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, 2004
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 2, 2004, 19,807,358 shares of Acacia Research-Acacia
Technologies common stock were issued and outstanding. As of November 2, 2004,
31,005,585 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, 2004 and
December 31, 2003 (Unaudited)....................................................... 1
Consolidated Statements of Operations and Comprehensive Income (Loss) for the
Three Months and Nine Months Ended September 30, 2004 and 2003 (Unaudited).......... 2
Consolidated Statements of Cash Flows for the Nine Months Ended
September 30, 2004 and 2003 (Unaudited)............................................. 3
Notes to Consolidated Financial Statements (Unaudited).............................. 4
*CombiMatrix Group Financial Statements
Balance Sheets as of September 30, 2004 and December 31, 2003 (Unaudited)........... 17
Statements of Operations for the Three Months and Nine Months Ended
September 30, 2004 and 2003 (Unaudited)............................................. 18
Statements of Cash Flows for the Nine Months Ended
September 30, 2004 and 2003 (Unaudited)............................................. 19
Notes to Financial Statements (Unaudited)........................................... 20
*Acacia Technologies Group Financial Statements
Balance Sheets as of September 30, 2004 and December 31, 2003 (Unaudited)........... 24
Statements of Operations for the Three Months and Nine Months Ended
September 30, 2004 and 2003 (Unaudited)............................................. 25
Statements of Cash Flows for the Nine Months Ended
September 30, 2004 and 2003 (Unaudited)............................................. 26
Notes to Financial Statements (Unaudited)........................................... 27
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations............................................................... 32
Item 3. Quantitative and Qualitative Disclosures About Market Risk.......................... 69
Item 4. Controls and Procedures............................................................. 69
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................................................... 71
Item 6. Exhibits............................................................................ 72
SIGNATURES............................................................................................... 73
EXHIBIT INDEX ........................................................................................... 74
*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.
ACACIA RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
(In thousands, except share and per share information)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2004 2003
-------------- --------------
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 32,322 $ 31,949
Short-term investments ..................................................... 24,721 18,551
Accounts receivable, net of allowance for doubtful accounts of
$0 (2004) and $145 (2003) ................................................ 496 323
Prepaid expenses, inventory, and other assets .............................. 1,130 1,180
-------------- --------------
Total current assets ............................................... 58,669 52,003
Property and equipment, net of accumulated depreciation and amortization ....... 2,656 2,823
Patents, net of accumulated amortization of $4,358 (2004) and $3,165 (2003) .... 12,463 13,683
Goodwill ....................................................................... 19,584 21,200
Other assets ................................................................... 174 331
-------------- --------------
$ 93,546 $ 90,040
============== ==============
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable, accrued expenses and other ............................... $ 4,007 $ 3,244
Current portion of deferred revenues ....................................... 1,092 18,108
-------------- --------------
Total current liabilities .......................................... 5,099 21,352
Deferred income taxes .......................................................... 3,051 3,260
Deferred revenues, net of current portion ...................................... 3,352 3,901
Other liabilities .............................................................. 370 --
-------------- --------------
Total liabilities .................................................. 11,872 28,513
-------------- --------------
Minority interests ............................................................. 780 1,127
-------------- --------------
Commitments and contingencies (Note 9)
Redeemable 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; 19,795,525 and 19,739,984
shares issued and outstanding as of September 30, 2004 and
December 31, 2003, respectively ...................................... 20 20
Acacia Research - CombiMatrix stock, par value $0.001 per share;
50,000,000 shares authorized; 31,005,585 and 26,328,122 shares
issued and outstanding as of September 30, 2004 and December 31,
2003, respectively ................................................... 31 26
Additional paid-in capital ................................................. 263,462 244,517
Deferred stock compensation ................................................ 1 (766)
Accumulated comprehensive income ........................................... (59) 8
Accumulated deficit ........................................................ (182,561) (183,405)
-------------- --------------
Total stockholders' equity ......................................... 80,894 60,400
-------------- --------------
$ 93,546 $ 90,040
============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
1
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE INCOME (LOSS)
(In thousands, except share and per share information)
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
------------------------------- -------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Revenues:
Research and development contract ........................... $ -- $ -- $ 17,302 $ --
License fees ................................................ 2,240 186 3,505 211
Government contract ......................................... 685 -- 1,603 --
Service contracts ........................................... 16 10 102 23
Products .................................................... 52 171 112 380
-------------- -------------- -------------- --------------
Total revenues .......................................... 2,993 367 22,624 614
-------------- -------------- -------------- --------------
Operating expenses:
Cost of government contract revenues ........................ 647 -- 1,505 --
Cost of product sales ....................................... 41 17 81 94
Research and development expenses ........................... 1,140 1,726 3,932 6,219
Non-cash stock compensation amortization - research and
development ............................................... (10) 243 91 525
Marketing, general and administrative expenses .............. 4,771 3,675 12,621 11,482
Non-cash stock compensation amortization - marketing,
general and administrative ................................ 157 421 634 1,055
Goodwill impairment charge .................................. 1,616 -- 1,616 --
Amortization of patents ..................................... 399 399 1,197 1,198
Legal settlement charges (credits) .......................... (90) -- 776 --
-------------- -------------- -------------- --------------
Total operating expenses ................................ 8,671 6,481 22,453 20,573
-------------- -------------- -------------- --------------
Operating income (loss) ................................. (5,678) (6,114) 171 (19,959)
-------------- -------------- -------------- --------------
Other income (expense):
Impairment charge ........................................... -- -- -- (207)
Interest income ............................................. 218 180 568 572
Realized gains on short-term investments .................... -- 32 -- 94
Other income ................................................ -- -- -- 1
-------------- -------------- -------------- --------------
Total other income (expense) ............................ 218 212 568 460
-------------- -------------- -------------- --------------
Income (loss) from continuing operations before income taxes
and minority interests ........................................ (5,460) (5,902) 739 (19,499)
Benefit for income taxes ........................................ 70 70 206 196
-------------- -------------- -------------- --------------
Income (loss) from continuing operations before minority
interests ..................................................... (5,390) (5,832) 945 (19,303)
Minority interests .............................................. -- -- 3 30
-------------- -------------- -------------- --------------
Income (loss) from continuing operations ........................ (5,390) (5,832) 948 (19,273)
-------------- -------------- -------------- --------------
Discontinued operations:
Estimated loss on disposal of discontinued operations ....... -- -- (104) --
-------------- -------------- -------------- --------------
Net income (loss) ............................................... (5,390) (5,832) 844 (19,273)
-------------- -------------- -------------- --------------
Unrealized gains (losses) on short-term investments ......... 19 (9) (59) (24)
Unrealized gains (losses) on foreign currency translation ... (1) 25 (8) 21
-------------- -------------- -------------- --------------
Comprehensive income (loss) ..................................... $ (5,372) $ (5,816) $ 777 $ (19,276)
============== ============== ============== ==============
Earnings (loss) per common share:
Attributable to the Acacia Technologies group:
Net loss .................................................... $ (1,842) $ (1,296) $ (3,984) $ (4,368)
Basic and diluted loss per share ............................ (0.09) (0.07) (0.20) (0.22)
Attributable to the CombiMatrix Group:
Basic
Net income (loss) ........................................... $ (3,548) $ (4,536) $ 4,828 $ (14,905)
Basic earnings (loss) per share ............................. (0.11) (0.18) 0.16 (0.64)
Diluted
Net income (loss) ........................................... $ (3,548) $ (4,536) $ 4,828 $ (14,905)
Diluted earnings (loss) per share ........................... (0.11) (0.18) 0.16 (0.64)
Weighted average shares:
Acacia Research - Acacia Technologies stock:
Basic and diluted ........................................... 19,793,487 19,645,949 19,777,820 19,642,541
============== ============== ============== ==============
Acacia Research - CombiMatrix stock:
Basic ....................................................... 30,962,190 25,890,408 29,570,562 23,129,476
============== ============== ============== ==============
Diluted ..................................................... 30,962,190 25,890,408 30,789,229 23,129,476
============== ============== ============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
2
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
FOR THE NINE MONTHS ENDED
---------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2004 2003
-------------- --------------
Cash flows from operating activities:
Net income (loss) from continuing operations ............................ $ 948 $ (19,273)
Adjustments to reconcile net income (loss) from continuing operations
to net cash used in operating activities:
Depreciation and amortization ....................................... 2,080 2,293
Minority interests .................................................. -- (30)
Non-cash stock compensation amortization ............................ 725 1,580
Deferred tax benefit ................................................ (209) (210)
Non-cash legal settlement charge .................................... 776 --
Non-cash impairment charges ......................................... 1,616 207
Other ............................................................... (53) 69
Changes in assets and liabilities:
Accounts receivable ................................................. (178) 134
Prepaid expenses, inventory and other assets ........................ 584 (173)
Accounts payable, accrued expenses and other ........................ 930 (618)
Deferred revenues ................................................... (17,565) 10,107
-------------- --------------
Net cash used in operating activities from continuing operations .... (10,346) (5,914)
Net cash used in operating activities from discontinued operations .. (636) (350)
-------------- --------------
Net cash used in operating activities ............................... (10,982) (6,264)
-------------- --------------
Cash flows from investing activities:
Purchase of property and equipment, net ............................. (721) (77)
Purchase of available-for-sale investments .......................... (44,949) (26,561)
Sale of available-for-sale investments .............................. 38,721 18,887
Other ............................................................... (5) --
-------------- --------------
Net cash used in investing activities from continuing operations .... (6,954) (7,751)
Net cash used in investing activities from discontinued operations .. (198) (356)
-------------- --------------
Net cash used in investing activities ............................... (7,152) (8,107)
-------------- --------------
Cash flows from financing activities:
Proceeds from the exercise of stock options and warrants ............ 4,797 741
Proceeds from sale of common stock, net of issuance costs ........... 13,715 4,862
-------------- --------------
Net cash provided by financing activities ........................... 18,512 5,603
-------------- --------------
Effect of exchange rate on cash ......................................... (5) (13)
-------------- --------------
Increase (decrease) in cash and cash equivalents ........................ 373 (8,781)
Cash and cash equivalents, beginning .................................... 31,949 43,083
-------------- --------------
Cash and cash equivalents, ending ....................................... $ 32,322 $ 34,302
============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS
3
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS. Acacia Research Corporation ("we," "us" and
"our") is comprised of two operating groups.
Our life sciences business, referred to as the "CombiMatrix group," is
primarily comprised of our wholly owned subsidiary, CombiMatrix Corporation and
CombiMatrix Corporation's wholly owned subsidiary, CombiMatrix K.K. CombiMatrix
Corporation is a life sciences technology company with a proprietary system for
rapid, cost competitive creation of DNA and other compounds on a programmable
semiconductor chip. This proprietary technology has applications in the areas of
genomics, proteomics, biosensors, drug discovery, drug development, diagnostics,
combinatorial chemistry, material sciences and nanotechnology. CombiMatrix K.K.,
a Japanese corporation located in Tokyo, is exploring opportunities for
CombiMatrix Corporation's active array system with pharmaceutical and
biotechnology companies in the Asian market.
Our intellectual property licensing business, referred to as the
"Acacia Technologies group," acquires, develops and licenses intellectual
property, and is comprised primarily of Acacia Research Corporation's wholly
owned subsidiaries, Acacia Media Technologies Corporation ("Acacia Media
Technologies"), Soundview Technologies, Inc. ("Soundview Technologies") and
Acacia Internet Access Corporation. The Acacia Technologies group is responsible
for the development, acquisition, licensing and protection of intellectual
property and proprietary technologies and is pursuing additional licensing and
strategic business alliances with companies in the intellectual property
licensing industry.
On December 11, 2002, our stockholders voted in favor of a
recapitalization transaction, which became effective on December 13, 2002,
whereby we created two new classes of common stock called Acacia
Research-CombiMatrix stock ("AR-CombiMatrix stock") and Acacia Research-Acacia
Technologies stock ("AR-Acacia Technologies stock"), and divided our existing
Acacia Research Corporation common stock into shares of the two new classes of
common stock. AR-CombiMatrix stock is intended to reflect separately the
performance of Acacia Research Corporation's CombiMatrix group. AR-Acacia
Technologies stock is intended to reflect separately the performance of Acacia
Research Corporation's Acacia Technologies group. Although the AR-CombiMatrix
stock and the AR-Acacia Technologies stock are intended to reflect the
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.
BASIS OF PRESENTATION. The accompanying unaudited 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 accompanying 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, 2003, 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 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, 2004 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, 2004 are not necessarily indicative of the results to be expected
for the entire year.
SEPARATE GROUP 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 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
4
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.
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. 104, "Revenue Recognition" ("SAB No. 104") and related
authoritative pronouncements. Revenues from multiple-element arrangements are
accounted for in accordance with Emerging Issues Task Force ("EITF") Issue
00-21, "Revenue Arrangements with Multiple Deliverables." Revenue is recognized
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.
COMBIMATRIX GROUP
Revenues from multiple-element arrangements involving license fees,
up-front payments and milestone payments, which are received and/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.
Revenues from government grants and contracts are recognized in
accordance with Accounting Research Bulletin ("ARB") No. 43, "Government
Contracts," and related pronouncements. Accordingly, revenues are recognized
under the percentage-of-completion method of accounting, using the cost-to-cost
approach to measure completeness at each reporting period. Under the
percentage-of-completion method of accounting, contract revenues and expenses
are recognized in the period that work is performed based on the percentage of
actual incurred costs to estimated total contract costs. Actual contract costs
and cost estimates include direct charges for labor and materials and indirect
charges for labor, overhead and certain general and administrative charges.
Contract change orders and claims are included when they can be reliably
estimated and are considered probable. For contracts that extend over a one-year
period, revisions in contract cost estimates, if they occur, have the effect of
adjusting current period earnings applicable to performance in prior periods.
Should current contract estimates indicate an overall future loss to be
incurred, a provision is made for the total anticipated loss in the current
period.
Revenue from the sale of products and services is recognized when
delivery has occurred or services have been rendered.
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 current. Deferred revenues will
be recognized as revenue in future periods when the applicable revenue
recognition criteria as described above are met.
ACACIA TECHNOLOGIES GROUP
Under the terms of our digital media transmission ("DMT(R)") license
agreements, the Acacia Technologies group grants non-exclusive licenses for the
use of its patented DMT(R) technology. All of the Acacia Technologies group's
material DMT(R) license agreements provide for license fee payments to be made
by the respective licensees over the term of the licenses. Pursuant to the terms
of our DMT(R) license agreements, once executed, the Acacia Technologies group
has no further obligations with respect to the grant of the licenses. License
fees paid to and recognized as revenue by the Acacia Technologies group are
non-refundable.
5
Revenue generated from license agreements are generally accrued and
recognized as revenue in the period earned, provided that amounts are fixed or
determinable and collectibility is reasonably assured.
Certain license agreements provide for the calculation of license fees
based on a licensee's actual quarterly sales or actual per unit activity,
applied to a contractual royalty rate. Licensees that pay license fees on a
quarterly basis generally report actual quarterly sales or actual per unit
activity information and related quarterly license fees due to the Acacia
Technologies group within 30 to 45 days after the end of the quarter in which
such sales or activity takes place. Consequently, the Acacia Technologies group
recognizes revenue from these licensing agreements on a three-month lag basis,
in the quarter following the quarter of sales or per unit activity, provided
amounts are fixed or determinable and collectibility is reasonably assured. The
lag method described above allows for the receipt of licensee royalty reports
prior to the recognition of revenue.
Certain license agreements provide for the payment of a minimum upfront
annual license fee at the inception of each annual license term. Minimum upfront
annual license fees are generally determined based on a licensees estimated
annual sales or a licensees base level of per unit activity. These minimum
upfront annual license fee payments are deferred and amortized to revenue on a
straight-line basis over the annual license term. To the extent actual annual
royalties, determined and reported in accordance with the terms of the
respective agreements, exceed the minimum upfront annual license fees paid, the
additional royalties are recognized in revenue in the quarter following the
quarter in which the base per unit activity was exceeded or the quarter
following the annual license term, depending on the terms of the respective
agreement, provided that amounts are fixed or determinable and collectibility is
reasonably assured.
License fee payments received by the Acacia Technologies group that do
not meet the revenue recognition criteria described above are deferred until the
revenue recognition criteria are met. The Acacia Technologies group assesses
collection of accrued license fees based on a number of factors, including past
transaction history and credit-worthiness. If it is determined that collection
is not reasonably assured, the fee is recognized when collectibility becomes
reasonably assured, assuming all other revenue recognition criteria have been
met, which is generally upon receipt of cash.
As a result of our licensing and any related intellectual property
enforcement activities that we choose to conduct, we may recognize royalty
revenues that relate to prior period infringements by licensees. Differences
between amounts initially recognized and amounts subsequently audited or
reported as an adjustment to those amounts will be recognized in the period the
adjustment is determined as a change in accounting estimate.
INVENTORY. Inventory, which consists primarily of raw materials to be
used in the production of the CombiMatrix group's array products, is stated at
the lower of cost or market using the first-in, first-out method.
STOCK-BASED COMPENSATION. Acacia Research Corporation has two
stock-based employee compensation plans, the 2002 CombiMatrix Stock Incentive
Plan and the 2002 Acacia Technologies Stock Incentive Plan. 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 SFAS No. 123,
"Accounting for Stock-Based Compensation" ("SFAS No. 123"), as amended by SFAS
No. 148 "Accounting for Stock-Based Compensation--Transition and Disclosure--an
amendment of SFAS No. 123" ("SFAS No. 148"), 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.
6
The following table illustrates the effect on net income (loss) and
earnings (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,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Loss from operations as reported ................................. $ (1,842) $ (1,296) $ (3,548) $ (4,536)
Add: Stock-based compensation, intrinsic value method
reported in net loss, net of tax .............................. -- -- 180 612
Deduct: Pro forma stock-based compensation fair value
method, net of tax ............................................ (411) (662) (1,575) (2,157)
------------ ------------ ------------ ------------
Loss from operations, pro forma .................................. $ (2,253) $ (1,958) $ (4,943) $ (6,081)
============ ============ ============ ============
Basic loss per share from operations as reported ................. $ (0.09) $ (0.07) $ (0.11) $ (0.18)
Basic loss per share from operations, pro forma .................. (0.11) (0.10) (0.16) (0.23)
Diluted loss per share from operations as reported ............... (0.09) (0.07) (0.11) (0.18)
Diluted loss per share from operations, pro forma ................ (0.11) (0.10) (0.16) (0.23)
AR-ACACIA TECHNOLOGIES STOCK AR-COMBIMATRIX STOCK
----------------------------- ----------------------------
NINE MONTHS ENDED NINE MONTHS ENDED
----------------------------- ----------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
------------ ------------ ------------ ------------
Income (loss) from operations as reported ........................ $ (3,984) $ (4,368) $ 4,828 $ (14,905)
Add: Stock-based compensation, intrinsic value method
reported in net income (loss), net of tax ..................... -- -- 606 1,433
Deduct: Pro forma stock-based compensation fair value
method, net of tax ............................................ (1,524) (2,685) (5,192) (7,302)
------------ ------------ ------------ ------------
Income (loss) from operations, pro forma ......................... $ (5,508) $ (7,053) $ 242 $ (20,774)
============ ============ ============ ============
Basic earnings (loss) per share from operations as reported ...... $ (0.20) $ (0.22) $ 0.16 $ (0.64)
Basic earnings (loss) per share from operations, pro forma ....... (0.28) (0.36) 0.01 (0.90)
Diluted earnings (loss) per share from operations as reported .... (0.20) (0.22) 0.16 (0.64)
Diluted earnings (loss) per share from operations, pro forma ..... (0.28) (0.36) 0.01 (0.90)
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.
IMPAIRMENT OF LONG-LIVED ASSETS AND GOODWILL. We review long-lived
assets and intangible assets for potential impairment annually and when events
or changes in circumstances indicate the carrying amount of an asset may not be
recoverable. In the event the sum of the expected undiscounted future cash flows
resulting from the use of the asset is less than the carrying amount of the
asset, an impairment loss equal to the excess of the asset's carrying value over
its fair value is recorded. If an asset is determined to be impaired, the loss
is measured based on quoted market prices in active markets, if available. If
quoted market prices are not available, the estimate of fair value is based on
various valuation techniques, including a discounted value of estimated future
cash flows.
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 two reporting units as of September 30, 2004 are: 1) the Acacia
Technologies group and 2) the CombiMatrix group. The fair values of our
reporting units are 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.
As a result of the August 2004 adverse ruling in Soundview
Technologies' V-chip related litigation described at Notes 4 and 9, as of
September 30, 2004, Soundview Technologies is no longer considered a reporting
unit.
7
3. EARNINGS PER SHARE
EARNINGS PER SHARE. Earnings per share for each class of common stock
is computed by dividing the earnings or loss 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 earnings or
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
income (loss) per share:
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
------------------------------- -------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
ACACIA RESEARCH - ACACIA TECHNOLOGIES STOCK
- -------------------------------------------
Basic and diluted weighted average number of common
shares outstanding .......................................... 19,793,487 19,645,949 19,777,820 19,642,541
============== ============== ============== ==============
Potential AR-Acacia Technologies stock common shares
excluded from the per share calculation because the
effect of their inclusion would be anti-dilutive ............ 649,498 317,000 1,202,948 3,173
============== ============== ============== ==============
ACACIA RESEARCH - COMBIMATRIX STOCK
- -----------------------------------
Basic weighted average number of common shares outstanding .... 30,962,190 25,890,408 29,570,562 23,129,476
Dilutive effect of outstanding stock options and warrants ..... -- -- 1,218,667 --
-------------- -------------- -------------- --------------
Diluted weighted average number of common and
potential common shares outstanding ......................... 30,962,190 25,890,408 30,789,229 23,129,476
============== ============== ============== ==============
Potential AR-CombiMatrix stock common shares excluded from
the per share calculation because the effect of their
inclusion would be anti-dilutive ............................ 725,906 1,167,778 -- 587,180
============== ============== ============== ==============
4. GOODWILL AND INTANGIBLES
The Acacia Technologies group had $160,000 of goodwill at September 30,
2004 and $1,776,000 at December 31, 2003. In August 2004, as a result of the
adverse ruling in Acacia Technologies group's V-chip patent infringement lawsuit
described at Note 9, the Acacia Technologies group recorded an impairment charge
totaling $1,616,000 associated with the write-down of goodwill related to the
V-chip.
The CombiMatrix group had $19,424,000 of goodwill at September 30, 2004
and December 31, 2003.
Acacia Research Corporation's only identifiable intangible assets at
September 30, 2004 and December 31, 2003 are patents. The gross carrying amounts
and accumulated amortization as of September 30, 2004 and December 31, 2003,
related to patents, by segment, are as follows (in thousands):
ACACIA TECHNOLOGIES GROUP COMBIMATRIX GROUP
--------------------------------- ---------------------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, DECEMBER 31,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Gross carrying amount - patents .... $ 4,726 $ 4,753 $ 12,095 $ 12,095
Accumulated amortization ........... (1,559) (1,187) (2,799) (1,978)
-------------- -------------- -------------- --------------
Patents, net ....................... $ 3,167 $ 3,566 $ 9,296 $ 10,117
============== ============== ============== ==============
As of September 30, 2004 and December 31, 2003, all V-chip patent
related intangibles were fully amortized. As a result, the gross carrying
amounts and accumulated amortization related to the V-chip patent intangibles
have been excluded from the table above. See Note 12 for patent amortization
expense by segment for the three and nine months ended September 30, 2004 and
2003.
8
Annual aggregate amortization expense for each of the next five years
through December 31, 2008 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, 2004 and December 31, 2003, all of our acquired
intangible assets other than goodwill were subject to amortization.
5. EQUITY FINANCING
In April 2004, Acacia Research Corporation raised gross proceeds of
$15,000,000 through the sale of 3,000,000 shares of Acacia Research -
CombiMatrix common stock at a price of $5.00 per share in a registered direct
offering. Net proceeds raised of approximately $13,715,000, which are net of
related issuance costs, were attributed to the CombiMatrix group.
6. RESEARCH AND DEVELOPMENT CONTRACTS
In March 2004, the CombiMatrix group completed all phases of its
research and development agreement with Roche Diagnostics, GmbH ("Roche"). As a
result of completing all of its obligations under this agreement and in
accordance with the CombiMatrix group's revenue recognition policies for
multiple-element arrangements, the CombiMatrix group recognized all previously
deferred Roche related contract revenues totaling $17,302,000 during the first
quarter of 2004.
In August 2004, the CombiMatrix group received a $1,000,000 upfront
payment from Furuno Electric Co., LTD ("Furuno") as part of a multi-year
collaboration agreement to develop a bench-top microarray synthesizer for
commercial applications. In 2003, the CombiMatrix group received upfront and
milestone payments from Toppan Printing Co., LTD. ("Toppan") totaling
$2,400,000, pursuant to a multi-year collaboration and supply agreement to
develop and manufacture microarrays using the CombiMatrix group's proprietary
electrochemical detection approach. The payments received from Furuno and Toppan
are included in deferred revenues at September 30, 2004 in accordance with the
CombiMatrix group's revenue recognition policies for multiple-element
arrangements.
7. INCOME TAXES
We estimate that there will be sufficient losses from operations in
the current fiscal year to offset any taxable income related to the Roche
deferred contract revenues totaling $17,302,000 recognized during the three
months ended March 31, 2004, resulting in no significant tax liability or
expense in the current period or for the year ending December 31, 2004.
Additionally, there was a deferred tax asset that was previously recognized for
income tax purposes that was offset by a valuation allowance; as a result of the
deferred revenue recognition, the associated deferred tax asset and related
valuation allowance were reduced during the first quarter of 2004 by
approximately $3.5 million.
8. RECENT ACCOUNTING PRONOUNCEMENTS
In June 2004, the FASB issued EITF Issue No. 02-14, "Whether an
Investor Should Apply the Equity Method of Accounting to Investments Other Than
Common Stock." EITF 02-14 addresses whether the equity method of accounting
applies when an investor does not have an investment in voting common stock of
an investee but exercises significant influence through other means. EITF 02-14
states that an investor should only apply the equity method of accounting when
it has investments in either common stock or in-substance common stock of a
corporation, provided that the investor has the ability to exercise significant
influence over the operating and financial policies of the investee. The
accounting provisions of EITF 02-14 are effective for reporting periods
beginning after September 15, 2004. We do not expect the adoption of EITF 02-14
to have a material impact on Acacia Research Corporation's, the CombiMatrix
group's or the Acacia Technologies group's financial position, results of
operations or cash flows.
On March 31, 2004, the FASB issued an Exposure Draft, SHARE-BASED
PAYMENT, that addresses the accounting for share-based payment transactions in
which an enterprise receives employee services in exchange for (a) equity
instruments of the enterprise or (b) liabilities that are based on the fair
value of the enterprise's equity instruments or that may be settled by the
issuance of such equity instruments. The proposed Statement would eliminate the
ability to account for share-based compensation transactions using APB No. 25
and generally would require instead that such transactions be accounted for
using a fair-value-based method. Disclosure of the effect of expensing the fair
9
value of equity compensation is currently required under existing literature
(see Note 2). While the final statement is subject to change, it is currently
anticipated it will become effective for periods beginning after June 15, 2005,
which would be Acacia Research Corporation's third fiscal quarter in 2005.
Acacia Research Corporation is in the process of evaluating the impact of this
proposal.
In March 2004, the FASB issued EITF Issue No. 03-6, "Participating
Securities and the Two-Class Method under FASB Statement No. 128, Earnings Per
Share," ("EITF 03-6") which addresses questions regarding the computation of
earnings per share ("EPS") by companies that have issued securities other than
common stock that contractually entitle the holder to participate in dividends
and earnings of the company when, and if, it declares dividends on its common
stock. The issue also provides further guidance in applying the two-class method
of calculating EPS and clarifies what constitutes a participating security and
how to apply the two-class method of computing EPS once it is determined that a
security is participating, including how to allocate undistributed earnings to
such a security. EITF 03-6 defines participation rights based solely on whether
the holder would be entitled to receive any dividends if the entity declared
them during the period, requires the use of the two-class method for computing
basic EPS when participating convertible securities exist and expands the use of
the two-class method to encompass other forms of participating securities,
including options, warrants, forwards, and other contracts to issue an entity's
common stock. The provisions of EITF 03-6 are effective for fiscal periods
beginning after March 31, 2004. The adoption of EITF 03-6 did not have a
material impact on the Acacia Research Corporation's, the CombiMatrix group's or
the Acacia Technologies group's financial position, results of operations or
cash flows.
9. COMMITMENTS AND CONTINGENCIES
COMBIMATRIX GROUP
On September 30, 2002, CombiMatrix Corporation and Dr. Donald
Montgomery entered into a settlement agreement with Nanogen, Inc. to settle all
pending litigation between the parties. During the nine months ended September
30, 2004, we recorded a net non-cash charge totaling $776,000 in connection with
certain anti-dilution provisions of that agreement. The non-cash charge reflects
management's estimate of the fair value of AR-CombiMatrix stock issued to
Nanogen, Inc. as a result of certain options and warrants exercised during the
nine months ended September 30, 2004 and the fair value of AR-CombiMatrix stock
potentially issuable to Nanogen, Inc. as of the balance sheet date. The
liability is adjusted at each balance sheet date for changes in the market value
of the AR-CombiMatrix stock and is reflected as long-term until settled in
equity. The anti-dilution provisions of the settlement agreement expire in
September 2005.
In addition to other terms of the settlement agreement, CombiMatrix
Corporation is also required to make quarterly payments to Nanogen, Inc. equal
to 12.5% of payments to CombiMatrix Corporation from sales of products developed
by CombiMatrix Corporation and its affiliates and based on the patents that had
been in dispute in the litigation, up to an annual maximum of $1,500,000. The
minimum quarterly payments under the settlement agreement will be $37,500 per
quarter for the period from October 1, 2003 through October 1, 2004, and $25,000
per quarter thereafter until the patents expire in 2018.
In July 2004, the CombiMatrix group and collaborator irsiCaixa
Foundation ("IRSI") entered into a three-year research, development, and
licensing agreement and selected two siRNA candidates for downstream
pre-clinical development against HIV. Pursuant to the terms of the agreement,
the CombiMatrix group will make research and development funding payments to
IRSI totaling $450,000 over a period of three years, beginning in July 2004. In
addition, the CombiMatrix group may make future contingent milestone payments
for compounds that are developed, in accordance with the terms of the agreement.
In consideration for receiving rights to commercialize the compounds under
development, the CombiMatrix group will pay royalties to IRSI based on
commercial sales of related products, in accordance with the agreement.
ACACIA TECHNOLOGIES GROUP
In connection with the purchase of the outstanding ownership interests
in Acacia Media Technologies in November 2001, Acacia Media Technologies also
executed related assignment agreements which granted to the former owners of
Acacia Media Technologies' current patent portfolio the right to receive a
royalty of 15% of future net revenues, as defined in the agreements, generated
by Acacia Media Technologies' current patent portfolio, which includes its
DMT(R) patents. No royalty obligation has been incurred as of September 30,
2004. Any royalties paid pursuant to the agreements will be expensed in the
consolidated statement of operations.
10
LITIGATION
Acacia Research Corporation is subject to claims, counterclaims and
legal actions that arise in the ordinary course of business. Management believes
that the ultimate liability with respect to these claims and legal actions, if
any, will not have a material effect on our financial position, results of
operations or cash flows.
SOUNDVIEW TECHNOLOGIES
In September 2002, the United States District Court for the District of
Connecticut granted a motion for summary judgment filed by the defendants in
Soundview Technologies pending patent infringement and antitrust lawsuit against
Sony Corporation of America, the Consumer Electronics Manufacturers Association
and the Electronics Industries Alliance d/b/a Consumer Electronics Association
in the United States District Court for the Eastern District of Virginia (filed
on April 5, 2000), alleging that television sets utilizing certain content
blocking technology (commonly known as the "V-chip") and sold in the United
States infringe Soundview Technologies' U.S. Patent No. 4,554,584. In granting
the motion, the court ruled that the defendants have not infringed on Soundview
Technologies' patent.
In September 2003, a motion for summary judgment filed by the remaining
defendants was granted by the United States District Court for the District of
Connecticut on Soundview Technologies' anti-trust claims due to the Court's
previous ruling of non-infringement as described above.
In August 2004, the U.S. Court of Appeals for the Federal Circuit
affirmed the September 2002 U.S. District Court for the District of Connecticut
ruling that the remaining television manufacturers named in the Acacia
Technologies group's V-chip patent infringement lawsuit do not infringe the
Acacia Technologies group's V-chip patent. As a result of the ruling, the Acacia
Technologies group recorded an impairment charge of $1,616,000 associated with
the write-off of goodwill related to the V-chip. In addition, as a result of the
conclusion of the V-chip patent litigation, the Acacia Technologies group
recognized $1,500,000 of V-chip related deferred license fee revenues and
$668,000 of V-chip related deferred legal costs in the third quarter of 2004.
The final ruling in the V-chip litigation, as described above, has no
impact on the revenues that we have recognized to date from licensees of our
patented V-chip technology.
ACACIA MEDIA TECHNOLOGIES CORPORATION
INTERNET WEBSITES
In February 2003, Acacia Media Technologies initiated DMT(R) patent
infringement litigation in the Federal District Court for the Central District
of California (the "Court") against approximately 39 defendants who provide
adult oriented digital content over the Internet. All of the defendants were
previously notified of our belief that their conduct infringes on our patent
rights. As of September 30, 2004, nine of the original 39 defendants remain in
the initial litigation.
In December 2003, Acacia Media Technologies added an additional eight
defendants to its pending patent infringement litigation described above. The
new complaints, filed with the Court, seek to create a defendant class for all
adult entertainment companies that infringe Acacia Media Technologies' DMT(R)
patents by transmitting pre-recorded, digital audio and audio/video adult
content via any electronic communication channel into or from the Central
District of California, or that operate at least one interactive website where a
user located in Central District of California can exchange information with a
host computer. Defendant class action status, which must be approved by the
Court, would permit the Court's rulings on certain key issues to legally bind
all members of the class, whether or not they have been specifically named as
defendants in the litigation.
On July 12, 2004, the United States District Court for the Central
District of California issued a Markman Order giving the Court's construction of
some of the disputed patent terms and phrases contained in two of the five U.S.
DMT(R) patents.
HOTEL ON-DEMAND TV INDUSTRY
In November 2003, Acacia Media Technologies initiated a patent
infringement lawsuit in the Federal District Court for the Central District of
California against On Command Corporation, provider of interactive in-room
entertainment, information and business services to the lodging industry,
regarding Acacia Media Technologies' DMT(R) technology. In June 2004 Acacia
11
Media Technologies entered into a license agreement for its DMT(R) technology
with On Command Corporation settling all outstanding litigation between the
parties.
CABLE AND SATELLITE TV
In June 2004, Acacia Media Technologies filed a Complaint in the
District Court for the Northern District of California alleging infringement of
Acacia Media Technologies' DMT(R) patents against 9 cable and satellite
companies. Companies named as defendants in the lawsuit include Comcast
Corporation, Charter Communications, Inc., The DirectTV Group, Inc., Echostar
Communications Corporation, Boulder Ridge Cable TV, Central Valley Cable TV,
LLC, Seren Innovations, Inc., Cox Communications, Inc., and Hospitality Network,
Inc. (a wholly owned subsidiary of Cox that supplies hotel on-demand TV
services). In September 2004, Acacia Media Technologies added Mediacom LLC to
this complaint. As of September 2004, Acacia Media Technologies has executed
license and settlement agreements with Boulder Ridge Cable TV, Central Valley
Cable TV, and Seren Innovations.
In September 2004, Acacia Media Technologies filed complaints in the
U.S. District Court for the District of Arizona, U.S. District Court for the
District of Minnesota and the U.S. District Court for the Northern District of
Ohio - Eastern Division, alleging infringement of Acacia Media Technologies'
DMT(R) patents against certain cable and satellite companies located in Arizona,
Minnesota, and Ohio. Companies named in the lawsuits include Armstrong Group,
Arvig Communication Systems, Block Communications, Inc., Cable America
Corporation, Cable One, Inc., Cable System Services, Inc., Cannon Valley
Communications, Inc., East Cleveland Cable TV and Communications, LLC, Loretel
Cablevision, Massillon Cable TV, Inc., Mid-Continent Media, Inc., Nelsonville TV
Cable, Inc., NPG Cable, Inc., Precis Communications, Inc. San Carlos
Cablevision, LLC, Savage Communications, Inc., Sjoberg's Cablevision, Inc., US
Cable, and Wide Open West, LLC.
10. DISCOUNTINUED OPERATIONS
Results for the nine months ended September 30, 2004 include a $104,000
charge, net of minority interests, related to estimated additional costs to be
incurred in connection with the discontinued operations of Soundbreak.com,
related primarily to certain noncancellable lease obligations and the inability
to sublease the related office space at rates commensurate with existing
obligations or negotiate more favorable terms.
11. SUBSEQUENT EVENT
In October 2004, the CombiMatrix group entered into an agreement to
acquire up to a one-third ownership interest in Leuchemix, Inc. ("Leuchemix"), a
private drug development firm, which is developing several compounds for the
treatment of leukemia and other cancers. In accordance with the terms of the
purchase agreement, the CombiMatrix group will purchase 3,137,500 shares of
Series A Preferred Stock of Leuchemix for a total purchase price of $4,000,000.
The ownership interest will be acquired and paid for quarterly over the next two
years. In accordance with the terms of the purchase agreement, CombiMatrix
Corporation's CEO was named a director of Leuchemix.
12. 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 Chief
Executive Officer ("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.
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.
12
CONSOLIDATING BALANCE SHEETS
(IN THOUSANDS)
AT SEPTEMBER 30, 2004 AT DECEMBER 31, 2003
------------------------------------------- -------------------------------------------
ACACIA ACACIA
TECH- COMBI- TECH- COMBI-
NOLOGIES MATRIX ELIMIN- CONSOL- NOLOGIES MATRIX ELIMIN- CONSOL-
GROUP GROUP ATIONS IDATED GROUP GROUP ATIONS IDATED
--------- --------- ---------- --------- --------- --------- ---------- ---------
ASSETS
Current assets:
Cash and cash equivalents ............ $ 29,366 $ 2,956 $ -- $ 32,322 $ 28,142 $ 3,807 $ -- $ 31,949
Short-term investments ............... 998 23,723 -- 24,721 5,059 13,492 -- 18,551
Accounts receivable .................. 175 321 -- 496 124 199 -- 323
Prepaid expenses, inventory and
other assets ....................... 758 372 -- 1,130 903 277 -- 1,180
Receivable from CombiMatrix group .... 115 -- (115) -- 99 -- (99) --
--------- --------- ---------- --------- --------- --------- ---------- ---------
Total current assets ............. 31,412 27,372 (115) 58,669 34,327 17,775 (99) 52,003
Property and equipment, net of
accumulated depreciation and
amortization ........................... 103 2,553 -- 2,656 71 2,752 -- 2,823
Patents, net of accumulated
amortization ........................... 3,167 9,296 -- 12,463 3,566 10,117 -- 13,683
Goodwill ................................. 160 19,424 -- 19,584 1,776 19,424 -- 21,200
Other assets ............................. 84 90 -- 174 238 93 -- 331
--------- --------- ---------- --------- --------- --------- ---------- ---------
$ 34,926 $ 58,735 $ (115) $ 93,546 $ 39,978 $ 50,161 $ (99) $ 90,040
========= ========= ========== ========= ========= ========= ========== =========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued
expenses and other ................. $ 2,209 $ 1,798 $ -- $ 4,007 $ 1,572 $ 1,672 $ -- $ 3,244
Current portion of deferred
revenues ........................... 593 499 -- 1,092 104 18,004 -- 18,108
Payable to Acacia Technologies
group .............................. -- 115 (115) -- -- 99 (99) --
--------- --------- ---------- --------- --------- --------- ---------- ---------
Total current liabilities ........ 2,802 2,412 (115) 5,099 1,676 19,775 (99) 21,352
Deferred income taxes .................... 905 2,146 -- 3,051 1,012 2,248 -- 3,260
Deferred revenues, net of current
portion ................................ -- 3,352 -- 3,352 1,500 2,401 -- 3,901
Other liabilities ........................ -- 370 -- 370 -- -- -- --
--------- --------- ---------- --------- --------- --------- ---------- ---------
Total liabilities ............... 3,707 8,280 (115) 11,872 4,188 24,424 (99) 28,513
--------- --------- ---------- --------- --------- --------- ---------- ---------
Minority interests ....................... 780 -- -- 780 1,127 -- -- 1,127
--------- --------- ---------- --------- --------- --------- ---------- ---------
Redeemable Stockholders' equity:
AR - Acacia Technologies stock ....... 30,439 -- -- 30,439 34,663 -- -- 34,663
AR - CombiMatrix stock ............... -- 50,455 -- 50,455 -- 25,737 -- 25,737
--------- --------- ---------- --------- --------- --------- ---------- ---------
Total stockholders' equity ....... 30,439 50,455 -- 80,894 34,663 25,737 -- 60,400
--------- --------- ---------- --------- --------- --------- ---------- ---------
$ 34,926 $ 58,735 $ (115) $ 93,546 $ 39,978 $ 50,161 $ (99) $ 90,040
========= ========= ========== ========= ========= ========= ========== =========
- ---------------------------
NOTE: Segment information for the Acacia Technologies group includes discontinued operations related to Soundbreak.com. Total assets
related to discontinued operations totaled $1,464,000 and $2,150,000 at September 30, 2004 and December 31, 2003, respectively.
Total liabilities related to discontinued operations totaled $296,000 and $395,000 at September 30, 2004 and December 31, 2003,
respectively.
13
CONSOLIDATING STATEMENTS OF OPERATIONS
(IN THOUSANDS)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2004 SEPTEMBER 30, 2004
------------------------------------------- -------------------------------------------
ACACIA ELIMIN- ACACIA ELIMIN-
TECH- COMBI- ATIONS/ TECH- COMBI- ATIONS/
NOLOGIES MATRIX RECLASS- CONSOL- NOLOGIES MATRIX RECLASS- CONSOL-
GROUP GROUP IFICATIONS IDATED GROUP GROUP IFICATIONS IDATED
--------- --------- ---------- --------- --------- --------- ---------- ---------
Revenues:
Research and development,
government and service
contracts .......................... $ -- $ 701 $ -- $ 701 $ -- $ 19,007 $ -- $ 19,007
License fees .......................... 2,240 -- -- 2,240 3,505 -- -- 3,505
Products .............................. -- 52 -- 52 -- 112 -- 112
--------- --------- ---------- --------- --------- --------- ---------- ---------
Total revenues ................... 2,240 753 -- 2,993 3,505 19,119 -- 22,624
--------- --------- ---------- --------- --------- --------- ---------- ---------
Operating expenses:
Cost of government contract
revenues ........................... -- 647 -- 647 -- 1,505 -- 1,505
Cost of product sales ................ -- 41 -- 41 -- 81 -- 81
Research and development expenses .... -- 1,140 -- 1,140 -- 3,932 -- 3,932
Non-cash stock compensation
amortization - research
and development .................... -- (10) -- (10) -- 91 -- 91
Marketing, general and
administrative expenses ............ 1,323 2,274 1,174 4,771 3,489 6,780 2,352 12,621
Non-cash stock compensation
amortization - marketing,
general and administrative ......... -- 157 -- 157 -- 634 -- 634
Legal expenses - patents ............. 1,174 -- (1,174) -- 2,352 -- (2,352) --
Goodwill impairment charge ........... 1,616 -- -- 1,616 1,616 -- -- 1,616
Amortization of patents .............. 125 274 -- 399 375 822 -- 1,197
Legal settlement charges
(credits) .......................... -- (90) -- (90) -- 776 -- 776
--------- --------- ---------- --------- --------- --------- ---------- ---------
Total operating expenses ......... 4,238 4,433 -- 8,671 7,832 14,621 -- 22,453
--------- --------- ---------- --------- --------- --------- ---------- ---------
Operating income (loss) .......... (1,998) (3,680) -- (5,678) (4,327) 4,498 -- 171
--------- --------- ---------- --------- --------- --------- ---------- ---------
Other income:
Interest income ...................... 120 98 -- 218 340 228 -- 568
--------- --------- ---------- --------- --------- --------- ---------- ---------
Total other income ............... 120 98 -- 218 340 228 -- 568
--------- --------- ---------- --------- --------- --------- ---------- ---------
Income (loss) from continuing
operations before income taxes
and minority interests ................. (1,878) (3,582) -- (5,460) (3,987) 4,726 -- 739
Benefit for income taxes ................. 36 34 -- 70 104 102 -- 206
--------- --------- ---------- --------- --------- --------- ---------- ---------
Income (loss) from continuing
operations before minority
interests .............................. (1,842) (3,548) -- (5,390) (3,883) 4,828 -- 945
Minority interests ....................... -- -- -- -- 3 -- -- 3
--------- --------- ---------- --------- --------- --------- ---------- ---------
Loss from continuing operations .......... (1,842) (3,548) -- (5,390) (3,880) 4,828 -- 948
Discontinued operations:
Estimated loss on disposal of
discontinued operations ............ -- -- -- -- (104) -- -- (104)
--------- --------- ---------- --------- --------- --------- ---------- ---------
Net income (loss) ........................ $ (1,842) $ (3,548) $ -- $ (5,390) $ (3,984) $ 4,828 $ -- $ 844
========= ========= ========== ========= ========= ========= ========== =========
14
CONSOLIDATING STATEMENTS OF OPERATIONS (CONTINUED)
(IN THOUSANDS)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, 2003 SEPTEMBER 30, 2003
------------------------------------------- -------------------------------------------
ACACIA ELIMIN- ACACIA ELIMIN-
TECH- COMBI- ATIONS/ TECH- COMBI- ATIONS/
NOLOGIES MATRIX RECLASS- CONSOL- NOLOGIES MATRIX RECLASS- CONSOL-
GROUP GROUP IFICATIONS IDATED GROUP GROUP IFICATIONS IDATED
--------- --------- ---------- --------- --------- --------- ---------- ---------
Revenues:
Research and development,
government and service
contracts .......................... $ -- $ 10 $ -- $ 10 $ -- $ 23 $ -- $ 23
License fees ......................... 186 -- -- 186 211 -- -- 211
Products ............................. -- 171 -- 171 -- 380 -- 380
--------- --------- ---------- --------- --------- --------- ---------- ---------
Total revenues ................... 186 181 -- 367 211 403 -- 614
--------- --------- ---------- --------- --------- --------- ---------- ---------
Operating expenses:
Cost of product sales ................ -- 17 -- 17 -- 94 -- 94
Research and development expenses .... -- 1,726 -- 1,726 -- 6,219 -- 6,219
Non-cash stock compensation
amortization - research
and development .................... -- 243 -- 243 -- 525 -- 525
Marketing, general and
administrative expenses ............ 955 2,122 -- 3,077 3,157 6,890 -- 10,047
Non-cash stock compensation
amortization - marketing,
general and administrative ......... -- 421 -- 421 -- 1,055 -- 1,055
Legal expenses - patents ............. 598 -- -- 598 1,435 -- -- 1,435
Amortization of patents .............. 125 274 -- 399 377 821 -- 1,198
--------- --------- ---------- --------- --------- --------- ---------- ---------
Total operating expenses ......... 1,678 4,803 -- 6,481 4,969 15,604 -- 20,573
--------- --------- ---------- --------- --------- --------- ---------- ---------
Operating income (loss) .......... (1,492) (4,622) -- (6,114) (4,758) (15,201) -- (19,959)
--------- --------- ---------- --------- --------- --------- ---------- ---------
Other income:
Impairment charges ................... -- -- -- -- (207) -- -- (207)
Interest income ...................... 128 52 -- 180 408 164 -- 572
Realized gains on short-term
investments ........................ 32 -- -- 32 94 -- -- 94
Other income ......................... -- -- -- -- 1 -- -- 1
--------- --------- ---------- --------- --------- --------- ---------- ---------
Total other (expenses) income .... 160 52 -- 212 296 164 -- 460
--------- --------- ---------- --------- --------- --------- ---------- ---------
Income (loss) from continuing
operations before income taxes and
minority interests ..................... (1,332) (4,570) -- (5,902) (4,462) (15,037) -- (19,499)
Benefit for income taxes ................. 36 34 -- 70 94 102 -- 196
--------- --------- ---------- --------- --------- --------- ---------- ---------
Income (loss) from continuing
operations before minority interests ... (1,296) (4,536) -- (5,832) (4,368) (14,935) -- (19,303)
Minority interests ....................... -- -- -- -- -- 30 -- 30
--------- --------- ---------- --------- --------- --------- ---------- ---------
Net income (loss) ........................ $ (1,296) $ (4,536) $ -- $ (5,832) $ (4,368) $(14,905) $ -- $(19,273)
========= ========= ========== ========= ========= ========= ========== =========
15
CONSOLIDATING STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2004 FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2003
---------------------------------------------- ----------------------------------------------
ACACIA ACACIA
TECH- COMBI- TECH- COMBI-
NOLOGIES MATRIX ELIMIN- CONSOL- NOLOGIES MATRIX ELIMIN- CONSOL-
GROUP GROUP ATIONS IDATED GROUP GROUP ATIONS IDATED
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Cash flows from operating
activities:
Net income (loss) from
continuing operations .......... $ (3,880) $ 4,828 $ -- $ 948 $ (4,368) $ (14,905) $ -- $ (19,273)
Adjustments to reconcile net
income (loss) from continuing
operations to net cash used
in operating activities:
Depreciation and amortization .... 413 1,667 -- 2,080 471 1,822 -- 2,293
Minority interests ............... -- -- -- -- -- (30) -- (30)
Non-cash stock compensation
amortization ................... -- 725 -- 725 -- 1,580 -- 1,580
Deferred tax benefit ............. (107) (102) -- (209) (108) (102) -- (210)
Non-cash legal settlement
charges ........................ -- 776 -- 776 -- -- -- --
Non-cash impairment charges ...... 1,616 -- -- 1,616 207 -- -- 207
Other ............................ 22 (75) -- (53) (6) 75 -- 69
Changes in assets and liabilities:
Accounts receivable .............. (51) (127) -- (178) (115) 249 -- 134
Prepaid expenses, inventory,
other receivables and other
assets ......................... 573 (5) 16 584 (98) (75) 45 (128)
Accounts payable, accrued
expenses and other ............. 733 213 (16) 930 (126) (492) (45) (663)
Deferred revenues ................ (1,011) (16,554) -- (17,565) 57 10,050 -- 10,107
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net cash used in operating
activities from continuing
operations ..................... (1,692) (8,654) -- (10,346) (4,086) (1,828) -- (5,914)
Net cash used in operating
activities from discontinued
operations ..................... (636) -- -- (636) (350) -- -- (350)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net cash used in operating
activities ..................... (2,328) (8,654) -- (10,982) (4,436) (1,828) -- (6,264)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Cash flows from investing
activities:
Purchase of property and
equipment, net ................ (67) (654) -- (721) (4) (73) -- (77)
Purchase of available-for-sale
investments ................... (948) (44,001) -- (44,949) (5,100) (21,461) -- (26,561)
Sale of available-for-sale
investments ................... 5,004 33,717 -- 38,721 -- 18,887 -- 18,887
Other ........................... (5) -- -- (5) -- -- -- --
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
investing activities from
continuing operations ......... 3,984 (10,938) -- (6,954) (5,104) (2,647) -- (7,751)
Net cash used in investing
activities from discontinued
operations .................... (198) -- -- (198) (356) -- -- (356)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
investing activities .......... 3,786 (10,938) -- (7,152) (5,460) (2,647) -- (8,107)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Cash flows from financing
activities:
Net cash attributed to the
Acacia Technologies group ..... (234) -- -- (234) (471) -- -- (471)
Net cash attributed to the
CombiMatrix group ............. -- 18,746 -- 18,746 -- 6,074 -- 6,074
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Net cash provided by (used in)
financing activities .......... (234) 18,746 -- 18,512 (471) 6,074 -- 5,603
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Effect of exchange rate on cash ... -- (5) -- (5) -- (13) -- (13)
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Increase (decrease) in cash and
cash equivalents ................ 1,224 (851) -- 373 (10,367) 1,586 -- (8,781)
Cash and cash equivalents,
beginning ....................... 28,142 3,807 -- 31,949 39,792 3,291 -- 43,083
---------- ---------- ---------- ---------- ---------- ---------- ---------- ----------
Cash and cash equivalents,
ending .......................... $ 29,366 $ 2,956 $ -- $ 32,322 $ 29,425 $ 4,877 $ -- $ 34,302
========== ========== ========== ========== ========== ========== ========== ==========
16
COMBIMATRIX GROUP
(A Division of Acacia Research Corporation)
BALANCE SHEETS
(In thousands)
(UNAUDITED)
SEPTEMBER 30, DECEMBER 31,
2004 2003
---------------- ----------------
ASSETS
Current assets:
Cash and cash equivalents .................................................. $ 2,956 $ 3,807
Available-for-sale investments ............................................. 23,723 13,492
Accounts receivable, net of allowance for doubtful accounts of
$0 (2004) and $145 (2003) ................................................ 321 199
Inventory, prepaid expenses and other assets ............................... 372 277
---------------- ----------------
Total current assets ................................................... 27,372 17,775
Property and equipment, net of accumulated depreciation and amortization ....... 2,553 2,752
Patents, net of accumulated amortization of $2,799 (2004) and $1,978 (2003) .... 9,296 10,117
Goodwill ....................................................................... 19,424 19,424
Other assets ................................................................... 90 93
---------------- ----------------
$ 58,735 $ 50,161
================ ================
LIABILITIES AND ALLOCATED NET WORTH
Current liabilities:
Accounts payable, accrued expenses and other ............................... $ 1,798 $ 1,672
Current portion of deferred revenues ....................................... 499 18,004
Payable to Acacia Technologies Group ....................................... 115 99
---------------- ----------------
Total current liabilities .............................................. 2,412 19,775
Deferred income taxes .......................................................... 2,146 2,248
Deferred revenues, net of current portion ...................................... 3,352 2,401
Other liabilities .............................................................. 370 --
---------------- ----------------
Total liabilities ...................................................... 8,280 24,424
---------------- ----------------
Commitments and contingencies (Note 8)
Allocated net worth:
Funds allocated by Acacia Research Corporation ............................. 158,565 138,675
Accumulated net losses ..................................................... (108,110) (112,938)
---------------- ----------------
Total allocated net worth .............................................. 50,455 25,737
---------------- ----------------
$ 58,735 $ 50,161
================ ================
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
17
COMBIMATRIX GROUP
(A Division of Acacia Research Corporation)
STATEMENTS OF OPERATIONS
(In thousands)
(UNAUDITED)
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
-------------------------------- -------------------------------
SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30, SEPTEMBER 30,
2004 2003 2004 2003
-------------- -------------- -------------- --------------
Revenues:
Research and development contract ........................ $ -- $ -- $ 17,302 $ --
Government contract ...................................... 685 -- 1,603 --
Service contracts ........................................ 16 10 102 23
Products ................................................. 52 171 112 380
-------------- -------------- -------------- --------------
Total revenues ....................................... 753 181 19,119 403
-------------- -------------- -------------- --------------
Operating expenses:
Cost of government contract revenues ..................... 647 -- 1,505 --
Cost of product sales .................................... 41 17 81 94
Research and development expenses ........................ 1,140 1,726 3,932 6,219
Non-cash stock compensation amortization - research
and development ........................................ (10) 243 91 525
Marketing, general and administrative expenses ........... 2,274 2,122 6,780 6,890
Non-cash stock compensation amortization - marketing,
general and administrative ............................. 157 421 634 1,055
Amortization of patents .................................. 274 274 822 821
Legal settlement charges (credits) ....................... (90) -- 776 --
-------------- -------------- -------------- --------------
Total operating expenses ............................. 4,433 4,803 14,621 15,604
-------------- -------------- -------------- --------------
Operating income (loss) .............................. (3,680) (4,622) 4,498 (15,201)
-------------- -------------- -------------- --------------
Other income:
Interest income .......................................... 98 52 228 164
-------------- -------------- -------------- --------------
Total other income ................................... 98 52 228 164
-------------- -------------- -------------- --------------
Income (loss) from operations before income taxes
and minority interests ..................................... (3,582) (4,570) 4,726 (15,037)
Benefit for income taxes ..................................... 34 34 102 102
-------------- -------------- -------------- --------------
Income (loss) from operations before minority interests ...... (3,548) (4,536) 4,828 (14,935)
Minority interests ........................................... -- -- -- 30
-------------- -------------- -------------- --------------
Division net income (loss) ................................... $ (3,548) $ (4,536) $ 4,828 $ (14,905)
============== ============== ============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
18
COMBIMATRIX GROUP
(A Division of Acacia Research Corporation)
STATEMENTS OF CASH FLOWS
(In thousands)
(UNAUDITED)
FOR THE NINE MONTHS ENDED
---------------------------------
SEPTEMBER 30, SEPTEMBER 30,
2004 2003
-------------- --------------
Cash flows from operating activities:
Division net income (loss) from operations ............................. $ 4,828 $ (14,905)
Adjustments to reconcile division net income (loss) from operations
to net cash used in operating activities:
Depreciation and amortization ...................................... 1,667 1,822
Minority interests ................................................. -- (30)
Non-cash stock compensation amortization ........................... 725 1,580
Deferred tax benefit ............................................... (102) (102)
Non-cash legal settlement charges .................................. 776 --
Other .............................................................. (75) 75
Changes in assets and liabilities:
Accounts receivable ................................................ (127) 249
Inventory, prepaid expenses and other assets ....................... (5) (75)
Accounts payable, accrued expenses and other ....................... 213 (492)
Deferred revenues .................................................. (16,554) 10,050
-------------- --------------
Net cash used in operating activities .............................. (8,654) (1,828)
-------------- --------------
Cash flows from investing activities:
Purchase of property and equipment, net ............................ (654) (73)
Purchase of available-for-sale investments ......................... (44,001) (21,461)
Sale of available-for-sale investments ............................. 33,717 18,887
-------------- --------------
Net cash used in investing activities .............................. (10,938) (2,647)
-------------- --------------
Cash flows from financing activities:
Net cash flows attributed to the CombiMatrix Group ................. 18,746 6,074
-------------- --------------
Effect of exchange rate on cash ........................................ (5) (13)
-------------- --------------
(Decrease) increase in cash and cash equivalents ....................... (851) 1,586
Cash and cash equivalents, beginning ................................... 3,807 3,291
-------------- --------------
Cash and cash equivalents, ending ...................................... $ 2,956 $ 4,877
============== ==============
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THESE FINANCIAL STATEMENTS.
19
COMBIMATRIX GROUP
(A DIVISION OF ACACIA RESEARCH CORPORATION)
NOTES TO FINANCIAL STATEMENTS (UNAUDITED)
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF BUSINESS. Acacia Research Corporation is comprised of
two separate divisions: the CombiMatrix group and the Acacia Technologies group.
Our life sciences business, referred to as the "CombiMatrix group," is
primarily comprised of our wholly owned subsidiary, CombiMatrix Corporation and
CombiMatrix Corporation's wholly owned subsidiary, CombiMatrix K.K. 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, also referred to as an array. This proprietary technology
has applications in the areas of genomics, proteomics, biosensors, drug
discovery, drug development, diagnostics, combinatorial chemistry, material
sciences and nanotechnology. CombiMatrix K.K., a Japanese corporation located in
Tokyo, is exploring opportunities for CombiMatrix Corporation's active array
system with pharmaceutical and biotechnology companies in the Asian market.
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.
BASIS OF PRESENTATION. The unaudited interim CombiMatrix group
financial statements as of September 30, 2004, and for the interim periods
presented, 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, 2003. The year-end 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 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 September 30, 2004, and the
results of its operations and its cash flows for the interim periods presented.
The results of operations for the three and nine months ended September 30, 2004
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 CombiMatrix group, a 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 sub