<PAGE>
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d)
OF THE SECURITIES ACT OF 1934
For the Quarter Ended September 30, 2000
Commission File No. 0-26068
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
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 November 10, 2000 the registrant had 16,078,087 shares of Common Stock,
$0.001 par value, issued and outstanding.
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<PAGE>
ACACIA RESEARCH CORPORATION
Table Of Contents
<TABLE>
<S> <C>
Part I. Financial Information
Item 1. Consolidated Financial Statements................................
Consolidated Balance Sheets.......................................... 3
Consolidated Statements 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
Item 3. Quantitative and Qualitative Disclosures About Market Risk....... 16
Part II. Other Information
Item 2. Changes in Securities............................................ 17
Item 6. Exhibits and Reports on Form 8-K................................. 17
Signatures................................................................. 18
</TABLE>
2
<PAGE>
ACACIA RESEARCH CORPORATION
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share information)
<TABLE>
<CAPTION>
September 30, December 31,
2000 1999
------------- ------------
(Unaudited)
<S> <C> <C>
ASSETS
------
Current assets
Cash and cash equivalents......................... $ 44,485 $ 37,631
Accounts receivable............................... 9 --
Management fees and other receivables............. 61 60
Receivables from affiliates....................... 12 318
Short-term investments............................ 40,863 --
Deposit on investment............................. -- 3,000
Prepaid expenses.................................. 627 208
Other assets...................................... 440 --
-------- --------
Total current assets............................ 86,497 41,217
Property and equipment, net......................... 3,142 1,154
Investment in affiliates, at equity................. 3,336 4,636
Investment in affiliates, at cost................... 3,000 --
Patents, net of accumulated amortization............ 9,226 3,534
Goodwill, net of accumulated amortization........... 4,970 1,012
Other assets........................................ 561 238
-------- --------
$110,732 $ 51,791
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
------------------------------------
Current liabilities
Accounts payable and accrued expenses............. $ 4,573 $ 1,633
Notes Payable..................................... 100 --
-------- --------
Total current liabilities....................... 4,673 1,633
Deferred income taxes............................... 2,729 --
Total liabilities............................... 7,402 1,633
-------- --------
Minority interests.................................. 25,129 4,896
-------- --------
Stockholders' equity
Common stock, par value $.001 per share;
60,000,000 shares authorized; 16,016,087 and
13,607,193 shares issued and outstanding as of
September 30, 2000 and December 31, 1999,
respectively..................................... 16 14
Additional paid-in capital........................ 116,081 62,283
Warrants to purchase common stock................. 86 58
Accumulated deficit............................... (37,982) (17,093)
-------- --------
Total stockholders' equity...................... 78,201 45,262
-------- --------
$110,732 $ 51,791
======== ========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
3
<PAGE>
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except share and per share information)
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
--------------------------- ---------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
(Unaudited)
<S> <C> <C> <C> <C>
Revenues:
Grant income.......... $ 17 $ -- $ -- --
Advertising........... 40 -- 18 --
Capital management fee
income............... -- 116 -- 25
---------- ---------- ---------- ----------
Total revenues...... 57 116 18 25
---------- ---------- ---------- ----------
Operating expenses:
Research and
development
expenses............. 7,577 2,190 5,947 1,150
Marketing, general,
and administrative
expenses............. 24,646 2,602 10,338 827
Amortization of
patents and
goodwill............. 1,571 1,205 708 417
---------- ---------- ---------- ----------
Total operating
expenses........... 33,794 5,997 16,993 2,394
---------- ---------- ---------- ----------
Operating loss........ (33,737) (5,881) (16,975) (2,369)
---------- ---------- ---------- ----------
Other income (expense):
Interest income....... 2,370 217 1,161 73
Interest expense...... (1) (123) -- (41)
Equity in income of
partnerships......... -- (47) -- (98)
Equity in losses of
affiliates........... (1,353) (906) (529) (285)
Other income.......... 27 -- 3 --
---------- ---------- ---------- ----------
Total other income
(expense).......... 1,043 (859) 635 (351)
---------- ---------- ---------- ----------
Loss before income taxes
and minority
interests.............. (32,694) (6,740) (16,340) (2,720)
Benefit (provision) for
income taxes........... 29 (20) 38 --
---------- ---------- ---------- ----------
Loss before minority
interests.............. (32,665) (6,760) (16,302) (2,720)
Minority interests...... 11,969 357 5,405 357
---------- ---------- ---------- ----------
Net loss................ $ (20,696) $ (6,403) $ (10,897) $ (2,363)
========== ========== ========== ==========
Loss per common share
Basic................. $ (1.42) $ (0.61) $ (0.69) $ (0.22)
Diluted............... $ (1.42) $ (0.61) $ (0.69) $ (0.22)
Weighted average number
of common and potential
common shares
outstanding used in
computation of loss per
share
Basic and Diluted..... 14,556,606 10,436,987 15,724,930 10,748,875
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
4
<PAGE>
ACACIA RESEARCH CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
<TABLE>
<CAPTION>
Nine Months Ended
---------------------------
September 30, September 30,
2000 1999
------------- -------------
(Unaudited)
<S> <C> <C>
Cash flows from operating activities:
Net loss........................................... $(20,696) $(6,403)
Adjustments to reconcile net loss to net cash used
in operating activities:
Depreciation and amortization.................... 2,043 1,362
Write-down of notes payable...................... -- 9
Equity in loss of affiliates and partnerships.... (1,353) 953
Minority interest in net loss.................... (11,974) (357)
Compensation expense relating to stock
options/warrants................................ 2,840 127
Change for acquired in-process research and
development..................................... 2,508 --
Deferred tax benefit............................. (41) --
Other............................................ 93 --
Changes in assets and liabilities, net of effects
of acquisitions:
Management fees and other receivables, prepaid
expenses, and other assets...................... (790) 118
Accounts payable, accrued expenses and other
liabilities..................................... 856 412
-------- -------
Net cash used in operating activities............ (23,808) (3,779)
-------- -------
Cash flows from investing activities:
Advances to affiliates............................. -- (101)
Capital contribution to equity investments......... (54) (25)
Purchase of additional equity in consolidated
subsidiaries...................................... (628) (31)
Withdrawals from partnerships...................... -- 500
Purchase of partnership interest................... -- (59)
Purchase of property and equipment................. (2,623) (548)
Purchase of short-term investments................. (40,863) --
-------- -------
Net cash used in investing activities.............. (44,168) (264)
-------- -------
Cash flows from financing activities:
Proceeds from exercise of stock options and
warrants.......................................... 16,840 4,134
Capital contributions from minority shareholders of
subsidiaries...................................... 35,673 1,571
Proceeds from sale of common stock, net of issuance
costs............................................. 22,317 3,272
-------- -------
Net cash provided by financing activities.......... 74,830 8,977
-------- -------
Increase in cash and cash equivalents.............. 6,854 4,934
Cash and cash equivalents, beginning............... 37,631 7,508
-------- -------
Cash and cash equivalents, ending.................. $ 44,485 $12,442
======== =======
Supplemental schedule of non-cash investing and
financing activities:
Issuance of common stock for additional equity in
consolidated subsidiary......................... $11,634 $288
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements.
5
<PAGE>
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 business focus is to identify and develop opportunities in
the life science sector that will be created by commercializing the new
biochip technology of the Company's subsidiary, CombiMatrix Corporation, and
other related investments in that sector.
By providing capital, management, 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 within our scope of
expertise.
At September 30, 2000, the Company had significant economic interests in a
number of companies. Majority owned subsidiaries include: CombiMatrix
Corporation ("CombiMatrix"), MerkWerks Corporation ("MerkWerks"),
Soundbreak.com Incorporated ("Soundbreak.com"), and Soundview Technologies
Incorporated ("Soundview Technologies"). We also own significant minority
interest in: EC Company Greenwich Information Technologies LLC ("Greenwich
Information Technologies"), Mediaconnex Communications, Inc. ("Mediaconnex")
and Signature-mail.com llc ("Signature-mail.com").
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 50.01% 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.
6
<PAGE>
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
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 $11.6 million. This purchase was accounted for
as a step acquisition. The purchase price was allocated to the fair value of
assets acquired and liabilities assumed, including acquired in-process
research and development. The amount attributable to goodwill was $2.9 million
which is amortized using the straight line method over the estimated remaining
useful life of five years. The amount attributable to in-process research and
development of $2.5 million was charged to expense and is included in the
Statements of Operations for the three and nine months ended September 30,
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 61.4% to 58.4%.
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 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 September 30, 2000 and the consolidated
results of operations and cash flows for the three and nine months ended
September 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.
7
<PAGE>
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>
Nine Months Ended Three Months Ended
--------------------------- ---------------------------
September 30, September 30, September 30, September 30,
2000 1999 2000 1999
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
Weighted Average Number of
Common Shares Outstanding
Computation of Basic
EPS...................... 14,556,606 10,436,987 15,724,930 10,748,875
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.............. 14,556,606 10,436,987 15,724,930 10,748,875
</TABLE>
(a) Potential common shares of 1,243,836 and 823,143 for the nine months ended
September 30, 2000 and September 30, 1999, respectively, and 1,078,693 and
1,105,992 for the three months ended September 30, 2000 and September 30,
1999, respectively, have been excluded for the per share calculation
because the effect of their inclusion would be anti-dilutive.
SHORT-TERM INVESTMENTS--Our short-term investments are held in a variety of
interest bearing instruments including: high-grade corporate bonds, commercial
paper, and money market accounts. These investments are classified as
available for sale and carried at fair market value at September 30, 2000,
which approximates cost.
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 developing 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.
8
<PAGE>
ACACIA RESEARCH CORPORATION
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS--(Continued)
The table below presents information about the Company's reportable
segments for the nine months ended September 30, 2000 and 1999 (in thousands).
<TABLE>
<CAPTION>
Nine months ended Corporate
September 30, 2000 Portfolio CombiMatrix Soundbreak.com Other Total
------------------ --------- ----------- -------------- ------ --------
<S> <C> <C> <C> <C> <C>
Revenue.................. $ -- $ 17 $ -- $ 40 $ 57
Amortization of patents
and goodwill............ 1,560 -- -- 11 1,571
Other income............. 26 -- -- 1 27
Interest income.......... 989 845 466 70 2,370
Interest expense......... 1 -- -- -- 1
Equity in losses of
affiliates.............. 1,353 -- -- -- 1,353
Loss before minority
interests and income
taxes................... 9,499 7,317 14,047 1,831 32,694
Segment assets........... 45,540 51,182 10,959 3,051 110,732
Investments in
affiliates, at equity... 3,336 -- -- -- 3,336
Investments in
affiliates, at cost..... 3,000 -- -- -- 3,000
Capital Expenditures..... 472 888 990 273 2,623
<CAPTION>
Nine months ended Corporate
September 30, 1999 Portfolio CombiMatrix Soundbreak.com Other Total
------------------ --------- ----------- -------------- ------ --------
<S> <C> <C> <C> <C> <C>
Revenue.................. $ 116 $ -- $ -- $ -- $ 116
Amortization of patents
and goodwill............ 1,195 -- -- 10 1,205
Other income............. -- -- -- -- --
Interest income.......... 194 20 3 -- 217
Interest expense......... -- 123 -- -- 123
Equity in losses of
affiliates ............. 906 -- -- -- 906
Equity in income of
partnerships............. 47 47
Loss before minority
interests and income
taxes................... 4,223 1,772 493 252 6,740
Segment assets........... 15,408 2,634 4,600 171 22,813
Investments in
affiliates, at equity... 2,600 -- -- -- 2,600
Investments in
affiliates, at cost..... 1,334 -- -- -- 1,334
Capital Expenditures..... 95 28 413 12 548
</TABLE>
9
<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 September 30, 2000 and 1999 (in thousands).
<TABLE>
<CAPTION>
Three Months Ended Corporate
September 30, 2000 Portfolio CombiMatrix Soundbreak.com Other Total
------------------ --------- ----------- -------------- ------ --------
<S> <C> <C> <C> <C> <C>
Revenue.................. $ -- $ -- $ -- $ 18 $ 18
Amortization of patents
and goodwill............ 704 -- -- 4 708
Other income............. 2 -- -- 1 3
Interest income.......... 351 609 178 23 1,161
Interest expense......... -- -- -- -- --
Equity in losses of
affiliates.............. 529 -- -- -- 529
Loss before minority
interests and income
taxes................... 4,834 5,132 4,934 1,440 16,340
Segment assets........... 45,540 51,182 10,959 3,051 110,732
Investments in
affiliates, at equity... 3,336 -- -- -- 3,336
Investments in
affiliates, at cost..... 3,000 -- -- -- 3,000
Purchase of property and
equipment............... 114 780 159 270 1,323
<CAPTION>
Three Months Ended Corporate
September 30, 1999 Portfolio CombiMatrix Soundbreak.com Other Total
------------------ --------- ----------- -------------- ------ --------
<S> <C> <C> <C> <C> <C>
Revenue.................. $ 25 $ -- $ -- $ -- $ 25
Amortization of patents
and goodwill............ 413 -- -- 3 416
Other income............. -- -- -- --
Interest income.......... 59 10 3 -- 72
Interest expense......... -- 40 -- -- 40
Equity in losses of
affiliates.............. 286 -- -- -- 286
Equity in losses of
partnerships............ (3) (3)
Loss before minority
interests and income
taxes................... -- 693 493 100 2,720
Segment assets........... 15,408 2,634 4,600 171 22,813
Investments in
affiliates, at equity... 2,600 -- -- -- 2,600
Investments in
affiliates, at cost..... 1,334 -- -- -- 1,334
Purchase of property and
equipment............... 18 4 413 12 447
</TABLE>
10
<PAGE>
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 and Registration Statement on Form S-3/A dated September 29, 2000
filed with the Securities and Exchange Commission.
General
The following discussion is based primarily on our consolidated balance
sheet as of September 30, 2000, and on our operations for the period from
January 1, 2000 to September 30, 2000. The discussion compares the activities
for the nine and three months ended September 30, 2000 to the activities for
the nine and three months ended September 30, 1999. This information should be
read in conjunction with the accompanying consolidated financial statements
and notes thereto.
Results of Operations
<TABLE>
<CAPTION>
Nine Months Ended Three Months Ended
September 30, September 30,
------------------------- -------------------------
2000 1999 2000 1999
------------ ----------- ------------ -----------
<S> <C> <C> <C> <C>
Revenues................ $57,000 $ 116,000 $ 18,000 $ 25,000
Operating expenses...... (33,794,000) (5,997,000) (16,993,000) (2,394,000)
Other income (expense),
net.................... 1,043,000 (859,000) 635,000 (351,000)
Minority interests...... 11,969,000 357,000 5,405,000 357,000
Provision (benefit) for
income taxes........... 29,000 (20,000) 38,000 --
------------ ----------- ------------ -----------
Net loss................ $(20,696,000) $(6,403,000) $(10,897,000) $(2,363,000)
============ =========== ============ ===========
</TABLE>
Form 10-Q--Period ended September 30, 2000
For the Nine Months Ended September 30, 2000 and September 30, 1999
Revenues
Grant Income. During the nine months ended September 30, 2000, grant income
was $17,000 as compared to no grant income during the nine months ended
September 30, 1999. The grant income resulted from CombiMatrix's award of
three contracts from the federal government with respect to its biochip
technology.
11
<PAGE>
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 nine months ended September 30, 2000, advertising
income was $40,000 as compared to no advertising income during the nine months
ended September 30, 1999. Revenues attributable to advertising were earned by
a newly acquired company.
Capital Management Fees. During the nine months ended September 30, 2000,
capital management fee income, which includes performance fee income, was $0
as compared to $116,000 in capital management fee income generated during the
nine months ended September 30, 1999. No capital management fee income was
earned in the nine months ended September 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 $33,794,000 during the nine months
ended September 30, 2000 from $5,997,000 during the nine months ended
September 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, a charge for acquired in-process research and
development, and an expansion of CombiMatrix's research and development
efforts.
Research and Development Expenses. We incurred research and development
expenses of $7,577,000 for the nine months ended September 30, 2000, compared
to expenses of $2,190,000 during the nine months ended September 30, 1999.
Such expenses for the nine months ended September 30, 2000 are comprised of
expenses primarily incurred by CombiMatrix, which increased to $4,992,000 from
$1,580,000 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, and $2,508,000 of acquired in-process research and
development expense resulting from the acquisition of additional ownership
position from existing CombiMatrix shareholders. In July, 2000, we increased
our ownership of CombiMatrix from 51.8% to 61.4%. We acquired the additional
ownership position from existing shareholders of CombiMatrix in exchange for
approximately 489,000 restricted shares of our common stock, valued at
approximately $11.6 million. This purchase was accounted for as a step
acquisition. The purchase price was allocated to the fair value of assets
acquired and liabilities assumed, including acquired in process research and
development.
Marketing, General and Administrative Expenses. We incurred marketing,
general and administrative expenses of $24,646,000 for the nine months ended
September 30, 2000, compared to expenses of $2,602,000 during the nine months
ended September 30, 1999. During the nine months ended September 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
$14,513,000 for the nine months ended September 30, 2000, compared to expenses
of $496,000 during the nine months ended September 30, 1999. Of the September
30, 2000 amount, approximately $6,413,000 million is attributable to marketing
expenses, which were spent in connection with Soundbreak.com's initial
advertising campaign.
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 2000, CombiMatrix relocated from the San
Francisco bay area
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to the Seattle, Washington area. This relocation was completed during the
third quarter, and related costs of $152,000 were incurred in the quarter
ended June 30, 2000 and costs of $463,000 were incurred in the three months
ended September 30, 2000.
Marketing, general and administrative expenses include $2,840,000 and
$127,000 of noncash stock compensation expenses related to options and
warrants issued to employees and non-employee consultants for the nine months
ended September 30, 2000 and 1999, respectively.
Amortization of Patents and Goodwill. We reported amortization expenses
relating to patents and goodwill of $1,571,000 during the nine months ended
September 30, 2000, which was an increase from $1,205,000 during the nine
months ended September 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 July 2000, 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 $1,043,000 for the nine months ended September
30, 2000 compared to other expense of $859,000 for the nine months ended
September 30, 1999.
Interest Income. During the nine months ended September 30, 2000, interest
income was $2,370,000 as compared to interest income during the nine months
ended September 30, 1999, of $217,000. The increase is due to higher cash
balances in the nine months ended September 30, 2000 as compared to the nine
months ended September 30, 1999. We received $56 million in cash from outside
investors in connection with our warrant call and private placements for
Acacia, Soundbreak.com and CombiMatrix during the nine months ended
September 30, 2000.
Interest Expense. Interest expense for the nine months ended September 30,
2000 was $1,000 as compared to $123,000 during the nine months ended September
30, 1999. The expense incurred during the nine months ended September 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 nine months ended September 30, 2000, compared to equity
in loss of partnerships of $47,000 for the nine months ended September 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 $1,353,000 in the nine months ended September 30, 2000, compared to equity
in losses of affiliates of $906,000 in the nine months ended September 30,
1999. Losses during the nine months ended September 30, 2000 were primarily
attributable to a loss of $865,000 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 $489,000 for the nine months ended
September 30, 2000 as compared to $906,000 for the nine month period ended
September 30, 1999.
Minority Interests
Minority interests in the losses of consolidated subsidiaries increased to
$11,969,000 in the nine months ended September 30, 2000 as compared to
$357,000 in the nine months ended September 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 nine months ended
September 30, 2000.
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For the Three Months Ended September 30, 2000 and September 30, 1999
Revenues
Advertising. During the three months ended September 30, 2000, advertising
income was $18,000 as compared to no advertising income during the three
months ended September 30, 1999. Revenues attributable to advertising were
earned by a newly acquired company.
Capital Management Fees. During the three months ended September 30, 2000,
capital management fee income, which includes performance fee income, was $0
as compared to $25,000 in capital management fee income generated during the
three months ended September 30, 1999. No capital management fee income was
earned during the three months ended September 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 $16,993,000 during the three months
ended September 30, 2000 from $2,394,000 during the three months ended
September 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, a charge for acquired in-process research and
development, and an expansion of CombiMatrix's research and development
efforts.
Research and Development Expenses. We incurred research and development
expenses of $5,947,000 for the three months ended September 30, 2000, compared
to expenses of $1,150,000 during the three months ended September 30, 1999.
Such expenses for the three months ended September 30, 2000 are comprised of
expenses primarily incurred by CombiMatrix, which increased to $3,413,000 from
$635,000 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, and $2,508,000 of acquired in process research and
development expense resulting from the acquisition of additional ownership
position from existing CombiMatrix shareholders. In July, 2000 we increased
our ownership of CombiMatrix from 51.8% to 61.4%.
Marketing, General and Administrative Expenses. We incurred marketing,
general and administrative expenses of $10,338,000 for the three months ended
September 30, 2000, compared to expenses of $827,000 during the three months
ended September 30, 1999. During the three months ended September 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
$5,112,000 for the three months ended September 30, 2000. Of this amount,
approximately $4,200,000 is attributable to marketing expenses, which were
spent in connection with Soundbreak.com's initial advertising campaign.
CombiMatrix has increased 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 relocated from the San
Francisco bay area to the Seattle, Washington area. This relocation was
completed during the third quarter and related costs of $463,000 were incurred
in the three months ended September 30, 2000.
Marketing, general and administrative expenses include $2,320,000 and
$77,000 of noncash stock compensation expenses related to options and warrants
issued to employees and non-employee consultants in the three months ended
September 30, 2000 and 1999, respectively.
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Amortization of Patents and Goodwill. We reported amortization expenses
relating to patents and goodwill of $708,000 during the three months ended
September 30, 2000, which was an increase from $417,000 during the three months
ended September 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 and July 2000,
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 $635,000 for the three months ended September
30, 2000 compared to other expense of $351,000 for the three months ended
September 30, 1999.
Interest Income. During the three months ended September 30, 2000, interest
income was $1,161,000 as compared to interest income during the three months
ended September 30, 1999, of $73,000. The increase is due to higher cash
balances in the three months ended September 30, 2000 as compared to the three
months ended September 30, 1999. We received $23.7 million in cash from outside
investors in connection with our private placement and CombiMatrix private
placement during the three months ended September 30, 2000.
Interest Expense. Interest expense for the three months ended September 30,
2000 was $0 as compared to $41,000 during the three months ended September 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 September 30, 2000, compared to equity
in income of partnerships of $98,000 for the three months ended September 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 $529,000 in the three months ended September 30, 2000, compared to equity in
losses of affiliates of $285,000 in the three months ended September 30, 1999.
Losses during the three months ended September 30, 2000 were primarily
attributable to a loss of $322,000 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 $207,000 for the three months ended
September 30, 2000 as compared to $285,000 for the three month period ended
September 30, 1999.
Minority Interests
Minority interests in the losses of consolidated subsidiaries increased to
$5,405,000 in the three months ended September 30, 2000 as compared to $357,000
in the three months ended September 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
September 30, 2000.
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Liquidity and Capital Resources
At September 30, 2000, we had cash and short-term investments of $85.3
million on a consolidated basis, of which the parent company had $25.5 million
and our subsidiaries had $59.7 million. Working capital was $81.8 million on a
consolidated basis at September 30, 2000. Highlights of the financing and
commitment activities for the nine months ended September 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.
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 began
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.
Third Quarter:
. In July 2000, we increased our ownership of CombiMatrix from 51.8% to
61.4%. We acquired the additional ownership position from existing
shareholders of CombiMatrix in exchange for approximately 489,000
restricted shares of Acacia's common stock.
. $23.7 million of gross proceeds from a private equity financing.
. $36.0 million of gross proceeds from a private equity financing
completed for CombiMatrix, in which we contributed $17.5 million.
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.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
We are not a party to derivative financial instruments at or during the
three month period ended September 30, 2000.
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PART II OTHER INFORMATION
Item 2. Changes in Securities
In July 2000, the Company sold 861,638 units to accredited investors at a
purchase price of $27.50 per unit, each unit consisting of one share of the
Company's common stock, and one common stock purchase warrant. Each common
stock purchase warrant entitles its holder to purchase one share of the
Company's common stock at an exercise price of $33.00 per share, subject to
adjustment, and expires on July 20, 2003. Finders involved in this transaction
received finders fees at a rate of $2.093 per unit placed. The Company's sale
of these units was exempt from registration, as a private placement, under
Section 4(2) of the Securities Act of 1933 and Regulation D promulgated
thereunder.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
27 Financial Data Schedule
(b) Reports on Form 8-K
None
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SIGNATURES
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 Ryan
By: _________________________________
Paul Ryan
Chief Executive Officer
(Authorized Signatory)
/s/ Mary Rose Colonna
By: _________________________________
Mary Rose Colonna
Vice President of
Finance/Controller (Chief
Accounting Officer)
Date: November 14, 2000
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