the Acacia Technologies group's 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, excluding mandatorily
redeemable financial instruments of certain nonpublic entities, entered into or
modified after May 31, 2003, and otherwise is effective for Acacia Research
Corporation on July 1, 2003. For mandatorily redeemable financial instruments of
certain nonpublic entities, SFAS No. 150 is effective for fiscal periods
beginning after December 15, 2004. We do not expect the adoption of SFAS No. 150
to have a material impact on Acacia Research Corporation's, the CombiMatrix
group's or the Acacia Technologies group's financial condition or results of
operations.
7. COMMITMENTS AND CONTIGENCIES
In connection with the purchase of the outstanding ownership interests
in Acacia Media Technologies Corporation in November 2001, Acacia Media
Technologies Corporation also executed related assignment agreements which
granted to the former owners of Acacia Media Technologies Corporation's current
patent portfolio the right to receive a royalty of 15% of future net revenues
generated by Acacia Media Technologies Corporation's current patent portfolio,
which includes its DMT patents. Royalties to be paid will be expensed in the
consolidated statement of operations.
In September 2003, CombiMatrix Corporation paid Nanogen, Inc., or
Nanogen, $500,000, representing the second and final installment of the $1.0
million cash payment due to Nanogen in accordance with the September 30, 2002
settlement agreement entered into between CombiMatrix Corporation, Dr. Don
Montgomery and Nanogen. In addition, CombiMatrix Corporation will be required to
pay 12.5% of certain revenues, subject to minimum and maximum amounts not to
exceed $1.5 million per year, beginning in the fourth quarter of 2003, for the
remaining life of the CombiMatrix group's core patents.
9
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.
10
CONSOLIDATING BALANCE SHEETS
(IN THOUSANDS)
AT SEPTEMBER 30, 2003
---------------------------------------------------------
ACACIA
TECHNOLOGIES COMBIMATRIX
GROUP GROUP ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
ASSETS
Current assets:
Cash and cash equivalents ............... $ 29,425 $ 4,877 $ -- $ 34,302
Short-term investments .................. 5,100 14,157 -- 19,257
Accounts receivable ..................... 115 329 -- 444
Prepaid expenses, inventory and other
assets ................................ 933 512 -- 1,445
Receivable from CombiMatrix group ....... 159 -- (159) --
------------ ------------ ------------ ------------
Total current assets ............. 35,732 19,875 (159) 55,448
Property and equipment, net of accumulated
depreciation .............................. 90 2,934 -- 3,024
Patents, net of accumulated amortization .... 3,691 10,391 -- 14,082
Goodwill, net of accumulated amortization ... 1,776 19,425 -- 21,201
Other assets ................................ 243 96 -- 339
------------ ------------ ------------ ------------
$ 41,532 $ 52,721 $ (159) $ 94,094
============ ============ ============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued expenses and
other ................................. $ 2,086 $ 1,776 $ -- $ 3,862
Current portion of deferred revenues .... 1,560 18,748 -- 20,308
Payable to Acacia Technologies group .... -- 159 (159) --
------------ ------------ ------------ ------------
Total current liabilities ........ 3,646 20,683 (159) 24,170
Deferred income taxes ....................... 1,048 2,282 -- 3,330
Deferred revenues, net of current portion ... -- 474 -- 474
------------ ------------ ------------ ------------
Total liabilities ................ 4,694 23,439 (159) 27,974
------------ ------------ ------------ ------------
Minority interests .......................... 1,130 -- -- 1,130
------------ ------------ ------------ ------------
Stockholders' equity:
AR - Acacia Technologies stock .......... 35,708 -- -- 35,708
AR - CombiMatrix stock .................. -- 29,282 -- 29,282
------------ ------------ ------------ ------------
Total stockholders' equity ....... 35,708 29,282 -- 64,990
------------ ------------ ------------ ------------
$ 41,532 $ 52,721 $ (159) $ 94,094
============ ============ ============ ============
____________________________________________
NOTE: Segment information for the Acacia Technologies group includes
discontinued operations related to Soundbreak.com. Total assets related to
discontinued operations totaled $2,330,000 and $3,282,000 at September 30, 2003
and December 31, 2002, respectively. Total liabilities related to discontinued
operations totaled $575,000 and $918,000 at September 30, 2003 and December 31,
2002, respectively.
11a
CONSOLIDATING BALANCE SHEETS
(IN THOUSANDS)
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, inventory 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
============ ============ ============ ============
____________________________________________
NOTE: Segment information for the Acacia Technologies group includes
discontinued operations related to Soundbreak.com. Total assets related to
discontinued operations totaled $2,330,000 and $3,282,000 at September 30, 2003
and December 31, 2002, respectively. Total liabilities related to discontinued
operations totaled $575,000 and $918,000 at September 30, 2003 and December 31,
2002, respectively.
11b
CONSOLIDATING STATEMENTS OF OPERATIONS
(IN THOUSANDS)
THREE MONTHS ENDED SEPTEMBER 30, 2003
-----------------------------------------------------------------------------
ACACIA
TECHNOLOGIES COMBIMATRIX ELIMINATIONS/
GROUP GROUP RECLASSIFICATIONS CONSOLIDATED
----------------- ----------------- ----------------- -----------------
Revenues:
License fee income ........................ $ 186 $ -- $ -- $ 186
Product revenue ........................... -- 171 -- 171
Contract revenue .......................... -- 10 -- 10
----------------- ----------------- ----------------- -----------------
Total revenues ....................... 186 181 -- 367
----------------- ----------------- ----------------- -----------------
Operating expenses:
Cost of sales ............................. -- 17 -- 17
Research and development expenses ......... -- 1,726 -- 1,726
Non-cash stock compensation expense -
research and development ................ -- 243 -- 243
Marketing, general and administrative
expenses ................................ 955 2,122 -- 3,077
Non-cash stock compensation expense -
marketing, general and administrative ... -- 421 -- 421
Legal expenses - patents .................. 598 -- -- 598
Amortization of patents ................... 125 274 -- 399
----------------- ----------------- ----------------- -----------------
Total operating expenses ............. 1,678 4,803 -- 6,481
----------------- ----------------- ----------------- -----------------
Operating loss ....................... (1,492) (4,622) -- (6,114)
----------------- ----------------- ----------------- -----------------
Other income (expense):
Impairment of cost method investment ...... -- -- -- --
Interest income ........................... 128 52 -- 180
Realized gains on short-term investments .. 32 -- -- 32
Other income .............................. -- -- -- --
----------------- ----------------- ----------------- -----------------
Total other income ................... 160 52 -- 212
----------------- ----------------- ----------------- -----------------
Loss from operations before
income taxes and minority interests ......... (1,332) (4,570) -- (5,902)
Benefit for income taxes ...................... 36 34 -- 70
----------------- ----------------- ----------------- -----------------
Loss from operations before minority
interests ................................... (1,296) (4,536) -- (5,832)
Minority interests ............................ -- -- -- --
----------------- ----------------- ----------------- -----------------
Net loss ...................................... $ (1,296) $ (4,536) $ -- $ (5,832)
================= ================= ================= =================
12a
CONSOLIDATING STATEMENTS OF OPERATIONS
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 2003
-----------------------------------------------------------------------------
ACACIA
TECHNOLOGIES COMBIMATRIX ELIMINATIONS/
GROUP GROUP RECLASSIFICATIONS CONSOLIDATED
----------------- ----------------- ----------------- -----------------
Revenues:
License fee income ....................... $ 211 $ -- $ -- $ 211
Product revenue .......................... -- 380 -- 380
Contract revenue ......................... -- 23 -- 23
----------------- ----------------- ----------------- -----------------
Total revenues ...................... 211 403 -- 614
----------------- ----------------- ----------------- -----------------
Operating expenses:
Cost of sales ............................ -- 94 -- 94
Research and development expenses ........ -- 6,219 -- 6,219
Non-cash stock compensation expense -
research and development ............... -- 525 -- 525
Marketing, general and administrative
expenses ............................... 3,157 6,890 -- 10,047
Non-cash stock compensation expense -
marketing, general and administrative .. -- 1,055 -- 1,055
Legal expenses - patents ................. 1,435 -- -- 1,435
Amortization of patents .................. 377 821 -- 1,198
----------------- ----------------- ----------------- -----------------
Total operating expenses ............ 4,969 15,604 -- 20,573
----------------- ----------------- ----------------- -----------------
Operating loss ...................... (4,758) (15,201) -- (19,959)
----------------- ----------------- ----------------- -----------------
Other income (expense):
Impairment of cost method investment ..... (207) -- -- (207)
Interest income .......................... 408 164 -- 572
Realized gains on short-term investments . 94 -- -- 94
Other income ............................. 1 -- -- 1
----------------- ----------------- ----------------- -----------------
Total other income .................. 296 164 -- 460
----------------- ----------------- ----------------- -----------------
Loss from operations before
income taxes and minority interests ........ (4,462) (15,037) -- (19,499)
Benefit for income taxes ..................... 94 102 -- 196
----------------- ----------------- ----------------- -----------------
Loss from operations before minority
interests .................................. (4,368) (14,935) -- (19,303)
Minority interests ........................... -- 30 -- 30
----------------- ----------------- ----------------- -----------------
Net loss ..................................... $ (4,368) $ (14,905) $ -- $ (19,273)
================= ================= ================= =================
12b
CONSOLIDATING STATEMENTS OF OPERATIONS (CONTINUED)
(IN THOUSANDS)
THREE MONTHS ENDED SEPTEMBER 30, 2002
-----------------------------------------------------------------------------
ACACIA
TECHNOLOGIES COMBIMATRIX ELIMINATIONS/
GROUP GROUP RECLASSIFICATIONS CONSOLIDATED
----------------- ----------------- ----------------- -----------------
Revenues:
License fee income ........................ $ 43 $ -- $ -- $ 43
Product revenue ........................... -- 23 -- 23
Grant and contract revenue ................ -- 113 -- 113
----------------- ----------------- ----------------- -----------------
Total revenues ............................ 43 136 -- 179
----------------- ----------------- ----------------- -----------------
Operating expenses:
Cost of sales ............................. -- 6 -- 6
Research and development expenses ......... -- 6,449 -- 6,449
Non-cash stock compensation expense -
research and development ................ -- 753 -- 753
Marketing, general and administrative
expenses ................................ 1,423 2,614 -- 4,037
Non-cash stock compensation expense -
marketing, general and administrative ... -- 1,263 -- 1,263
Legal expenses - patents .................. 690 -- -- 690
Amortization of patents ................... 465 85 -- 550
Legal settlement charges .................. -- 18,471 -- 18,471
----------------- ----------------- ----------------- -----------------
Total operating expenses .................. 2,578 29,641 -- 32,219
----------------- ----------------- ----------------- -----------------
Operating loss ............................ (2,535) (29,505) -- (32,040)
----------------- ----------------- ----------------- -----------------
Other (expense) income:
Impairment of cost method investment ...... (2,748) -- -- (2,748)
Interest income ........................... 150 111 -- 261
Realized losses on short-term
investments ............................. -- -- -- --
Unrealized losses on short-term
investments ............................. (213) -- -- (213)
Interest expense .......................... -- (44) -- (44)
Other (expense) income .................... (5) -- -- (5)
----------------- ----------------- ----------------- -----------------
Total other (expense) income .............. (2,816) 67 -- (2,749)
----------------- ----------------- ----------------- -----------------
Loss from operations before income taxes
and minority interests ...................... (5,351) (29,438) -- (34,789)
Benefit for income taxes ...................... 253 34 -- 287
----------------- ----------------- ----------------- -----------------
Loss from operations before minority
interests ................................... (5,098) (29,404) -- (34,502)
Minority interests ............................ 23 14,057 -- 14,080
----------------- ----------------- ----------------- -----------------
Loss from continuing operations ............... (5,075) (15,347) -- (20,422)
Discontinued operations:
Estimated loss on disposal of
Soundbreak.com .......................... (200) -- -- (200)
----------------- ----------------- ----------------- -----------------
Net loss ...................................... $ (5,275) $ (15,347) $ -- $ (20,622)
================= ================= ================= =================
13a
CONSOLIDATING STATEMENTS OF OPERATIONS (CONTINUED)
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 2002
-----------------------------------------------------------------------------
ACACIA
TECHNOLOGIES COMBIMATRIX ELIMINATIONS/
GROUP GROUP RECLASSIFICATIONS CONSOLIDATED
----------------- ----------------- ----------------- -----------------
Revenues:
License fee income ........................ $ 43 $ -- $ -- $ 43
Product revenue ........................... -- 297 -- 297
Grant and contract revenue ................ -- 526 -- 526
----------------- ----------------- ----------------- -----------------
Total revenues ............................ 43 823 -- 866
----------------- ----------------- ----------------- -----------------
Operating expenses:
Cost of sales ............................. -- 259 -- 259
Research and development expenses ......... -- 14,143 -- 14,143
Non-cash stock compensation expense -
research and development ................ -- 1,867 -- 1,867
Marketing, general and administrative
expenses ................................ 5,288 7,824 -- 13,112
Non-cash stock compensation expense -
marketing, general and administrative ... 19 3,697 -- 3,716
Legal expenses - patents .................. 1,141 -- -- 1,141
Amortization of patents ................... 1,395 283 -- 1,678
Legal settlement charges .................. -- 18,471 -- 18,471
----------------- ----------------- ----------------- -----------------
Total operating expenses .................. 7,843 46,544 -- 54,387
----------------- ----------------- ----------------- -----------------
Operating loss ............................ (7,800) (45,721) -- (53,521)
----------------- ----------------- ----------------- -----------------
Other (expense) income:
Impairment of cost method investment ...... (2,748) -- -- (2,748)
Interest income ........................... 450 510 -- 960
Realized losses on short-term
investments ............................. (1,483) -- -- (1,483)
Unrealized losses on short-term
investments ............................. (690) -- -- (690)
Interest expense .......................... -- (165) -- (165)
Other (expense) income .................... 47 -- -- 47
----------------- ----------------- ----------------- -----------------
Total other (expense) income .............. (4,424) 345 -- (4,079)
----------------- ----------------- ----------------- -----------------
Loss from operations before income taxes
and minority interests ...................... (12,224) (45,376) -- (57,600)
Benefit for income taxes ...................... 318 113 -- 431
----------------- ----------------- ----------------- -----------------
Loss from operations before minority
interests ................................... (11,906) (45,263) -- (57,169)
Minority interests ............................ 186 20,434 -- 20,620
----------------- ----------------- ----------------- -----------------
Loss from continuing operations ............... (11,720) (24,829) -- (36,549)
Discontinued operations:
Estimated loss on disposal of
Soundbreak.com .......................... (200) -- -- (200)
----------------- ----------------- ----------------- -----------------
Net loss ...................................... $ (11,920) $ (24,829) $ -- $ (36,749)
================= ================= ================= =================
13b
CONSOLIDATING STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
NINE MONTHS ENDED SEPTEMBER 30, 2003
--------------------------------------------------------
ACACIA
TECHNOLOGIES COMBIMATRIX
GROUP GROUP ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
Cash flows from operating activities:
Net loss from operations ......................... $ (4,368) $ (14,905) $ -- $ (19,273)
Adjustments to reconcile net loss
from operations to net cash used
in operating activities:
Depreciation and amortization ................. 471 1,822 -- 2,293
Minority interests ............................ -- (30) -- (30)
Non-cash stock compensation expense ........... -- 1,580 -- 1,580
Deferred tax benefit .......................... (108) (102) -- (210)
Net sales of trading securities ............... -- -- -- --
Unrealized losses on short-term investments ... -- -- -- --
Minority interest distributions ............... -- -- -- --
Impairment of cost method investment .......... 207 -- -- 207
Issuance of common stock by
subsidiary - legal settlement ............... -- -- -- --
Other ......................................... (6) 75 -- 69
Changes in assets and liabilities:
Accounts receivable ........................... (115) 249 -- 134
Prepaid expenses, inventory, and
other assets ................................ (98) (75) -- (173)
Accounts payable, accrued expenses
and other ................................... (126) (492) -- (618)
Deferred revenues ............................. 57 10,050 -- 10,107
------------ ------------ ------------ ------------
Net cash used in operating activities
from continuing operations .................. (4,086) (1,828) -- (5,914)
Net cash used in operating activities
from discontinued operations ................ (350) -- -- (350)
------------ ------------ ------------ ------------
Net cash used in operating activities ......... (4,436) (1,828) -- (6,264)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment, net ....... (4) (73) -- (77)
Purchase of available-for-sale investments .... (5,100) (21,461) -- (26,561)
Sale of available-for-sale investments ........ -- 18,887 -- 18,887
Other ......................................... -- -- -- --
------------ ------------ ------------ ------------
Net cash (used in) provided by investing
activities from continuing operations ....... (5,104) (2,647) -- (7,751)
Net cash used in investing activities from
discontinued operations ..................... (356) -- -- (356)
------------ ------------ ------------ ------------
Net cash (used in) provided by investing
activities .................................. (5,460) (2,647) -- (8,107)
------------ ------------ ------------ ------------
Cash flows from financing activities:
Net cash attributed to the Acacia
Technologies group .......................... (471) -- -- (471)
Net cash attributed to the CombiMatrix
group ....................................... -- 6,074 -- 6,074
------------ ------------ ------------ ------------
Net cash (used in) provided by financing
activities .................................. (471) 6,074 -- 5,603
------------ ------------ ------------ ------------
Effect of exchange rate on cash ..................... -- (13) -- (13)
------------ ------------ ------------ ------------
(Increase) decrease in cash and cash equivalents .... (10,367) 1,586 -- (8,781)
Cash and cash equivalents, beginning ................ 39,792 3,291 -- 43,083
------------ ------------ ------------ ------------
Cash and cash equivalents, ending ................... $ 29,425 $ 4,877 $ -- $ 34,302
============ ============ ============ ============
14a
NINE MONTHS ENDED SEPTEMBER 30, 2002
--------------------------------------------------------
ACACIA
TECHNOLOGIES COMBIMATRIX
GROUP GROUP ELIMINATIONS CONSOLIDATED
------------ ------------ ------------ ------------
Cash flows from operating activities:
Net loss from operations ......................... $ (11,720) $ (24,829) $ -- $ (36,549)
Adjustments to reconcile net loss
from operations to net cash used
in operating activities:
Depreciation and amortization ................. 1,556 1,296 -- 2,852
Minority interests ............................ (186) (20,434) -- (20,620)
Non-cash stock compensation expense ........... 19 5,564 -- 5,583
Deferred tax benefit .......................... (107) (113) -- (220)
Net sales of trading securities ............... 2,688 -- -- 2,688
Unrealized losses on short-term investments ... 690 -- -- 690
Minority interest distributions ............... 430 -- -- 430
Impairment of cost method investment .......... 2,748 -- -- 2,748
Issuance of common stock by
subsidiary - legal settlement ............... -- 17,471 -- 17,471
Other ......................................... (8) 95 -- 87
Changes in assets and liabilities:
Accounts receivable ........................... -- (2,409) -- (2,409)
Prepaid expenses, inventory, and
other assets ................................ (846) (144) -- (990)
Accounts payable, accrued expenses
and other ................................... 342 2,008 -- 2,350
Deferred revenues ............................. -- 5,180 -- 5,180
------------ ------------ ------------ ------------
Net cash used in operating activities
from continuing operations .................. (4,394) (16,315) -- (20,709)
Net cash used in operating activities
from discontinued operations ................ (812) -- -- (812)
------------ ------------ ------------ ------------
Net cash used in operating activities ......... (5,206) (16,315) -- (21,521)
------------ ------------ ------------ ------------
Cash flows from investing activities:
Purchase of property and equipment, net ....... (70) (544) -- (614)
Purchase of available-for-sale investments .... (4,500) (8,272) -- (12,772)
Sale of available-for-sale investments ........ -- 14,292 -- 14,292
Other ......................................... (157) -- -- (157)
------------ ------------ ------------ ------------
Net cash (used in) provided by investing
activities from continuing operations ....... (4,727) 5,476 -- 749
Net cash used in investing activities from
discontinued operations ..................... (3) -- -- (3)
------------ ------------ ------------ ------------
Net cash (used in) provided by investing
activities .................................. (4,730) 5,476 -- 746
------------ ------------ ------------ ------------
Cash flows from financing activities:
Net cash attributed to the Acacia
Technologies group .......................... (800) -- -- (800)
Net cash attributed to the CombiMatrix
group ....................................... -- 179 -- 179
------------ ------------ ------------ ------------
Net cash (used in) provided by financing
activities .................................. (800) 179 -- (621)
------------ ------------ ------------ ------------
Effect of exchange rate on cash ..................... -- 71 -- 71
------------ ------------ ------------ ------------
(Increase) decrease in cash and cash equivalents .... (10,736) (10,589) -- (21,325)
Cash and cash equivalents, beginning ................ 46,859 12,592 -- 59,451
------------ ------------ ------------ ------------
Cash and cash equivalents, ending ................... $ 36,123 $ 2,003 $ -- $ 38,126
============ ============ ============ ============
14b
COMBIMATRIX GROUP
(A Division of Acacia Research Corporation)
BALANCE SHEETS
(In thousands)
(Unaudited)
SEPTEMBER 30, DECEMBER 31,
2003 2002
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents ........................ $ 4,877 $ 3,291
Short-term investments ........................... 14,157 11,605
Accounts receivable .............................. 329 578
Prepaid expenses, inventory and other assets ..... 512 446
---------- ----------
Total current assets ........................ 19,875 15,920
Property and equipment, net of accumulated
depreciation and amortization ....................... 2,934 3,895
Patents, net of accumulated amortization of
$1,704 (2003) and $883 (2002) ....................... 10,391 11,212
Goodwill, net of accumulated amortization of
$1,312 (2003) and (2002) ............................ 19,425 18,859
Other assets .......................................... 96 87
---------- ----------
$ 52,721 $ 49,973
========== ==========
LIABILITIES AND ALLOCATED NET WORTH
Current liabilities:
Accounts payable, accrued expenses and other ..... $ 1,776 $ 2,302
Current portion of deferred revenues ............. 18,748 9,172
Payable to Acacia Technologies group ............. 159 114
---------- ----------
Total current liabilities ................... 20,683 11,588
Deferred income taxes ................................. 2,282 2,384
Deferred revenues, net of current portion ............. 474 --
---------- ----------
Total liabilities ........................... 23,439 13,972
---------- ----------
Minority interests .................................... -- 684
---------- ----------
Commitments and contingencies (Note 6)
Allocated net worth:
Funds allocated by Acacia Research Corporation ... 138,156 129,286
Accumulated net losses ........................... (108,874) (93,969)
---------- ----------
Total allocated net worth ................... 29,282 35,317
---------- ----------
$ 52,721 $ 49,973
========== ==========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
FINANCIAL STATEMENTS.
15
COMBIMATRIX GROUP
(A Division of Acacia Research Corporation)
STATEMENTS OF OPERATIONS
(In thousands)
(Unaudited)
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------- ---------------------
2003 2002 2003 2002
--------- --------- --------- ---------
Revenues:
Product revenue ............................. $ 171 $ 23 $ 380 $ 297
Grant and contract revenue .................. 10 113 23 526
--------- --------- --------- ---------
Total revenues ......................... 181 136 403 823
--------- --------- --------- ---------
Operating expenses:
Cost of sales ............................... 17 6 94 259
Research and development expenses ........... 1,726 6,449 6,219 14,143
Non-cash stock compensation expense -
research and development .................. 243 753 525 1,867
Marketing, general and administrative
expenses .................................. 2,122 2,614 6,890 7,824
Non-cash stock compensation expense -
marketing, general and administrative ..... 421 1,263 1,055 3,697
Amortization of patents ..................... 274 85 821 283
Legal settlement charges .................... -- 18,471 -- 18,471
--------- --------- --------- ---------
Total operating expenses ............... 4,803 29,641 15,604 46,544
--------- --------- --------- ---------
Operating loss ......................... (4,622) (29,505) (15,201) (45,721)
--------- --------- --------- ---------
Other income (expense):
Interest income ............................. 52 111 164 510
Interest expense ............................ -- (44) -- (165)
--------- --------- --------- ---------
Total other income ..................... 52 67 164 345
--------- --------- --------- ---------
Loss from operations before income taxes
and minority interests ......................... (4,570) (29,438) (15,037) (45,376)
Benefit for income taxes ......................... 34 34 102 113
--------- --------- --------- ---------
Loss from operations before minority interests ... (4,536) (29,404) (14,935) (45,263)
Minority interests ............................... -- 14,057 30 20,434
--------- --------- --------- ---------
Division net loss ................................ $ (4,536) $(15,347) $(14,905) $(24,829)
========= ========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
FINANCIAL STATEMENTS.
16
COMBIMATRIX GROUP
(A Division of Acacia Research Corporation)
STATEMENTS OF CASH FLOWS
(In thousands)
(Unaudited)
NINE MONTHS ENDED
---------------------------------------
SEPTEMBER 30, 2003 SEPTEMBER 30, 2002
------------------ ------------------
Cash flows from operating activities:
Division net loss from operations .................... $ (14,905) $ (24,829)
Adjustments to reconcile division net loss
from operations to net cash used in
operating activities:
Depreciation and amortization ..................... 1,822 1,296
Minority interests ................................ (30) (20,434)
Non-cash stock compensation expense ............... 1,580 5,564
Deferred tax benefit .............................. (102) (113)
Legal settlement charges .......................... -- 17,471
Other ............................................. 75 95
Changes in assets and liabilities:
Accounts receivable ............................... 249 (2,409)
Prepaid expenses, inventory and other assets ...... (75) (144)
Accounts payable, accrued expenses and other ...... (492) 2,008
Deferred revenues ................................. 10,050 5,180
------------------ ------------------
Net cash used in operating activities ............. (1,828) (16,315)
------------------ ------------------
Cash flows from investing activities:
Purchase of property and equipment, net ........... (73) (544)
Purchase of available-for-sale investments ........ (21,461) (8,272)
Sale of available-for-sale investments ............ 18,887 14,292
------------------ ------------------
Net cash (used in) provided by investing
activities ...................................... (2,647) 5,476
------------------ ------------------
Cash flows from financing activities:
Net cash flows attributed to the
CombiMatrix group ............................... 6,074 179
------------------ ------------------
Effect of exchange rate on cash ........................ (13) 71
------------------ ------------------
Increase (decrease) in cash and cash equivalents ....... 1,586 (10,589)
Cash and cash equivalents, beginning ................... 3,291 12,592
------------------ ------------------
Cash and cash equivalents, ending ...................... $ 4,877 $ 2,003
================== ==================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE
FINANCIAL STATEMENTS.
17
COMBIMATRIX GROUP
(A DIVISION OF ACACIA RESEARCH CORPORATION)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
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 Mat