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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q/A
(Amendment No. 1)
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES ACT OF 1934
For the Quarter Ended June 30, 2000
Commission File No. 0-26068
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ACACIA RESEARCH CORPORATION
(Exact name of registrant as specified in its charter)
<TABLE>
<S> <C>
Delaware 95-4405754
(State or other jurisdiction (I.R.S. Employer
of incorporation organization) Identification No.)
</TABLE>
55 South Lake Avenue, Pasadena CA 91101
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (626) 396-8300
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Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. YES [X] NO [_]
At August 9, 2000 the registrant had 15,987,887 shares of Common Stock,
$0.001 par value, issued and outstanding.
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ACACIA RESEARCH CORPORATION
Table Of Contents
<TABLE>
<S> <C> <C> <C>
Part I. Financial Information
Item 1. Consolidated Financial Statements
Consolidated Balance Sheets............................................................ 3
Consolidated Statement of Operations................................................... 4
Consolidated Statements of Cash Flows.................................................. 5
Notes to Consolidated Financial Statements............................................. 6
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.. 11
Signature......................................................................................... 18
</TABLE>
Introductory Note
The Registrant amends its Form 10-Q for the period ended June 30, 2000 to
(i) revise disclosure in Note 2 to the Consolidated Financial Statements and
(ii) revise disclosure with respect to results of operations in Item 2.
2
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ACACIA RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share information)
<TABLE>
<CAPTION>
June 30, December 31,
2000 1999
----------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
------
Current assets
Cash and cash equivalents........................... $ 54,674 $ 37,631
Accounts receivable................................. 40 --
Management fees and other receivables............... 22 60
Receivables from affiliates......................... 20 318
Deposit on investment............................... -- 3,000
Prepaid expenses.................................... 1,012 208
Other assets........................................ 18 --
-------- --------
Total current assets.............................. 55,786 41,217
Property and equipment, net........................... 2,060 1,154
Investment in affiliates, at equity................... 3,845 4,636
Investment in affiliates, at cost..................... 3,000 --
Patents, net of accumulated amortization.............. 3,074 3,534
Goodwill, net of accumulated amortization............. 1,689 1,012
Other assets.......................................... 449 238
-------- --------
$ 69,903 $ 51,791
======== ========
<CAPTION>
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
<S> <C> <C>
Current liabilities
Accounts payable and accrued expenses............... $ 1,168 $ 1,293
-------- --------
Total current liabilities......................... 1,168 1,293
Other liabilities..................................... 340 340
-------- --------
Total liabilities................................. 1,508 1,633
-------- --------
Minority interests.................................... 16,143 4,896
-------- --------
Stockholders' equity
Common stock, par value $.001 per share; 60,000,000
shares authorized; 14,614,481 and 13,607,193 shares
issued and outstanding as of June 30, 2000 and
December 31, 1999, respectively.................... 15 14
Additional paid-in capital.......................... 79,129 62,283
Warrants to purchase common stock................... -- 58
Accumulated deficit................................. (26,892) (17,093)
-------- --------
Total stockholders' equity........................ 52,252 45,262
-------- --------
$ 69,903 $ 51,791
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
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ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands, except share and per share information)
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
---------------------- ----------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Grant income................ $ 17 $ -- $ -- $ --
Advertising................. 22 -- 22 --
Capital management fee
income..................... -- 91 -- 30
---------- ---------- ---------- ----------
Total revenues............ 39 91 22 30
========== ========== ========== ==========
Operating expenses:
Research and development
expenses................... 1,630 1,039 896 570
Marketing, general, and
administrative expenses.... 14,308 1,775 9,722 945
Amortization of patents and
goodwill................... 863 789 446 399
---------- ---------- ---------- ----------
Total operating expenses.. 16,801 3,603 11,064 1,914
---------- ---------- ---------- ----------
Operating loss.............. (16,762) (3,512) (11,042) (1,884)
---------- ---------- ---------- ----------
Other income (expense):
Interest income............. 1,209 145 782 73
Interest expense............ (1) (83) -- (42)
Equity in income of
partnerships............... -- 50 -- 7
Equity in losses of
affiliates................. (824) (620) (538) (187)
Other income................ 24 -- 4 --
---------- ---------- ---------- ----------
Total other income
(expense)................ 408 (508) 248 (149)
---------- ---------- ---------- ----------
Loss before income taxes and
minority interests........... (16,354) (4,020) (10,794) (2,033)
Provision for income taxes.... (9) (20) (2) (3)
---------- ---------- ---------- ----------
Loss before minority
interests.................... (16,363) (4,040) (10,796) (2,036)
Minority interests............ 6,564 -- 4,559 --
---------- ---------- ---------- ----------
Net loss...................... $ (9,799) $ (4,040) $ (6,237) $ (2,036)
========== ========== ========== ==========
Loss per common share
Basic....................... $ (0.67) $ (0.39) $ (0.43) $ (0.20)
Diluted..................... $ (0.67) $ (0.39) $ (0.43) $ (0.20)
Weighted average number of
common and potential common
shares outstanding used in
computation of loss per share
Basic and Diluted........... 14,521,311 10,278,458 14,515,149 10,346,238
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
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ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Six Months Ended
---------------------------
June 30, 2000 June 30, 1999
------------- -------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................... $ (9,799) $(4,040)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 1,138 889
Amortization of discount on notes payable........ -- 40
Equity in loss of affiliates and partnerships.... 824 570
Minority interest in net loss.................... (6,564) --
Compensation expense relating to stock
options/warrants................................ 520 50
Other............................................ -- 9
Changes in assets and liabilities, net of effects
of acquisitions:
Management fees and other receivables, prepaid
expenses, and other assets...................... (737) 227
Accounts payable, accrued expenses and other
liabilities..................................... (125) (52)
-------- -------
Net cash used in operating activities............ (14,743) (2,307)
-------- -------
Cash flows from investing activities:
Advances to affiliates........................... -- (3)
Payments received on advances to affiliates...... -- 2
Capital contribution to equity investments....... (33) (25)
Purchase of additional equity in consolidated
subsidiary...................................... -- (31)
Withdrawls from partnerships..................... -- 500
Purchase of partnership interest................. -- (49)
Purchase of property and equipment............... (1,300) (101)
-------- -------
Net cash (used in) provided by investing
activities...................................... (1,333) 293
-------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options and
warrants........................................ 16,283 193
Capital contributions from minority shareholders
of subsidiaries................................. 16,836 33
-------- -------
Net cash provided by financing activities........ 33,119 226
-------- -------
Increase in cash and cash equivalents.............. 17,043 (1,788)
Cash and cash equivalents, beginning............... 37,631 7,508
-------- -------
Cash and cash equivalents, ending.................. $ 54,674 $ 5,720
======== =======
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
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ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS
Acacia Research Corporation (the "Company") was incorporated on January 25,
1993 under the laws of the State of California. On December 28, 1999, the
Company changed its state of incorporation from California to Delaware. The
Company is currently engaged in developing new technology-related businesses.
The Company's current new business focus is to identify and develop
opportunities in the life science sector that will be created by
commercializing of the new biochip technology of the Company's subsidiary,
CombiMatrix Corporation, and other new technologies investing in that sector.
By providing seed capital, critical management and technical advice, and
on-going operational support, we provide an infrastructure that allows early-
stage companies to focus on their core strengths: creating new products and
services. This support, in turn, allows developing businesses the opportunity
to reduce their time to market. We also obtain ownership positions, through
strategic investments, in businesses that fit well with our existing operating
companies.
At June 30, 2000, the Company had significant economic interests in a
number of companies and takes an active role in each company's growth and
advancement. These companies are: CombiMatrix Corporation ("CombiMatrix"),
Acacia Launchpad LLC ("Launchpad"), Soundbreak.com Incorporated
("Soundbreak.com"), Soundview Technologies Incorporated ("Soundview
Technologies"), MerkWerks Corporation ("MerkWerks"), Signature-mail.com llc
("Signature-mail.com"), Mediaconnex Communications, Inc. ("Mediaconnex"), and
Greenwich Information Technologies LLC ("Greenwich Information Technologies").
In January 2000, the Company acquired a 7.6% interest in The EC Company for
$3 million in a $17.3 million "non-voting" Series B Preferred Stock private
placement. The EC Company is a leader in business-to-business Internet
exchange transactions for mid-market suppliers.
In February 2000, the Company issued a redemption notice for common stock
purchase warrants issued in its December 1999 private placement. Holders of
these warrants had 30 days to exercise the warrants at a price of $26.00 per
share. As a result, all of these warrants were exercised prior to the
redemption date with the Company receiving proceeds of approximately $14.8
million for the issuance of 578,238 shares of common stock.
In March 2000, CombiMatrix completed a private equity financing raising
gross proceeds of $17.5 million through the sale of 3.5 million shares of
CombiMatrix common stock. The Company invested $10 million in this private
placement and acquired 2 million shares. As a result of the transaction, the
Company increased its equity ownership in CombiMatrix from 50.0% to 51.8%.
CombiMatrix issued warrants in conjunction with the private placement for
finders fees. A total of 31,050 warrants to purchase CombiMatrix's common
stock at a per share exercise price of $5.50 were issued.
Also in March 2000, Soundbreak.com completed a Series C "non-voting"
Convertible Preferred private equity financing raising gross proceeds of
approximately $19 million through the sale of 188,437 Series C Preferred
shares. The Company invested $9 million in this private placement and acquired
90,000 Preferred shares. As a result of the transaction, the Company's equity
ownership in Soundbreak.com decreased from 73.6% to 66.9%, on an as converted
basis. Each share of the Series C Preferred Stock is convertible into 15
shares of Soundbreak.com's common stock. Soundbreak.com issued warrants in
conjunction with the private placement for finders fees. A total of 40,838
warrants to purchase Soundbreak.com's common stock at a per share exercise
price of $6.66 were issued.
The Acacia Research Corporation 1996 Stock Option Plan (the "1996 Plan")
provides for the grant of Nonqualified Stock Options and Incentive Stock
Options to key employees, including officers of the Company
6
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ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
and its subsidiaries and certain other individuals. In May 2000, the Company
increased the authorized number of shares of common stock subject to the
amended 1996 Plan by 1,000,000 shares to a total of 4,000,000 shares.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION--The accompanying unaudited consolidated financial
statements contain all adjustments which consist only of normal recurring
adjustments necessary to present fairly the consolidated financial position of
the Company and its subsidiaries at June 30, 2000 and the consolidated results
of operations and cash flows for the three and six months ended June 30, 2000
and 1999. This interim financial information and notes thereto should be read
in conjunction with the Company's Annual Report on Form 10-K for the year
ended December 31, 1999. The Company's consolidated results of operations and
cash flows for interim periods are not necessarily indicative of the results
to be expected for any other interim period or the full year.
RECLASSIFICATIONS--Certain reclassifications of prior year's amounts have
been made to conform to the 2000 presentation.
LOSS PER SHARE--Losses per share is presented on both a basic and diluted
basis. A reconciliation of the denominator of the basic EPS computation to the
denominator of the diluted EPS computation is as follows:
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
--------------------- ---------------------
June 30, June 30, June 30, June 30,
2000 1999 2000 1999
---------- ---------- ---------- ----------
<S> <C> <C> <C> <C>
Weighted Average Number of Common
Shares Outstanding Computation of
Basic EPS 14,512,311 10,278,458 14,515,149 10,346,238
Dilutive Effect of Outstanding
Stock Options and Warrants (a) -- -- -- --
Weighted Average Number of Common
and Potential Common Shares
Outstanding Used in Computation
of Diluted EPS 14,512,311 10,278,458 14,515,149 10,346,238
</TABLE>
--------
(a) Potential common shares of 1,258,676 and 612,442 for the six months ended
June 30, 2000 and June 30, 1999, respectively, and 963,770 and 810,198 for
the three months ended June 30, 2000 and June 30, 1999, respectively, have
been excluded for the per share calculation because the effect of their
inclusion would be anti-dilutive.
3. SEGMENT INFORMATION
The Company has three reportable segments: Corporate Portfolio, CombiMatrix
and Soundbreak.com.
The Corporate Portfolio segment makes direct investments in emerging
companies with intellectual property rights, most of which are involved in
developing new or unproven technologies.
CombiMatrix is a biotech company with a proprietary biochip array processor
system for the rapid, cost competitive synthesis of DNA, peptides and other
chemical compounds on a software programmable semiconductor chip. This
proprietary technology has significant applications in the areas of genomics,
proteomics and diagnostics.
Soundbreak.com is a new media company featuring 24-hour audio and video
streaming of music performances and live performances hosted by professional
talent targeting a demographic of viewers under age 35 and including extensive
viewer interaction formats.
The Company evaluates segment performances based on earnings potential and
cost of future completed products or services. Material intercompany
transactions and transfers have been eliminated in consolidation. The
accounting policies of the segments are the same as those used in the
preparation of the Company's consolidated financial statements.
7
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ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The table below presents information about the Company's reportable segments
for the six months ended June 30, 2000 and 1999 (in thousands).
<TABLE>
<CAPTION>
Corporate
Six months ended June 30, Portfolio CombiMatrix Soundbreak.com Other Total
2000 --------- ----------- -------------- ------ -------
<S> <C> <C> <C> <C> <C>
Revenue................... $ -- $ 17 $ -- $ 22 $ 39
Amortization of patents
and goodwill............. 856 -- -- 7 863
Other income.............. 24 -- -- -- 24
Interest income........... 638 236 288 47 1,209
Interest expense.......... 1 -- -- -- 1
Equity in losses of
affiliates............... 824 -- -- -- 824
Loss before minority
interests and income
taxes.................... 4,665 2,185 9,113 391 16,354
Segment assets............ 34,876 17,427 15,638 1,962 69,903
Investments in affiliates,
at equity................ 3,845 -- -- -- 3,845
Investments in affiliates,
at cost.................. 3,000 -- -- -- 3,000
Capital Expenditures...... 358 108 831 3 1,300
</TABLE>
<TABLE>
<CAPTION>
Corporate
Portfolio CombiMatrix Other Total
Six months ended June 30, 1999 --------- ----------- ----- -------
<S> <C> <C> <C> <C>
Management fee income..................... $ 91 $ -- $ -- $ 91
Amortization of patents and goodwill...... 782 -- 7 789
Interest income........................... 135 10 -- 145
Interest expense.......................... -- 83 -- 83
Equity in losses of affiliates............ 620 -- -- 620
Equity in income of partnerships.......... 50 -- -- 50
Loss before minority interests and Income
taxes.................................... 2,789 1,079 152 4,020
Segment assets............................ 15,577 460 242 16,279
Investments in affiliates, at equity...... 2,885 -- -- 2,885
Partnerships interests, at equity......... 1,432 -- -- 1,432
Capital expenditures...................... 77 24 -- 101
</TABLE>
8
<PAGE>
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The table below presents information about the Company's reportable segments
for the three months ended June 30, 2000 and 1999 (in thousands).
<TABLE>
<CAPTION>
Corporate
Three Months Ended June Portfolio CombiMatrix Soundbreak.com Other Total
30, 2000 --------- ----------- -------------- ------ -------
<S> <C> <C> <C> <C> <C>
Revenue................... $ -- $ -- $ -- $ 22 $ 22
Amortization of patents
and goodwill............. 442 -- -- 4 446
Other income.............. 4 -- -- -- 4
Interest income........... 312 219 227 24 782
Interest expense.......... -- -- -- -- --
Equity in losses of
affiliates............... 538 -- -- -- 538
Loss before minority
interests and income
taxes.................... 2,579 1,300 6,687 228 10,794
Segment assets............ 34,738 17,427 15,638 2,100 69,903
Investments in affiliates,
at equity................ 3,845 -- -- -- 3,845
Investments in affiliates,
at cost.................. 3,000 -- -- -- 3,000
Purchase of property and
equipment................ 264 108 357 3 732
</TABLE>
<TABLE>
<CAPTION>
Corporate
Portfolio CombiMatrix Other Total
Three Months Ended June 30, 1999 --------- ----------- ----- -------
<S> <C> <C> <C> <C>
Management fee income..................... $ 30 $ -- $ -- $ 30
Amortization of patents and goodwill...... 395 -- 4 399
Other income.............................. -- -- -- --
Interest income........................... 72 1 -- 73
Interest expense.......................... -- 42 -- 42
Equity in losses of affiliates............ 187 -- -- 187
Equity in income of partnerships.......... 6 -- -- 6
Loss before minority interests and income
taxes.................................... 1,417 597 66 2,080
Segment assets............................ 15,577 460 242 16,279
Investments in affiliates, at equity...... 2,885 -- -- 2,885
Investments in affiliates, at cost........ 1,432 -- -- 1,432
Purchase of property and equipment........ 7 2 -- 9
</TABLE>
9
<PAGE>
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
4. SUBSEQUENT EVENTS
In July 2000, the Company increased its ownership of privately held
CombiMatrix Corporation from 51.8% to 61.4%. The Company acquired the
additional ownership position from existing shareholders of CombiMatrix in
exchange for approximately 489,000 restricted shares of the Company's common
stock, valued at approximately $9.4 million. This purchase will be accounted
for as a step acquisition. The purchase price will be allocated to the fair
value of assets acquired and liabilities assumed, including acquired in-
process research and development. Any amount attributable to in-process
research and development will be charged to expense in the third quarter of
2000. The allocation of the purchase price is expected to be completed in the
third quarter of 2000.
In July 2000, the Company completed an institutional private equity
financing raising gross proceeds of $23.7 million through the sale of 861,638
units, each unit consisting of one share of the Company's common stock and one
three-year callable common stock purchase warrant. Each common stock purchase
warrant entitles the holder to purchase one share of the Company's common
stock at a price of $33.00 per share and is callable by the Company once the
closing bid price of the Company's common stock averages $39.60 or above for
20 consecutive trading days on the Nasdaq National Market System. The Company
issued an additional 11,000 units in lieu of cash payments in conjunction with
the private placement for finders fees.
In August 2000, CombiMatrix completed a private equity financing raising
gross proceeds of $36 million through the sale of 4 million shares of
CombiMatrix common stock. The Company invested $17.5 million in this private
placement and acquired 1,944,445 shares. As a result of the transaction, the
Company decreased its equity ownership in CombiMatrix from 61.2 % to 58.4%.
10
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Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Forward-Looking Statements
This report contains forward-looking statements within the meaning of the
"safe harbor" provisions of the Private Securities Litigation Reform Act of
1995. Reference is made in particular to the description of our plans and
objectives for future operations, assumptions underlying such plans and
objectives, and other forward-looking statements included in this report. Such
statements may be identified by the use of forward-looking terminology such as
"may," "will," "expect," "believe," "estimate," "anticipate," "intend,"
"continue," or similar terms, variations of such terms or the negative of such
terms. Such statements are based on management's current expectations and are
subject to a number of factors and uncertainties, which could cause actual
results to differ materially from those described in the forward-looking
statements. Such statements address future events and conditions concerning
capital expenditures, earnings, litigation, regulatory matters, markets for
products and services, liquidity and capital resources, and accounting
matters. Actual results in each case could differ materially from those
anticipated in such statements by reason of factors such as future economic
conditions, changes in consumer demand, legislative, regulatory and
competitive developments in markets in which the Company and its affiliates
operate, and other circumstances affecting anticipated revenues and costs. The
Company expressly disclaim any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statements contained in this
report to reflect any change in our expectations with regard thereto or any
change in events, conditions or circumstances on which any such statement is
based. Additional factors that could cause such results to differ materially
from those described in the forward-looking statements are set forth in
connection with the forward-looking statement and the Company's Annual Report
on Form 10-K filed with the Securities and Exchange Commission.
General
The following discussion is based primarily on our consolidated balance
sheet as of June 30, 2000, and on our operations for the period from January
1, 2000 to June 30, 2000. The discussion compares the activities for the six
and three months ended June 30, 2000 to the activities for the six and three
months ended June 30, 1999. This information should be read in conjunction
with the accompanying consolidated financial statements and notes thereto.
Results of Operations
<TABLE>
<CAPTION>
Six Months Ended Three Months Ended
June 30, June 30,
------------------------- -------------------------
2000 1999 2000 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues................ $ 39,000 $ 91,000 $ 22,000 $ 30,000
Operating expenses...... (16,801,000) (3,603,000) (11,064,000) (1,914,000)
Other income (expense),
net.................... 408,000 (508,000) 248,000 (149,000)
Minority interests...... 6,564,000 -- 4,559,000 --
(Provision) benefit for
income taxes........... (9,000) (20,000) (2,000) (3,000)
------------ ----------- ------------ -----------
Net loss................ $ (9,799,000) $(4,040,000) $ (6,237,000) $(2,036,000)
============ =========== ============ ===========
</TABLE>
Form 10-Q--Period ended June 30, 2000
For the Six Months Ended June 30, 2000 and June 30, 1999
Revenues
Grant Income. During the six months ended June 30, 2000, grant income was
$17,000 as compared to no grant income during the six months ended June 30,
1999. The grant income resulted from CombiMatrix's award of three contracts
from the federal government with respect to its biochip technology.
CombiMatrix was awarded
11
<PAGE>
two grants in July 1999 for Phase I SBIR from the Department of Energy and the
Department of Defense. CombiMatrix was further awarded a Phase II SBIR
Department of Defense contract for the use of its biochip technology to
develop nanode array sensor microchips in January 2000.
Advertising. During the six months ended June 30, 2000, advertising income
was $22,000 as compared to no advertising income during the six months ended
June 30, 2000. Revenues attributable to advertising were earned by a newly
acquired company.
Capital Management Fees. During the six months ended June 30, 2000, capital
management fee income, which includes performance fee income, was $0 as
compared to $91,000 in capital management fee income generated during the six
months ended June 30, 2000. No capital management fee income was earned in the
six months ended June 30, 2000, because we closed the Acacia Capital
Management division on December 31, 1999. Costs associated with exiting this
business were not material.
Operating Expenses
Total operating expenses increased to $16,801,000 during the six months
ended June 30, 2000 from $3,603,000 during the six months ended June 30, 1999
primarily due to expenses relating to the operating activities of
Soundbreak.com, an increase in our compensation costs and rent for larger
office facilities, plus an expansion of CombiMatrix's research and development
efforts.
Research and Development Expenses. We incurred research and development
expenses of $1,630,000 for the six months ended June 30, 2000, compared to
expenses of $1,039,000 during the six months ended June 30, 1999. Such
expenses for the six months ended June 30, 2000 are comprised of expenses
primarily incurred by CombiMatrix, which increased to $1,579,000 from $946,000
in the prior period, due to an increase in the number of CombiMatrix personnel
and laboratory facilities as it expanded its research and development efforts.
Marketing, General and Administrative Expenses. We incurred marketing,
general and administrative expenses of $14,308,000 for the six months ended
June 30, 2000, compared to expenses of $1,775,000 during the six months ended
June 30, 1999. During the six months ended June 30, 2000, these expenses
increased due to general expansion of the Company, including an increase in
business development expenses as we explore new business opportunities, an
increase in office expenses relating to our move to larger office facilities,
and an increase in salaries and fringe benefits primarily due to an increase
in the number of our personnel as well as higher wages and payroll expenses.
Soundbreak.com's marketing, general and administrative expenses were
$9,400,000 for the six months ended June 30, 2000. No expenses were
attributable to Soundbreak.com during 1999, as Soundbreak.com did not begin
operations until subsequent to the second quarter of 1999. Of this amount,
approximately $4,900,000 million is attributable to marketing expenses, which
were spent in connection with Soundbreak.com's initial advertising campaign.
We anticipate continued dedication of substantial resources to enhance
Soundbreak.com's website and these costs for Soundbreak.com may substantially
increase in future periods.
CombiMatrix is increasing its employee base and has made extensive use of
consultants to assist in solving specialized issues or providing particular
services. Product development and commercialization relating to CombiMatrix's
technology will require additional personnel in areas such as regulatory
affairs, marketing and general operations. We anticipate that CombiMatrix will
continue to hire additional managerial and clerical employees in future
periods. In addition, during June 2000, CombiMatrix began its relocation
efforts from the San Francisco bay area to the Seattle, Washington area.
Relocation expenses, in the aggregate, will be approximately $500,000. The
relocation efforts will be completed during the third quarter of 2000 and
approximately $152,000 associated with such efforts was recognized during the
six months ended June 30, 2000.
12
<PAGE>
Marketing, general and administrative expenses include expenses incurred in
the use of consultants in which a portion of the compensation has been paid in
equity securities (stock options or warrants). We are required to record the
fair value of such securities as they vest. Using option valuation techniques,
we incurred an expense of approximately $520,000 for the six months ended June
30, 2000 and $50,000 for the six months ended June 30, 1999.
Amortization of Patents and Goodwill. We reported amortization expenses
relating to patents and goodwill of $863,000 during the six months ended June
30, 2000, which was an increase from $789,000 during the six months ended June
30, 1999. As a result of our purchase of additional equity interests in
Soundview Technologies in July 1997 and January 1998, in MerkWerks in January
1998 and June 1999, and in CombiMatrix in August 1999, we are incurring
amortization expenses each quarter for periods ranging from three to five
years relating to the intangible assets acquired. Amortization expenses at or
above the current level are expected to continue for the foreseeable future.
Other Income (Expense)
We reported other income of $408,000 for the six months ended June 30, 2000
compared to other expense of $508,000 for the six months ended June 30, 1999.
Interest Income. During the six months ended June 30, 2000, interest income
was $1,209,000 as compared to interest income during the six months ended June
30, 1999, of $145,000. The increase is due to higher cash balances in the six
months ended June 30, 2000 as compared to the six months ended June 30, 1999.
We received $32.3 million in cash from outside investors in connection with
our warrant call and private placements for Soundbreak.com and CombiMatrix
during the six months ended June 30, 2000.
Interest Expense. Interest expense for the six months ended June 30, 2000
was $1,000 as compared to $83,000 during the six months ended June 30, 1999.
The expense incurred during the six months ended June 30, 1999 is primarily
attributable to CombiMatrix and relates to three-year 6% unsecured
subordinated promissory notes issued by CombiMatrix in a private offering
completed in March 1998. Warrants to purchase CombiMatrix common stock were
also issued in this private placement. During the fourth quarter of 1999,
CombiMatrix offered holders of the unsecured subordinated notes the
opportunity to convert their outstanding principal balance into CombiMatrix
Common Stock and all noteholders had converted as of December 1999.
Equity in Loss of Partnerships. We reported no equity in loss of
partnerships in the six months ended June 30, 2000, compared to equity in
income of partnerships of $50,000 for the six months ended June 30, 1999. The
decrease was a result of the liquidation of the partnerships during 1999.
Equity in Losses of Affiliates. We reported equity in losses of affiliates
of $824,000 in the six months ended June 30, 2000, compared to equity in
losses of affiliates of $620,000 in the six months ended June 30, 1999. Losses
during the six months ended June 30, 2000 were primarily attributable to a
loss of $543,000 for our investment in Mediaconnex. This amount was offset by
a decrease in the recognized losses for Whitewing Labs, Greenwich, and
Signature-mail.com totaling $281,000 for the six months ended June 30, 2000 as
compared to $620,000 for the six month period ended June 30, 1999.
Minority Interests
Minority interests in the losses of consolidated subsidiaries increased to
$6,564,000 in the six months ended June 30, 2000 as compared to $0 in the six
months ended June 30, 1999. The increase in minority interests relates to the
CombiMatrix private placements and Soundbreak.com initial funding and private
placements. Minority shareholders participated in the losses of CombiMatrix
and Soundbreak.com for the six months ended June 30, 2000.
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For the Three Months Ended June 30, 2000 and June 30, 1999
Revenues
Grant Income. During the three months ended June 30, 2000, grant income was
$17,000 as compared to no grant income during the three months ended June 30,
1999. The grant income resulted from CombiMatrix's award of three contracts
from the federal government with respect to its biochip technology.
CombiMatrix was awarded two grants in July 1999 for Phase I SBIR from the
Department of Energy and the Department of Defense. CombiMatrix was further
awarded a Phase II SBIR Department of Defense contract for the use of its
biochip technology to develop nanode array sensor microchips in January 2000.
Advertising. During the three months ended June 30, 2000, advertising
income was $22,000 as compared to no advertising income during the three
months ended June 30, 2000. Revenues attributable to advertising were earned
by a newly acquired company.
Capital Management Fees. During the three months ended June 30, 2000,
capital management fee income, which includes performance fee income, was $0
as compared to $30,000 in capital management fee income generated during the
three months ended June 30, 2000. No capital management fee income was earned
during the three months ended June 30, 2000, because we closed the Acacia
Capital Management division on December 31, 1999. Costs associated with
exiting this business were not material.
Operating Expenses
Total operating expenses increased to $11,064,000 during the three months
ended June 30, 2000 from $1,914,000 during the three months ended June 30,
1999 primarily due to expenses relating to the operating activities of
Soundbreak.com, an increase in our compensation costs and rent for larger
office facilities, plus an expansion of CombiMatrix's research and development
efforts.
Research and Development Expenses. We incurred research and development
expenses of $896,000 for the three months ended June 30, 2000, compared to
expenses of $570,000 during the three months ended June 30, 1999. Such
expenses for the three months ended June 30, 2000 are comprised of expenses
primarily incurred by CombiMatrix, which increased to $833,000 from $527,000
in the prior period, due to an increase in the number of CombiMatrix personnel
and laboratory facilities as it expanded its research and development efforts.
Marketing, General and Administrative Expenses. We incurred marketing,
general and administrative expenses of $9,722,000 for the three months ended
June 30, 2000, compared to expenses of $945,000 during the three months ended
June 30, 1999. During the three months ended June 30, 2000, these expenses
increased due to general expansion of the Company, including an increase in
business development expenses as we explore new business opportunities, an
increase in office expenses relating to our move to larger office facilities,
and an increase in salaries and fringe benefits primarily due to an increase
in the number of our personnel as well as higher wages and payroll expenses.
Soundbreak.com's marketing, general and administrative expenses were
$6,900,000 for the three months ended June 30, 2000. [No expenses were
attributable to Soundbreak.com during 1999, as Soundbreak.com did not begin
operations until subsequent to the second quarter of 1999.] [true?] Of this
amount, approximately
$4,200,000 is attributable to marketing expenses, which were spent in
connection with Soundbreak.com's initial advertising campaign. We anticipate
continued dedication of substantial resources to enhance Soundbreak.com's
website and these costs for Soundbreak.com may substantially increase in
future periods.
CombiMatrix is increasing its employee base and has made extensive use of
consultants to assist in solving specialized issues or providing particular
services. Product development and commercialization relating to CombiMatrix's
technology will require additional personnel in areas such as regulatory
affairs, marketing and general operations. We anticipate that CombiMatrix will
continue to hire additional managerial and clerical employees in future
periods. In addition, during June 2000, CombiMatrix began its relocation
efforts from the
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San Francisco bay area to the Seattle, Washington area. Relocation expenses,
in the aggregate, will be approximately $500,000. The relocation efforts will
be completed during the third quarter of 2000 and approximately $152,000
associated with such efforts was recognized during the three months ended June
30, 2000.
Amortization of Patents and Goodwill. We reported amortization expenses
relating to patents and goodwill of $446,000 during the three months ended
June 30, 2000, which was an increase from $399,000 during the three months
ended June 30, 1999. As a result of our purchase of additional equity
interests in Soundview Technologies in July 1997 and January 1998, in
MerkWerks in January 1998 and June 1999, and in CombiMatrix in August 1999, we
are incurring amortization expenses each quarter for periods ranging from
three to five years relating to the intangible assets acquired. Amortization
expenses at or above the current level are expected to continue for the
foreseeable future.
Other Income (Expense)
We reported other income of $248,000 for the three months ended June 30,
2000 compared to other expense of $149,000 for the three months ended June 30,
1999.
Interest Income. During the three months ended June 30, 2000, interest
income was $782,000 as compared to interest income during the three months
ended June 30, 1999, of $73,000. The increase is due to higher cash balances
in the three months ended June 30, 2000 as compared to the three months ended
June 30, 1999. We received $32.3 million in cash from outside investors in
connection with our warrant call and private placements for Soundbreak.com and
CombiMatrix during the three months ended June 30, 2000.
Interest Expense. Interest expense for the three months ended June 30, 2000
was $0 as compared to $42,000 during the three months ended June 30, 1999. The
expense incurred during the three months ended June 30, 1999 is primarily
attributable to CombiMatrix and relates to three-year 6% unsecured
subordinated promissory notes issued by CombiMatrix in a private offering
completed in March 1998. Warrants to purchase CombiMatrix common stock were
also issued in this private placement. During the fourth quarter of 1999,
CombiMatrix offered holders of the unsecured subordinated notes the
opportunity to convert their outstanding principal balance into CombiMatrix
Common Stock and all noteholders had converted as of December 1999.
Equity in Loss of Partnerships. We reported no equity in loss of
partnerships in the three months ended June 30, 2000, compared to equity in
income of partnerships of $7,000 for the three months ended June 30, 1999. The
decrease was a result of the liquidation of the partnerships during 1999.
Equity in Losses of Affiliates. We reported equity in losses of affiliates
of $538,000 in the three months ended June 30, 2000, compared to equity in
losses of affiliates of $187,000 in the three months ended June 30,
1999. Losses during the three months ended June 30, 2000 were primarily
attributable to a loss of $399,000 for our investment in Mediaconnex. This
amount was offset by a decrease in the recognized losses for Whitewing Labs,
Greenwich, and Signature-mail.com totaling $139,000 for the three months ended
June 30, 2000 as compared to $187,000 for the three month period ended June
30, 1999.
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Minority Interests
Minority interests in the losses of consolidated subsidiaries increased to
$4,559,000 in the three months ended June 30, 2000 as compared to $0 in the
three months ended June 30, 1999. The increase in minority interests relates
to the CombiMatrix private placements and Soundbreak.com initial funding and
private placements. Minority shareholders participated in the losses of
CombiMatrix and Soundbreak.com for the three months ended June 30, 2000.
Liquidity and Capital Resources
At June 30, 2000, we had cash and cash equivalents of $54.7 million on a
consolidated basis, of which the parent company had $22.6 million and our
subsidiaries had $32.1 million. Working capital was $54.6 million on a
consolidated basis at June 30, 2000. Highlights of the financing and
commitment activities for the six months ended June 30, 2000 include:
First Quarter:
. $14.8 million of proceeds received from the exercise of common stock
purchase warrants issued in the December 1999 private placement.
. $17.5 million of gross proceeds from a private equity financing
completed for CombiMatrix, in which we contributed $10 million.
. $19 million of gross proceeds from a private equity financing completed
for Soundbreak.com, in which we contributed $9 million.
. In April 2000, we entered into a commitment for relocation costs and
services related to the move of CombiMatrix's operating facilities to
the State of Washington. This commitment provides for moving and
relocation expenses for employees including real estate and apartment
search services. Costs associated with the relocation efforts are
expected, in the aggregate, to be approximately $500,000, of which
$152,000 was recognized during the three months ended June 30, 2000.
Second Quarter:
. We entered into a lease commitment for additional office space, which
increased our monthly lease payment from approximately $22,000 to
$26,000. The amendment calls for reimbursement of improvements to the
expansion space approximating $19,000 by the landlord. The lease is
anticipated to begin October 1, 2000 and ends in November 2003.
. Acacia Launchpad LLC entered into a one-year lease commitment for new
office space. The monthly lease payments are approximately $14,000 per
month.
We have no committed lines of credit or other committed funding. However,
we anticipate that existing working capital reserves will provide sufficient
funds for our operating expenses and investment activities for at least the
next twelve months. For new or existing businesses that require additional
capital needs above the funds provided by us, we intend to seek additional
financing. There can be no assurance that we will not encounter unforeseen
difficulties that may deplete our capital resource more rapidly than
anticipated. Any efforts to seek additional funds could be made through
equity, debt, or other external financing and there can be no assurance that
additional funding will be available on favorable terms, if at all. Such
financing transactions may be dilutive to existing investors.
Subsequent to June 30, 2000:
In July 2000, the Company increased its ownership of privately held
CombiMatrix Corporation from 51.8% to 61.4%. The Company acquired the
additional ownership position from existing shareholders of CombiMatrix
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in exchange for approximately 489,000 restricted shares of the Company's
common stock, valued at approximately $9.4 million. This purchase will be
accounted for as a step acquisition. The purchase price will be allocated to
the fair value of assets acquired and liabilities assumed, including acquired
in process research and development. Any amount attributed to in-process R& D
will be charged to expense in the third quarter of 2000. The allocation of the
purchase price is expected to be in the third quarter of 2000.
In July 2000, the Company completed an institutional private equity
financing raising gross proceeds of $24 million through the sale of 861,638
shares of units, each unit consisting of one share of the Company's common
stock and one three-year callable common stock purchase warrant. Each common
stock purchase warrant entitles the holder to purchase one share of the
Company's common stock at a price of $33.00 per share and is callable by the
company's once the closing bid price of the Company's common stock averages
$39.60 or above for 20 consecutive trading days on the Nasdaq National Market
System. The Company issued an additional 11,000 units in lieu of cash payments
in conjunction with the private placement for finders fees.
In August 2000, CombiMatrix was granted a United States patent for its
biochip array processor system, which enables quick and economical turnaround
of custom-designed microarrays for use in biological research. The patent
covers CombiMatrix's core technology, which is a method for producing
microarrays by synthesizing biological materials on a three-dimensional,
active surface.
In August 2000, CombiMatrix completed a private equity financing raising
gross proceeds of $36 million through the sale of 4 million shares of
CombiMatrix common stock. The Company invested $17.5 million in this private
placement and acquired 1,944,445 shares. As a result of the transaction, the
Company decreased its equity ownership in CombiMatrix from 61.2% to 58.4%.
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Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
ACACIA RESEARCH CORPORATION
/s/ Paul R. Ryan
By: _________________________________
Paul R. Ryan
Chairman of the Board and Chief
Executive Officer (Authorized
Signatory)
Date: September 28, 2000
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