FILED PURSUANT TO RULE 424(B)(5)
REGISTRATION NO. 333-112885
SUPPLEMENT
TO PROSPECTUS DATED MARCH 17, 2004
1,300,444 SHARES
[ACACIA LOGO]
1,300,444 SHARES OF
ACACIA RESEARCH-COMBIMATRIX COMMON STOCK
Acacia Research Corporation is offering 1,300,444 shares of its Acacia
Research-CombiMatrix common stock. The Acacia Research-CombiMatrix common stock
is intended to reflect the performance of Acacia Research Corporation's
CombiMatrix group. Holders of Acacia Research-CombiMatrix common stock, however,
are common stockholders of Acacia Research Corporation and are subject to all of
the risks of an equity investment in Acacia Research Corporation and all of its
businesses, assets and liabilities.
Our Acacia Research-CombiMatrix common stock is traded on the Nasdaq National
Market under the ticker symbol "CBMX." The last reported sales price of our
Acacia Research-CombiMatrix common stock on June 29, 2005, was $2.43 per share.
In connection with this offering, we will pay fees to certain finders. See "Plan
of Distribution" beginning on page 26 of this prospectus supplement for more
information regarding these arrangements.
INVESTING IN OUR COMMON STOCK INVOLVES RISKS. SEE "RISK FACTORS" BEGINNING
ON PAGE 1 OF THIS PROSPECTUS SUPPLEMENT.
PER SHARE TOTAL
Offering Price $2.25 $2,925,999
Finder's Fees $0.1125 $ 47,550
Proceeds, before expenses to us $2,878,449
We estimate the total expenses of this offering, excluding the finders' fees,
will be approximately $15,000. The finders are not required to sell any specific
number or dollar amount of the shares of Acacia Research-CombiMatrix common
stock offered by this offering, but will use best efforts to sell the shares of
Acacia Research-CombiMatrix common stock offered.
We expect that delivery of the shares of Acacia Research-CombiMatrix common
stock being offered under this prospectus supplement will be made to investors
on or about July 5, 2005. Because there is no minimum offering amount required
as a condition to closing in this offering, the actual public offering amount,
finders' fees and net proceeds to us, if any, in this offering are not presently
determinable and may be substantially less than the total offering amounts set
forth above.
NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE SECURITIES
COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR DETERMINED IF THIS
PROSPECTUS SUPPLEMENT IS TRUTHFUL OR COMPLETE. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
The date of this prospectus supplement is June 29, 2005
TABLE OF CONTENTS
Page
ABOUT THIS SUPPLEMENT.........................................................1
RISK FACTORS..................................................................1
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION..................25
USE OF PROCEEDS..............................................................26
LEGAL MATTERS................................................................26
PLAN OF DISTRIBUTION.........................................................26
PROSPECTUS SUPPLEMENT
---------------------
ABOUT THIS SUPPLEMENT
Unless otherwise mentioned or unless the context requires otherwise, all
references in this prospectus supplement and the accompanying prospectus to "the
company," "we," "us," "our," or similar references mean Acacia Research
Corporation.
This prospectus supplement describes the specific terms of this offering
and other current matters relating to our business. This prospectus supplement
forms a part of the accompanying prospectus dated March 17, 2004, which gives
more general information about securities we may offer from time to time, some
of which may not apply to the Acacia Research-CombiMatrix common stock offered
by this prospectus supplement. To the extent there is a conflict between the
information contained in this prospectus supplement, on the one hand, and the
information contained in the accompanying prospectus or any document
incorporated by reference therein, on the other hand, the information in this
prospectus supplement shall control.
We have not authorized any dealer, salesman or other person to give any
information or to make any representation other than those contained or
incorporated by reference in this prospectus supplement and the accompanying
prospectus. You must not rely upon any information or representation not
contained or incorporated by reference in this prospectus supplement or the
accompanying prospectus. This prospectus supplement and the accompanying
prospectus do not constitute an offer to sell or the solicitation of an offer to
buy common stock, nor does this prospectus supplement and the accompanying
prospectus constitute an offer to sell or the solicitation of an offer to buy
common stock in any jurisdiction to any person to whom it is unlawful to make
such offer or solicitation in such jurisdiction. You should not assume that the
information contained in this prospectus supplement and the accompanying
prospectus is accurate on any date subsequent to the date set forth on the front
of the document or that any information we have incorporated by reference is
correct on any date subsequent to the date of the document incorporated by
reference, even though this prospectus supplement and any accompanying
prospectus is delivered or common stock is sold on a later date.
Information that we file with the SEC subsequent to the date on the cover
will automatically update and supersede the information contained in this
prospectus supplement and the accompanying prospectus. We incorporate by
reference the documents listed in the accompanying prospectus and any future
filings made with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the
Securities Exchange Act of 1934, as amended, until we issue all of the common
stock offered pursuant to this prospectus supplement and the accompanying
prospectus.
RISK FACTORS
AN INVESTMENT IN OUR ACACIA RESEARCH-COMBIMATRIX COMMON STOCK INVOLVES A
HIGH DEGREE OF RISK. BEFORE INVESTING IN OUR ACACIA RESEARCH-COMBIMATRIX COMMON
STOCK , YOU SHOULD CAREFULLY CONSIDER THE SPECIFIC RISKS DETAILED IN THIS "RISK
FACTORS" SECTION, TOGETHER WITH ALL OF THE OTHER INFORMATION CONTAINED IN THIS
PROSPECTUS SUPPLEMENT AND ACCOMPANYING PROSPECTUS. IF ANY OF THESE RISKS OCCUR,
OUR BUSINESS, RESULTS OF OPERATIONS AND FINANCIAL CONDITION COULD BE HARMED, THE
PRICE OF OUR ACACIA RESEARCH-COMBIMATRIX COMMON STOCK COULD DECLINE, AND YOU MAY
LOSE ALL OR PART OF YOUR INVESTMENT.
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GENERAL RISKS
WE HAVE A HISTORY OF LOSSES AND WILL PROBABLY INCUR ADDITIONAL LOSSES IN THE
FUTURE.
We have sustained substantial losses since our inception resulting in an
accumulated deficit, as of March 31, 2005 of $193.2 million on a consolidated
basis. We may never become profitable, or if we do, we may never be able to
sustain profitability. We expect to incur significant research and development,
marketing, general and administrative and legal expenses. As a result, it is
more likely than not that we will incur losses for the foreseeable future.
IF WE, OR OUR SUBSIDIARIES, ENCOUNTER UNFORESEEN DIFFICULTIES AND CANNOT OBTAIN
ADDITIONAL FUNDING ON FAVORABLE TERMS, OUR BUSINESS MAY SUFFER.
Acacia Research Corporation's consolidated cash and cash equivalents along
with short-term investments totaled $61.6 million at March 31, 2005.
To date, the CombiMatrix group has relied primarily upon selling equity
securities, as well as payments from strategic partners, to generate the funds
needed to finance the implementation of the CombiMatrix group's business
strategies. To date, the Acacia Technologies group has relied primarily upon
selling of equity securities and payments from our V-chip technology licensees
(primarily in 2001) and Digital Media Transmission ("DMT(R)") technology
licensees (2003 to current) to generate the funds needed to finance the
operations of the Acacia Technologies group. See the risk factor entitled,
"Although we recognized significant revenue from the V-chip technology patent
held by the Acacia Technologies group, this patent expired in July 2003, and if
the group does not develop other recurring sources of revenue, its financial
condition will be adversely impacted" on page 15 of this prospectus supplement.
We cannot assure you that we will not encounter unforeseen difficulties,
including the outside influences identified above, that may deplete our capital
resources more rapidly than anticipated. As a result, our subsidiary companies
may be required to obtain additional financing through bank borrowings, debt or
equity financings or otherwise, which would require us to make additional
investments or face a dilution of our equity interests. Any efforts to seek
additional funds could be made through equity, debt or other external
financings. Nevertheless, we cannot assure that additional funding will be
available on favorable terms, if at all. If we fail to obtain additional funding
when needed for our subsidiary companies and ourselves, we may not be able to
execute our business plans and our business may suffer.
BECAUSE WE HAVE A LIMITED OPERATING HISTORY, WE CANNOT ASSURE THAT OUR
OPERATIONS WILL BE PROFITABLE.
We commenced operations in 1993 and, accordingly, have a limited operating
history. In addition, certain of our subsidiary companies are in the early
stages of development and/or operations and have limited operating histories. We
also recently acquired eleven (11) new subsidiaries, and although we conducted
customary due diligence before completing the acquisition, we cannot assure that
our projections for profitability will be accurate because of our limited
history with these new companies. You should consider our prospects in light of
the risks, expenses and difficulties frequently encountered by companies with
such limited operating histories. Since we have a limited operating history, we
cannot assure you that our operations will be profitable or that we will
generate sufficient revenues to meet our expenditures and support our
activities.
We have sustained substantial losses since our inception. If we continue to
incur operating losses in future periods, we may not have enough money to expand
our business and our subsidiary companies' businesses in the future.
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FAILURE TO EFFECTIVELY MANAGE OUR GROWTH COULD PLACE STRAINS ON OUR MANAGERIAL,
OPERATIONAL AND FINANCIAL RESOURCES AND COULD ADVERSELY AFFECT OUR BUSINESS AND
OPERATING RESULTS.
Our growth has placed, and is expected to continue to place, a strain on
our managerial, operational and financial resources. Further, as our subsidiary
companies' businesses grow, we will be required to manage multiple
relationships. Any further growth by us or our subsidiary companies or an
increase in the number of our strategic relationships will increase this strain
on our managerial, operational and financial resources. This strain may inhibit
our ability to achieve the rapid execution necessary to successfully implement
our business plan.
OUR FUTURE SUCCESS DEPENDS ON OUR ABILITY TO EXPAND OUR ORGANIZATION TO MATCH
THE GROWTH OF OUR SUBSIDIARIES.
As our subsidiaries grow, the administrative demands upon Acacia Research
Corporation will grow, and our success will depend upon our ability to meet
those demands. These demands include increased accounting, management, legal
services, staff support for our board of directors, and general office services.
We may need to hire additional qualified personnel to meet these demands, the
cost and quality of which is dependent in part upon market factors outside of
our control. Further, we will need to effectively manage the training and growth
of our staff to maintain an efficient and effective workforce, and our failure
to do so could adversely affect our business and operating results.
THE AVAILABILITY OF SHARES FOR SALE IN THE FUTURE COULD REDUCE THE MARKET PRICE
OF OUR COMMON STOCK.
In the future, we may issue securities to raise cash for acquisitions. We
may also pay for interests in additional subsidiary companies by using a
combination of cash and our common stock or just our common stock. We may also
issue securities convertible into our common stock. Any of these events may
dilute your ownership interest in our company and have an adverse impact on the
price of our common stock.
In addition, sales of a substantial amount of our common stock in the
public market, or the perception that these sales may occur, could reduce the
market price of our common stock. This could also impair our ability to raise
additional capital through the sale of our securities.
DELAWARE LAW AND OUR CHARTER DOCUMENTS CONTAIN PROVISIONS THAT COULD DISCOURAGE
OR PREVENT A POTENTIAL TAKEOVER OF ACACIA RESEARCH CORPORATION THAT MIGHT
OTHERWISE RESULT IN OUR STOCKHOLDERS RECEIVING A PREMIUM OVER THE MARKET PRICE
OF THEIR SHARES.
Provisions of Delaware law and our certificate of incorporation and bylaws
could make the following more difficult: the acquisition of our company by means
of a tender offer, proxy contest or otherwise, and the removal of incumbent
officers and directors. These provisions include:
o section 203 of the Delaware General Corporation Law, which
prohibits a merger with a 15%-or-greater stockholder, such as a
party that has completed a successful tender offer, until three
years after that party became a 15%-or-greater stockholder;
o amendment of our bylaws by the stockholders requires a two-thirds
approval of the outstanding shares;
o the authorization in our certificate of incorporation of
undesignated preferred stock, which could be issued without
stockholder approval in a manner designed to prevent or
discourage a takeover;
3
o provisions in our bylaws eliminating stockholders' rights to call
a special meeting of stockholders, which could make it more
difficult for stockholders to wage a proxy contest for control of
our board of directors or to vote to repeal any of the
anti-takeover provisions contained in our certificate of
incorporation and bylaws; and
o the division of our board of directors into three classes with
staggered terms for each class, which could make it more
difficult for an outsider to gain control of our board of
directors.
Such potential obstacles to a takeover could adversely affect the ability
of our stockholders to receive a premium price for their stock in the event
another company wants to acquire us.
WE MAY INCUR INCREASED COSTS AS A RESULT OF RECENTLY ENACTED AND PROPOSED
CHANGES IN LAWS AND REGULATIONS RELATING TO CORPORATE GOVERNANCE MATTERS.
Recently enacted and proposed changes in the laws and regulations affecting
public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and
rules adopted or proposed by the Securities and Exchange Commission and by
NASDAQ, will result in increased costs to us as we evaluate the implications of
any new rules and respond to their requirements. New rules could make it more
difficult or more costly for us to obtain certain types of insurance, including
director and officer liability insurance, and we may be forced to accept reduced
policy limits and coverage or incur substantially higher costs to obtain the
same or similar coverage. The impact of these events could also make it more
difficult for us to attract and retain qualified persons to serve on our board
of directors, our board committees or as executive officers. We cannot predict
or estimate the amount of the additional costs we may incur or the timing of
such costs to comply with any new rules and regulations.
RISKS RELATING TO THE COMBIMATRIX GROUP
The risk factors beginning on this page discuss risks relating to the
CombiMatrix group. Because each holder of Acacia Research-CombiMatrix common
stock is also a holder of the common stock of one company, Acacia Research
Corporation, the risks associated with the Acacia Technologies group could
affect our Acacia Research-CombiMatrix common stock. As such, we also urge you
to read the Acacia Technologies section "Risks Relating to the Acacia
Technologies Group" below.
BECAUSE OUR BUSINESS OPERATIONS ARE SUBJECT TO MANY UNCONTROLLABLE OUTSIDE
INFLUENCES, WE MAY NOT SUCCEED.
Our CombiMatrix group's business operations are subject to numerous risks
from outside influences, including the following:
o TECHNOLOGICAL ADVANCES MAY MAKE OUR COMBIMATRIX GROUP SEMICONDUCTOR
BASED ARRAY TECHNOLOGY OBSOLETE OR LESS COMPETITIVE, AND AS A RESULT,
OUR REVENUE AND THE VALUE OF OUR ASSETS COULD BECOME OBSOLETE OR LESS
COMPETITIVE.
Our CombiMatrix group products and services are dependent upon our
semiconductor based array technology. The semiconductor based array technology
is an advancement in conventional arrays that are used for the same purpose.
Current array technologies have revolutionized drug discovery and development,
and we believe that our CombiMatrix group's array technology provides
characteristics, including flexibility, superior cost metrics, and performance,
which address certain needs of the life sciences market that are not addressed
by conventional arrays, and offers the latest in technological advances in this
area. Our products and services are substantially dependent upon our ability to
offer the latest in semiconductor based array technology in the SNP genotyping,
gene expression profiling and proteomic markets. We believe technological
advances of conventional arrays and semiconductor based arrays are currently
being developed by our existing competition and potential new competitors in the
4
market, including Affymetrix, Inc., Agilent Technologies, Inc., Becton,
Dickinson and Company, Ciphergen Biosystems, Inc., Gene Logic Inc., Illumina,
Inc., Johnson & Johnson, Nanogen, Inc., Orchid Biosciences, Inc., Applera
Corporation, Roche Diagnostics GmbH and Sequenom, Inc. We also expect to face
additional competition from new market entrants and consolidation of our
existing competitors. Many of the CombiMatrix group's competitors have existing
strategic relationships with major pharmaceutical and biotechnology companies,
greater commercial experience and substantially greater financial and personnel
resources than we do. We expect new competitors to emerge and the intensity of
competition to increase in the future. If these companies are able to offer
technological advances to conventional arrays or semiconductor based arrays, our
products may become less valuable or even obsolete. While we continue to invest
resources in research and development to enhance the technology of our products
and services, we cannot provide any assurance that our competitors or new
competitors will not enter the market with the same or similar technological
advances before we are able to do so.
o NEW ENVIRONMENTAL REGULATION MAY MATERIALLY INCREASE THE NET LOSSES OF
OUR COMBIMATRIX GROUP.
The CombiMatrix group's operations involve the use, transportation, storage
and disposal of hazardous substances, and as a result it is subject to
environmental and health and safety laws and regulations. Any changes in these
laws and regulations could increase CombiMatrix's compliance costs, and as a
result, could materially increase the net losses of our CombiMatrix group.
o OUR TECHNOLOGIES FACE UNCERTAIN MARKET VALUE.
Our CombiMatrix group includes the following technologies and products that
were recently introduced into the market: CustomArray(TM), DNA Microarray,
CustomArray(TM), 12K DNA expression array and related products,
Design-on-Demand(TM) Arrays, and NanoArrayTM technology. These technologies and
products have not gained widespread market acceptance, and we cannot provide any
assurance that the increase, if any, in market acceptance of these technologies
and products will meet or exceed our expectations.
Further, our CombiMatrix group is currently developing the following
technologies and products that have not yet been introduced into the market: (a)
Bench-Top DNA Microarray Synthesizer for CustomArray(TM) formatted arrays, (b)
microarray technology for the detection of biological threat agents, (c) drug
discovery and development using the CustomArray(TM) platform, and (d)
nanotechnology-based chemical sensors to be used for the detection of biological
agents in air and water. The level of market acceptance of these technologies
and products will have a significant impact upon our results of operations, and
we cannot provide any assurance that the increase, if any, in market acceptance
of these technologies and products will meet or exceed our expectations.
o THE FOREGOING OUTSIDE INFLUENCES MAY AFFECT OTHER RISK FACTORS
DESCRIBED IN THIS PROSPECTUS SUPPLEMENT AND ACCOMPANYING PROSPECTUS.
Any one of the foregoing outside influences may cause our company to need
additional financing to meet the challenges presented or to compensate for a
loss in revenue, and we may not be able to obtain the needed financing. See the
heading "If we, or our subsidiaries, encounter unforeseen difficulties and
cannot obtain additional funding on favorable terms, our business may suffer"
beginning on page 2 of this prospectus supplement. Further, any one of the
foregoing outside influences affecting the CombiMatrix group could make it less
likely that our CombiMatrix group will be able to gain acceptance of its array
technology by researchers in the pharmaceutical, biotechnology and academic
communities. See the heading "If the CombiMatrix group's new and unproven
technology is not used by researchers in the pharmaceutical, biotechnology and
academic communities, its business will suffer" beginning on page 9 of this
prospectus supplement.
5
THE COMBIMATRIX GROUP HAS A HISTORY OF LOSSES AND EXPECTS TO INCUR ADDITIONAL
LOSSES IN THE FUTURE.
The CombiMatrix group has sustained substantial losses since its inception.
The CombiMatrix group may never become profitable, or if it does, it may never
be able to sustain profitability. We expect the CombiMatrix group to incur
significant research and development, marketing, general and administrative
expenses. As a result, we expect the CombiMatrix group to incur losses for the
foreseeable future.
THE COMBIMATRIX GROUP MUST ENTER INTO NEW STRATEGIC PARTNERSHIPS TO GENERATE
REVENUE CONSISTENT WITH ITS OPERATING HISTORY AS A RESULT OF THE COMPLETION OF
THE RELATIONSHIP WITH ROCHE DIAGNOSTICS GMBH
In March 2004, the CombiMatrix group completed all phases of its research
and development agreement with Roche Diagnostics GmbH ("Roche"). As a result of
completing all of its obligations under this agreement and in accordance with
the CombiMatrix group's revenue recognition policies for multiple-element
arrangements, the CombiMatrix group recognized all previously deferred Roche
related contract revenues totaling $17,302,000 during the first quarter of 2004.
To date, the CombiMatrix group has relied primarily upon selling equity
securities, as well as payments from strategic partners, to generate the funds
needed to finance the implementation of the CombiMatrix group's business
strategies. The CombiMatrix group has historically been substantially dependent
on its arrangements with Roche, and has relied upon payments by Roche and other
partners for a majority of its future revenues. The CombiMatrix group intends to
enter into additional strategic partnerships to develop and commercialize future
products. The CombiMatrix group is deploying unproven technologies and continues
to develop its commercial products. There can be no assurance that the
CombiMatrix group will be able to implement its future plans. Failure by
management to achieve its plans would have a material adverse effect on the
CombiMatrix group's and Acacia Research Corporation's ability to achieve its
intended business objectives.
THE COMBIMATRIX GROUP MAY FAIL TO MEET MARKET EXPECTATIONS BECAUSE OF
FLUCTUATIONS IN ITS QUARTERLY OPERATING RESULTS, WHICH COULD CAUSE ITS STOCK
PRICE TO DECLINE.
The CombiMatrix group's revenues and operating results have fluctuated in
the past and may continue to fluctuate significantly from quarter to quarter in
the future. It is possible that in future periods the CombiMatrix group's
revenues could fall below the expectations of securities analysts or investors,
which could cause the market price of our Acacia Research-CombiMatrix common
stock to decline. The following are among the factors that could cause the
CombiMatrix group's operating results to fluctuate significantly from period to
period:
o its unpredictable revenue sources, as described below and in our
most recent annual report incorporated by reference on page 32 of
the accompanying prospectus;
o the nature, pricing and timing of the CombiMatrix group's and its
competitors' products;
o changes in the CombiMatrix group's and its competitors' research
and development budgets;
o expenses related to, and the CombiMatrix group's ability to
comply with, governmental regulations of its products and
processes; and
o expenses related to, and the results of, patent filings and other
proceedings relating to intellectual property rights.
The CombiMatrix group anticipates significant fixed expenses due in part to
its need to continue to invest in product development. It may be unable to
adjust its expenditures if revenues in a particular period fail to meet its
6
expectations, which would harm its operating results for that period. As a
result of these fluctuations, the CombiMatrix group believes that
period-to-period comparisons of the CombiMatrix group's financial results will
not necessarily be meaningful, and you should not rely on these comparisons as
an indication of its future performance.
THE COMBIMATRIX GROUP'S REVENUES WILL BE UNPREDICTABLE, AND THIS MAY HARM ITS
FINANCIAL CONDITION.
The amount and timing of revenues that the CombiMatrix group may realize
from its business will be unpredictable because:
o whether products are commercialized and generate revenues
depends, in part, on the efforts and timing of its potential
customers;
o its sales cycles may be lengthy; and
o it cannot be sure as to the timing of receipt of payment for its
products.
As a result, the CombiMatrix group's revenues may vary significantly from
quarter to quarter, which could make its business difficult to manage and cause
its quarterly results to be below market expectations. If this happens, the
price of the CombiMatrix group's common stock may decline significantly.
TECHNOLOGY COMPANY STOCK PRICES ARE ESPECIALLY VOLATILE, AND THIS VOLATILITY MAY
DEPRESS THE PRICE OF OUR ACACIA RESEARCH-COMBIMATRIX COMMON STOCK.
The stock market has experienced significant price and volume fluctuations,
and the market prices of technology companies, particularly biotechnology
companies, has been highly volatile. We believe that various factors may cause
the market price of our Acacia Research-CombiMatrix common stock to fluctuate,
perhaps substantially, including, among others, announcements of:
o its or its competitors' technological innovations;
o developments or disputes concerning patents or proprietary
rights;
o supply, manufacturing or distribution disruptions or other
similar problems;
o proposed laws regulating participants in the biotechnology
industry;
o developments in relationships with collaborative partners or
customers;
o its failure to meet or exceed securities analysts' expectations
of its financial results; or
o a change in financial estimates or securities analysts'
recommendations.
In the past, companies that have experienced volatility in the market price
of their stock have been the objects of securities class action litigation. If
our Acacia Research-CombiMatrix common stock was the object of securities class
action litigation, it could result in substantial costs and a diversion of
management's attention and resources, which could materially harm the business
and financial results of the CombiMatrix group.
THE COMBIMATRIX GROUP IS DEPLOYING NEW AND UNPROVEN TECHNOLOGIES WHICH MAKES
EVALUATION OF ITS BUSINESS AND PROSPECTS DIFFICULT, AND IT MAY BE FORCED TO
CEASE OPERATIONS IF IT DOES NOT DEVELOP COMMERCIALLY SUCCESSFUL PRODUCTS.
7
The CombiMatrix group has not proven its ability to commercialize products
on a large scale. In order to successfully commercialize products on a large
scale, it will have to make significant investments, including investments in
research and development and testing, to demonstrate their technical benefits
and cost-effectiveness. Problems frequently encountered in connection with the
commercialization of products using new and unproven technologies might limit
its ability to develop and commercialize its products. For example, the
CombiMatrix group's products may be found to be ineffective, unreliable or
otherwise unsatisfactory to potential customers. The CombiMatrix group may
experience unforeseen technical complications in the processes it uses to
develop, manufacture, customize or receive orders for its products. These
complications could materially delay or limit the use of products the
CombiMatrix group attempts to commercialize, substantially increase the
anticipated cost of its products or prevent it from implementing its processes
at appropriate quality and scale levels, thereby causing its business to suffer.
THE COMBIMATRIX GROUP MAY NEED TO RAISE ADDITIONAL CAPITAL IN THE FUTURE, AND IF
ADDITIONAL CAPITAL IS NOT AVAILABLE ON ACCEPTABLE TERMS, THE COMBIMATRIX GROUP
MAY HAVE TO CURTAIL OR CEASE OPERATIONS.
The CombiMatrix group's future capital requirements will be substantial and
will depend on many factors including how quickly it commercializes its
products, the progress and scope of its collaborative and independent research
and development projects, the filing, prosecution, enforcement and defense of
patent claims and the need to obtain regulatory approval for certain products in
the United States or elsewhere. Changes may occur that would cause the
CombiMatrix group's available capital resources to be consumed significantly
sooner than it expects.
The CombiMatrix group may be unable to raise sufficient additional capital
on favorable terms or at all. If it fails to do so, it may have to curtail or
cease operations or enter into agreements requiring it to relinquish rights to
certain technologies, products or markets because it will not have the capital
necessary to exploit them.
IF THE COMBIMATRIX GROUP DOES NOT ENTER INTO SUCCESSFUL PARTNERSHIPS AND
COLLABORATIONS WITH OTHER COMPANIES, IT MAY NOT BE ABLE TO FULLY DEVELOP ITS
TECHNOLOGIES OR PRODUCTS, AND ITS BUSINESS WOULD BE HARMED.
Since the CombiMatrix group does not possess all of the resources necessary
to develop and commercialize products that may result from its technologies on a
mass scale, it will need either to grow its sales, marketing and support group
or make appropriate arrangements with strategic partners to market, sell and
support its products. The CombiMatrix group believes that it will have to enter
into additional strategic partnerships to develop and commercialize future
products. If it does not enter into adequate agreements, or if its existing
arrangements or future agreements are not successful, its ability to develop and
commercialize products will be impacted negatively, and its revenues will be
adversely affected.
Historically, the CombiMatrix group was substantially dependent on its
arrangement with Roche. The CombiMatrix group relied on payments by Roche to
fund the majority of its resources engaged in fulfilling its contractual
obligations to Roche. Roche's primary service to the CombiMatrix group is to
distribute its technology platform. If the CombiMatrix group were to lose its
relationship with Roche, the CombiMatrix group would continue to distribute its
technology platform itself or be required to establish a distribution agreement
with other partners. This could prove difficult, time-consuming and expensive,
and the CombiMatrix group may not be successful in achieving this objective.
8
THE COMBIMATRIX GROUP HAS LIMITED EXPERIENCE COMMERCIALLY MANUFACTURING,
MARKETING OR SELLING ANY OF ITS POTENTIAL PRODUCTS, AND UNLESS IT DEVELOPS THESE
CAPABILITIES, IT MAY NOT BE SUCCESSFUL.
Even if the CombiMatrix group is able to develop its products for
commercial release on a large-scale, it has limited experience in manufacturing
its products in the volumes that will be necessary for it to achieve commercial
sales and in marketing or selling its products to potential customers. We cannot
assure you that the CombiMatrix group will be able to commercially produce its
products on a timely basis, in sufficient quantities or on commercially
reasonable terms.
THE COMBIMATRIX GROUP FACES INTENSE COMPETITION AND WE CANNOT ASSURE YOU THAT IT
WILL BE SUCCESSFUL.
The CombiMatrix group expects to compete with companies that design,
manufacture and market instruments for analysis of genetic variation and
function and other applications using established sequential and parallel
testing technologies. The CombiMatrix group is also aware of other biotechnology
companies that have or are developing testing technologies for the SNP
genotyping, gene expression profiling and proteomic markets. The CombiMatrix
group anticipates that it will face increased competition in the future as new
companies enter the market with new technologies and its competitors improve
their current products.
The markets for the CombiMatrix group's products are characterized by
rapidly changing technology, evolving industry standards, changes in customer
needs, emerging competition and new product introductions. One or more of the
CombiMatrix group's competitors may offer technology superior to those of the
CombiMatrix group and render its technology obsolete or uneconomical. Many of
its competitors have greater financial and personnel resources and more
experience in marketing, sales and research and development than it has. Some of
its competitors currently offer arrays with greater density than it does and
have rights to intellectual property, such as genomic information or proprietary
technology, which provides them with a competitive advantage. If the CombiMatrix
group were not able to compete successfully, its business and financial
condition would be materially harmed.
IF THE COMBIMATRIX GROUP'S NEW AND UNPROVEN TECHNOLOGY IS NOT USED BY
RESEARCHERS IN THE PHARMACEUTICAL, BIOTECHNOLOGY AND ACADEMIC COMMUNITIES, ITS
BUSINESS WILL SUFFER.
The CombiMatrix group's products may not gain market acceptance. In that
event, it is unlikely that its business will succeed. Biotechnology and
pharmaceutical companies and academic research centers have historically
analyzed genetic variation and function using a variety of technologies, and
many of them have made significant capital investments in existing technologies.
Compared to existing technologies, the CombiMatrix group's technologies are new
and unproven. In order to be successful, its products must meet the commercial
requirements of the biotechnology, pharmaceutical and academic communities as
tools for the large-scale analysis of genetic variation and function. Market
acceptance will depend on many factors, including:
o the development of a market for its tools for the analysis of
genetic variation and function, the study of proteins and other
purposes;
o the benefits and cost-effectiveness of its products relative to
others available in the market;
o its ability to manufacture products in sufficient quantities with
acceptable quality and reliability and at an acceptable cost;
o its ability to develop and market additional products and
enhancements to existing products that are responsive to the
changing needs of its customers;
9
o the willingness and ability of customers to adopt new
technologies requiring capital investments or the reluctance of
customers to change technologies in which they have made a
significant investment; and
o the willingness of customers to transmit test data and permit the
CombiMatrix group to transmit test results over the Internet,
which will be a necessary component of its product and services
packages unless customers purchase or license its equipment for
use in their own facilities.
IF THE MARKET FOR ANALYSIS OF GENOMIC INFORMATION DOES NOT DEVELOP OR IF GENOMIC
INFORMATION IS NOT AVAILABLE TO THE COMBIMATRIX GROUP'S POTENTIAL CUSTOMERS, ITS
BUSINESS WILL NOT SUCCEED.
The CombiMatrix group is designing its technology primarily for
applications in the biotechnology, pharmaceutical and academic communities. The
usefulness of the CombiMatrix group's technology depends in part upon the
availability of genomic data. The CombiMatrix group is initially focusing on
markets for analysis of genetic variation and function, namely gene expression
profiling. These markets are new and emerging, and they may not develop as the
CombiMatrix group anticipates, or at all. Also, researchers may not seek or be
able to convert raw genomic data into medically valuable information through the
analysis of genetic variation and function. If genomic data is not available for
use by the CombiMatrix group's customers or if its target markets do not emerge
in a timely manner, or at all, demand for its products will not develop as it
expects, and it may never become profitable.
THE COMBIMATRIX GROUP'S FUTURE SUCCESS DEPENDS ON THE CONTINUED SERVICE OF ITS
ENGINEERING, TECHNICAL AND KEY MANAGEMENT PERSONNEL AND ITS ABILITY TO IDENTIFY,
HIRE AND RETAIN ADDITIONAL ENGINEERING, TECHNICAL AND KEY MANAGEMENT PERSONNEL.
There is intense competition for qualified personnel in the CombiMatrix
group's industry, particularly for engineers and senior level management. Loss
of the services of, or failure to recruit, engineers or other technical and key
management personnel could be significantly detrimental to the group and could
adversely affect its business and operating results. The CombiMatrix group may
not be able to continue to attract and retain engineers or other qualified
personnel necessary for the development of its products and business or to
replace engineers or other qualified personnel who may leave the group in the
future. The CombiMatrix group's anticipated growth is expected to place
increased demands on its resources and likely will require the addition of new
management personnel.
THE EXPANSION OF THE COMBIMATRIX GROUP'S PRODUCT LINES MAY SUBJECT IT TO
REGULATION BY THE UNITED STATES FOOD AND DRUG ADMINISTRATION AND FOREIGN
REGULATORY AUTHORITIES, WHICH COULD PREVENT OR DELAY ITS INTRODUCTION OF NEW
PRODUCTS.
If the CombiMatrix group manufactures, markets or sells any products for
any regulated clinical or diagnostic applications, those products will be
subject to extensive governmental regulation as medical devices in the United
States by the FDA and in other countries by corresponding foreign regulatory
authorities. The process of obtaining and maintaining required regulatory
clearances and approvals is lengthy, expensive and uncertain. Products that
CombiMatrix Corporation manufactures, markets or sells for research purposes
only are not subject to governmental regulations as medical devices or as
analyte specific reagents to aid in disease diagnosis. We believe that the
CombiMatrix group's success will depend upon commercial sales of improved
versions of products, certain of which cannot be marketed in the United States
and other regulated markets unless and until the CombiMatrix group obtains
clearance or approval from the FDA and its foreign counterparts, as the case may
be. Delays or failures in receiving these approvals may limit our ability to
benefit from new CombiMatrix group products.
10
AS THE COMBIMATRIX GROUP'S OPERATIONS EXPAND, ITS COSTS TO COMPLY WITH
ENVIRONMENTAL LAWS AND REGULATIONS WILL INCREASE, AND FAILURE TO COMPLY WITH
THESE LAWS AND REGULATIONS COULD HARM ITS FINANCIAL RESULTS.
The CombiMatrix group's operations involve the use, transportation, storage
and disposal of hazardous substances, and as a result it is subject to
environmental and health and safety laws and regulations. As the CombiMatrix
group expands its operations, its use of hazardous substances will increase and
lead to additional and more stringent requirements. The cost to comply with
these and any future environmental and health and safety regulations could be
substantial. In addition, the CombiMatrix group's failure to comply with laws
and regulations, and any releases of hazardous substances into the environment
or at its disposal sites, could expose the CombiMatrix group to substantial
liability in the form of fines, penalties, remediation costs and other damages,
or could lead to a curtailment or shut down of its operations. These types of
events, if they occur, would adversely impact the group's financial results.
THE COMBIMATRIX GROUP'S BUSINESS DEPENDS ON ISSUED AND PENDING PATENTS, AND THE
LOSS OF ANY PATENTS OR THE GROUP'S FAILURE TO SECURE THE ISSUANCE OF PATENTS
COVERING ELEMENTS OF ITS BUSINESS PROCESSES WOULD MATERIALLY HARM ITS BUSINESS
AND FINANCIAL CONDITION.
The CombiMatrix group's success depends on its ability to protect and
exploit its intellectual property. The CombiMatrix group currently has four
patents issued in the United States, four patents issued in Europe and 59 patent
applications pending in the United States, Europe and elsewhere. The patents
covering the CombiMatrix group's core technology begin to expire January 5,
2018.
The patent application process before the United States Patent and
Trademark Office and other similar agencies in other countries is initially
confidential in nature. Patents that are filed outside the United States,
however, are published approximately eighteen months after filing. The
CombiMatrix group cannot determine in a timely manner whether patent
applications covering technology that competes with its technology have been
filed in the United States or other foreign countries or which, if any, will
ultimately issue or be granted as enforceable patents. Some of the CombiMatrix
group's patent applications may claim compositions, methods or uses that may
also be claimed in patent applications filed by others. In some or all of these
applications, a determination of priority of inventorship may need to be decided
in a proceeding before the United States Patent and Trademark Office or a
foreign regulatory body or a court. If the CombiMatrix group is unsuccessful in
these proceedings, it could be blocked from further developing, commercializing
or selling products. Regardless of the ultimate outcome, this process is
time-consuming and expensive.
ANY INABILITY TO ADEQUATELY PROTECT THE COMBIMATRIX GROUP'S PROPRIETARY
TECHNOLOGIES COULD MATERIALLY HARM THE COMBIMATRIX GROUP'S COMPETITIVE POSITION
AND FINANCIAL RESULTS.
If the CombiMatrix group does not protect its intellectual property
adequately, competitors may be able to use its technologies and erode any
competitive advantage that it may have. The laws of some foreign countries do
not protect proprietary rights to the same extent as the laws of the United
States, and many companies have encountered significant problems in protecting
their proprietary rights abroad. These problems can be caused by the absence of
rules and methods for defending intellectual property rights.
The patent positions of companies developing tools for the biotechnology,
pharmaceutical and academic communities, including the CombiMatrix group's
patent position, generally are uncertain and involve complex legal and factual
questions. The CombiMatrix group will be able to protect its proprietary rights
from unauthorized use by third parties only to the extent that its proprietary
technologies are covered by valid and enforceable patents or are effectively
maintained as trade secrets. The CombiMatrix group's existing patents and any
future issued or granted patents it obtains may not be sufficiently broad in
scope to prevent others from practicing its technologies or from developing
competing products. There also is a risk that others may independently develop
similar or alternative technologies or designs around the CombiMatrix group's
11
patented technologies. In addition, others may oppose or invalidate its patents,
or its patents may fail to provide it with any competitive advantage. Enforcing
the CombiMatrix group's intellectual property rights may be difficult, costly
and time-consuming and ultimately may not be successful.
The CombiMatrix group also relies upon trade secret protection for its
confidential and proprietary information. While it has taken security measures
to protect its proprietary information, these measures may not provide adequate
protection for its trade secrets or other proprietary information. The
CombiMatrix group seeks to protect its proprietary information by entering into
confidentiality and invention disclosure and transfer agreements with employees,
collaborators and consultants. Nevertheless, employees, collaborators or
consultants may still disclose its proprietary information, and the CombiMatrix
group may not be able to meaningfully protect its trade secrets. In addition,
others may independently develop substantially equivalent proprietary
information or techniques or otherwise gain access to its trade secrets.
ANY LITIGATION TO PROTECT THE COMBIMATRIX GROUP'S INTELLECTUAL PROPERTY, OR ANY
THIRD-PARTY CLAIMS OF INFRINGEMENT, COULD DIVERT SUBSTANTIAL TIME AND MONEY FROM
THE COMBIMATRIX GROUP'S BUSINESS AND COULD SHUT DOWN SOME OF ITS OPERATIONS.
The CombiMatrix group's commercial success depends in part on its
non-infringement of the patents or proprietary rights of third parties. Many
companies developing tools for the biotechnology and pharmaceutical industries
use litigation aggressively as a strategy to protect and expand the scope of
their intellectual property rights. Accordingly, third parties may assert that
the CombiMatrix group is employing their proprietary technology without
authorization. In addition, third parties may claim that use of the CombiMatrix
group's technologies infringes their current or future patents. The CombiMatrix
group could incur substantial costs and the attention of its management and
technical personnel could be diverted while defending ourselves against any of
these claims. The CombiMatrix group may incur the same liabilities in enforcing
its patents against others. The CombiMatrix group has not made any provision in
its financial plans for potential intellectual property related litigation, and
it may not be able to pursue litigation as aggressively as competitors with
substantially greater financial resources.
If parties making infringement claims against the CombiMatrix group are
successful, they may be able to obtain injunctive or other equitable relief,
which effectively could block the CombiMatrix group's ability to further
develop, commercialize and sell products, and could result in the award of
substantial damages against it. If the CombiMatrix group is unsuccessful in
protecting and expanding the scope of its intellectual property rights, its
competitors may be able to develop, commercialize and sell products that compete
with it using similar technologies or obtain patents that could effectively
block its ability to further develop, commercialize and sell its products. In
the event of a successful claim of infringement against the CombiMatrix group,
we may be required to pay substantial damages and either discontinue those
aspects of its business involving the technology upon which it infringed or
obtain one or more licenses from third parties. While the CombiMatrix group may
license additional technology in the future, it may not be able to obtain these
licenses at a reasonable cost, or at all. In that event, it could encounter
delays in product introductions while it attempts to develop alternative methods
or products, which may not be successful. Defense of any lawsuit or failure to
obtain any of these licenses could prevent it from commercializing available
products.
RISKS RELATING TO THE ACACIA TECHNOLOGIES GROUP
The risk factors beginning on this page discuss risks relating to the
Acacia Technologies group. Because each holder of Acacia Research-CombiMatrix
common stock, is a holder of the common stock of one company, Acacia Research
Corporation, the risks associated with the Acacia Technologies group could
affect the Acacia Research-CombiMatrix common stock. As such, we also urge you
to read carefully the following section.
12
BECAUSE OUR BUSINESS OPERATIONS ARE SUBJECT TO MANY UNCONTROLLABLE OUTSIDE
INFLUENCES, WE MAY NOT SUCCEED.
Our Acacia Technologies group's business operations are subject to numerous
risks from outside influences, including the following:
o NEW LEGISLATION, REGULATIONS OR RULES RELATED TO OBTAINING PATENTS OR
ENFORCING PATENTS COULD SIGNIFICANTLY INCREASE ACACIA TECHNOLOGIES
GROUP'S OPERATING COSTS AND DECREASE ITS REVENUE.
Our Acacia Technology group acquires patents with enforcement opportunities
and is spending a significant amount of resources to enforce those patents. If
new legislation, regulations or rules are implemented either by Congress, the
United States Patent and Trademark Office, or the courts that impact the patent
application process, the patent enforcement process or the rights of patent
holders, these changes could negatively affect our expenses and revenue. For
example, new rules regarding the burden of proof in patent enforcement actions
could significantly increase the cost of our enforcement actions, and new
standards or limitations on liability for patent infringement could negatively
impact our revenue derived from such enforcement actions. While we are not aware
that any such changes are likely to occur in the foreseeable future, we cannot
assure you that such changes will not occur.
o TRIAL JUDGES AND JURIES OFTEN FIND IT DIFFICULT TO UNDERSTAND COMPLEX
PATENT ENFORCEMENT LITIGATION, AND AS A RESULT, WE MAY NEED TO APPEAL
ADVERSE DECISIONS BY LOWER COURTS IN ORDER TO SUCCESSFULLY ENFORCE OUR
PATENTS.
It is difficult to predict the outcome of patent enforcement litigation at
the trial level. It is often difficult for juries and trial judges to understand
complex, patented technologies, and as a result, there is a higher rate of
successful appeals in patent enforcement litigation than more standard business
litigation. Such appeals are expensive and time consuming, resulting in
increased costs and delayed revenue. Although we diligently pursue enforcement
litigation, we cannot predict with significant reliability the decisions made by
juries and trial courts.
o MORE PATENT APPLICATIONS ARE FILED EACH YEAR RESULTING IN LONGER
DELAYS IN GETTING PATENTS ISSUED BY THE UNITED STATES PATENT AND
TRADEMARK OFFICE.
Our Acacia Technology group holds and continues to acquire pending patents.
We have identified a trend of increasing patent applications each year, which we
believe is resulting in longer delays in obtaining approval of pending patent
applications. The delays could cause delays in recognizing revenue from these
patents and could cause us to miss opportunities to license patents before other
competing technologies are developed or introduced into the market. See the
subheading "COMPETITION IS INTENSE IN THE INDUSTRIES IN WHICH OUR SUBSIDIARIES
DO BUSINESS AND AS A RESULT, WE MAY NOT BE ABLE TO GROW OR MAINTAIN OUR MARKET
SHARE FOR OUR TECHNOLOGIES AND PATENTS," on page 14 of this prospectus
supplement.
o FEDERAL COURTS ARE BECOMING MORE CROWDED, AND AS A RESULT, PATENT
ENFORCEMENT LITIGATION IS TAKING LONGER.
Our patent enforcement actions are almost exclusively prosecuted in federal
court. Federal trial courts that hear our patent enforcement actions also hear
criminal cases. Criminal cases always take priority over our actions. As a
result, it is difficult to predict the length of time it will take to complete
an enforcement action. Moreover, we believe there is a trend in increasing
numbers of civil lawsuits and criminal proceedings before federal judges, and as
a result, we believe that the risk of delays in our patent enforcement actions
will have a greater affect on our business in the future unless this trend
changes.
13
o ANY REDUCTIONS IN THE FUNDING OF THE UNITED STATES PATENT AND
TRADEMARK OFFICE COULD HAVE AN ADVERSE IMPACT ON THE COST OF
PROCESSING PENDING PATENT APPLICATIONS AND THE VALUE OF THOSE PENDING
PATENT APPLICATIONS.
The assets of Acacia Technologies group consists of patent portfolios,
including pending patent applications before the U.S. Patent and Trademark
Office (USPTO). The value of our patent portfolios is dependent upon the
issuance of patents in a timely manner, and any reductions in the funding of the
USPTO could negatively impact the value of our assets. Further, reductions in
funding from Congress could result in higher patent application filing and
maintenance fees charged by the USPTO, causing an unexpected increase in our
expenses.
o COMPETITION IS INTENSE IN THE INDUSTRIES IN WHICH OUR SUBSIDIARIES DO
BUSINESS AND AS A RESULT, WE MAY NOT BE ABLE TO GROW OR MAINTAIN OUR
MARKET SHARE FOR OUR TECHNOLOGIES AND PATENTS.
Our Acacia Technologies group expects to encounter competition in the area
of patent acquisition and enforcement as the number of companies entering this
market is increasing. This includes competitors seeking to acquire the same or
similar patents and technologies that we may seek to acquire. Companies such as
British Technology Group, Rembrandt Management Group, and Intellectual Ventures
LLC are already in the business of acquiring the rights to patents for the
purpose of enforcement, and we expect more companies to enter the market. As new
technological advances occur, many of our patented technologies may become
obsolete before they are completely monetized. If we are unable to replace
obsolete technologies with more technologically advanced patented technologies,
then this obsolescence could have a negative effect on our ability to generate
future revenues.
o OUR PATENTED TECHNOLOGIES FACE UNCERTAIN MARKET VALUE.
Our Acacia Technologies group has acquired patents and technologies that
are at early stages of adoption in the commercial and consumer markets. Demand
for some of these technologies is untested and is subject to fluctuation based
upon the rate at which our licensees will adopt our patents and technologies in
their products and services. See the related risk factor beginning on page 17 of
this prospectus supplement.
o AS PATENT ENFORCEMENT LITIGATION BECOMES MORE PREVALENT, IT MAY BECOME
MORE DIFFICULT FOR US TO VOLUNTARILY LICENSE OUR PATENTS.
We believe that the more prevalent patent enforcement actions become, the
more difficult it will be for us to voluntarily license our patents. As a
result, we may need to increase the number of our patent enforcement actions to
cause infringing companies to license the patent or pay damages for lost
royalties. This may increase the risks associated with an investment in our
company.
o THE FOREGOING OUTSIDE INFLUENCES MAY AFFECT OTHER RISK FACTORS
DESCRIBED IN THIS PROSPECTUS SUPPLEMENT.
Any one of the foregoing outside influences may cause our company to need
additional financing to meet the challenges presented or to compensate for a
loss in revenue, and we may not be able to obtain the needed financing. See the
heading "If we, or our subsidiaries, encounter unforeseen difficulties and
cannot obtain additional funding on favorable terms, our business may suffer"
beginning on page 2 of this prospectus supplement.
THE ACACIA TECHNOLOGIES GROUP HAS INCURRED LOSSES IN THE PAST AND EXPECTS TO
INCUR ADDITIONAL LOSSES IN THE FUTURE.
The Acacia Technologies group has sustained substantial losses in the past.
We expect the Acacia Technologies group to incur significant legal, marketing,
general and administrative expenses. As a result, we expect the Acacia
Technologies group to incur losses for the foreseeable future.
14
ALTHOUGH WE RECOGNIZED SIGNIFICANT REVENUE FROM THE V-CHIP TECHNOLOGY PATENT
HELD BY THE ACACIA TECHNOLOGIES GROUP, THIS PATENT EXPIRED IN JULY 2003, AND IF
THE GROUP DOES NOT DEVELOP OTHER RECURRING SOURCES OF REVENUE, ITS FINANCIAL
CONDITION WILL BE ADVERSELY IMPACTED.
The Acacia Technologies group, and Acacia Research Corporation as a whole,
recognized $27.5 million in revenues from licensing the V-chip patent to
television manufacturers, including $1.5 million in previously deferred revenue
during the year ended December 31, 2004. The Acacia Technologies group's patent
on the V-chip technology expired in July 2003, and we do not expect to recognize
further revenue from this patent.
In 2003, the Acacia Technologies group began to commercially license its
DMT technology recognizing approximately $4.3 million in DMT license fee
revenues as of March 31, 2005 and intends to acquire and license additional
intellectual property. During the year ended December 31, 2004, we recognized
$2.8 million in revenue from our Digital Media Transmission patents. Pursuant to
assignment agreements related to the purchase of Acacia Media Technologies, the
former patent portfolio owners are entitled to 15% of future net revenues, as
defined by each agreement, generated by the digital media transmission patents.
In July 2004, the Acacia Technologies group acquired U.S. Patent No.
6,226,677 from LodgeNet Entertainment Corporation, which covers technology and
methods for redirecting users to a login page when accessing the Internet, and
launched its licensing and enforcement program for this patent in the third
quarter of 2004. Acacia Global Acquisition Corporation's acquisition of the
assets of Global Patent Holdings, LLC in 2005, provides the Acacia Technologies
group with ownership of companies that control 27 patent portfolios, which
include 120 U.S. patents and certain foreign counterparts, and cover
technologies used in a wide variety of industries. In April 2005, Acacia Patent
Acquisition Corporation acquired a patent relating to a commonly used technology
to connect laptop computer to peripheral devices via docking stations. The
acquisitions expand and diversify the Acacia Technologies group's revenue
generating opportunities. The Acacia Technologies group believes that its cash
and cash equivalent balances, including the proceeds from the February 2005
equity financing received following the acquisition of the assets from Global
Patent Holdings, anticipated cash flow from operations and other external
sources of available credit, will be sufficient to meet its cash requirements
through the next twelve months. However, due to the nature of our licensing
business and uncertainties regarding the amount and timing of the receipt of
license fees from potential infringers, stemming primarily from uncertainties
regarding the outcome of enforcement actions, rates of adoption of our patented
technologies, the growth rates of our existing licensees and other factors, we
cannot currently predict the amount and timing of the receipt of license fee
revenues with a sufficient degree of precision.
THE ACACIA TECHNOLOGIES GROUP MAY FAIL TO MEET MARKET EXPECTATIONS BECAUSE OF
FLUCTUATIONS IN ITS QUARTERLY OPERATING RESULTS, WHICH COULD CAUSE THE PRICE OF
ACACIA RESEARCH-ACACIA TECHNOLOGIES COMMON STOCK TO DECLINE.
The Acacia Technologies group's revenues and operating results have
fluctuated in the past and may continue to fluctuate significantly from quarter
to quarter in the future. It is possible that in future periods the Acacia
Technologies group's revenues could fall below the expectations of securities
analysts or investors, which could cause the market price of our Acacia
Research-Acacia Technologies common stock to decline. The following are among
the factors that could cause the Acacia Technologies group's operating results
to fluctuate significantly from period to period:
o the performance of our third-party licensees;
o costs related to acquisitions, alliances, licenses and other
efforts to expand our operations;
o the timing of payments under the terms of any customer or license
agreements into which the Acacia Technologies group may enter;
and
15
o expenses related to, and the results of, patent filings and other
enforcement proceedings relating to intellectual property rights,
as more fully described on page 13 of this prospectus supplement.
THE ACACIA TECHNOLOGIES GROUP'S REVENUES WILL BE UNPREDICTABLE, AND THIS MAY
HARM ITS FINANCIAL CONDITION.
The amount and timing of revenues that the Acacia Technologies group may
realize from its business will be unpredictable because:
o whether the Acacia Technologies group generates revenues depends,
in part, on the success of its licensees;
o its cycle of obtaining licensees may be lengthy; and
o it cannot be sure as to the timing of receipt of payment.
As a result, the Acacia Technologies group's revenues may vary
significantly from quarter to quarter, which could make its business difficult
to manage and cause its quarterly results to be below market expectations. If
this happens, the price of our Acacia Research-Acacia Technologies common stock
may decline significantly.
TECHNOLOGY COMPANY STOCK PRICES ARE ESPECIALLY VOLATILE, AND THIS VOLATILITY MAY
DEPRESS THE PRICE OF OUR ACACIA RESEARCH-ACACIA TECHNOLOGIES COMMON STOCK .
The stock market has experienced significant price and volume fluctuations,
and the market prices of technology companies have been highly volatile. We
believe that various factors may cause the market price of our Acacia
Research-Acacia Technologies common stock to fluctuate, perhaps substantially,
including, among others, the following:
o announcements of developments in our patent enforcement actions;
o developments or disputes concerning our patents;
o our or our competitors' technological innovations;
o developments in relationships with licensees;
o variations in our quarterly operating results;
o our failure to meet or exceed securities analysts' expectations
of our financial results; or
o a change in financial estimates or securities analysts'
recommendations;
o changes in management's or securities analysts' estimates of our
financial performance;
o changes in market valuations of similar companies;
o announcements by us or our competitors of significant contracts,
acquisitions, strategic partnerships, joint ventures, capital
commitments, new technologies, or patents; and
o failure to complete significant transactions.
16
For example, the Nasdaq Computer Index had a range of $896.80 - $944.48
during the 52-weeks ended June 22, 2005. Over the same period, our Acacia
Research-Acacia Technologies common stock fluctuated within a range of $7.14 -
$2.77. We believe fluctuations in our stock price during this period could have
been caused by court rulings in our patent enforcement actions. Court rulings in
patent enforcement actions are often difficult to understand, even when
favorable or neutral to the value of our patents, and we believe that investors
in the market may overreact, causing fluctuations in our stock prices that may
not accurately reflect the impact of court rulings on our business operations
and assets.
In the past, companies that have experienced volatility in the market price
of their stock have been the objects of securities class action litigation. If
our Acacia Research-Acacia Technologies common stock was the object of
securities class action litigation, it could result in substantial costs and a
diversion of management's attention and resources, which could materially harm
the business and financial results of the Acacia Technologies group.
THE MARKETS SERVED BY THE ACACIA TECHNOLOGIES GROUP ARE SUBJECT TO RAPID
TECHNOLOGICAL CHANGE, AND IF THE ACACIA TECHNOLOGIES GROUP IS UNABLE TO DEVELOP
AND ACQUIRE NEW TECHNOLOGIES AND PATENTS, ITS REVENUES COULD STOP GROWING OR
COULD DECLINE.
The markets served by the licensees of Acacia Technologies group frequently
undergo transitions in which products rapidly incorporate new features and
performance standards on an industry-wide basis. Products for communications
applications, high-speed computing applications, as well as other applications
covered by the Acacia Technologies group's intellectual property, are based on
continually evolving industry standards. The Acacia Technologies group's ability
to compete in the future will, however, depend on its ability to identify and
ensure compliance with evolving industry standards. This will require our
continued efforts and success of acquiring new patent portfolios with licensing
and enforcement opportunities. However, we expect to have sufficient liquidity
and capital resources for the foreseeable future in order to maintain the level
of acquisitions we believe we need to keep pace with these technological
advances. However, outside influences may cause the need for greater liquidity
and capital resources than expected, as described under the caption "Because our
business operations are subject to many uncontrollable outside influences, we
may not succeed" beginning on page 13 of this prospectus supplement.
THE SUCCESS OF OUR ACACIA TECHNOLOGIES GROUP DEPENDS IN PART UPON OUR ABILITY TO
RETAIN THE BEST LEGAL COUNSEL TO REPRESENT US IN PATENT ENFORCEMENT LITIGATION.
In addition, the success of the Acacia Technologies group depends upon our
ability to retain the best legal counsel to prosecute patent infringement
litigation. As our patent enforcement actions increase, it will become more
difficult to find the best legal counsel to handle all of our cases because many
of the best law firms may have a conflict of interest that prevents its
representation of our company.
RISKS RELATING TO OUR CAPITAL STRUCTURE
HOLDERS OF BOTH CLASSES OF OUR STOCK ARE STOCKHOLDERS OF ONE COMPANY, AND THE
FINANCIAL PERFORMANCE OF ONE GROUP COULD AFFECT THE OTHER, THUS EXPOSING THE
HOLDERS OF EACH GROUP'S STOCK TO THE RISKS OF AN INVESTMENT IN THE ENTIRE
COMPANY.
Holders of Acacia Research-CombiMatrix common stock and Acacia
Research-Acacia Technologies common stock are stockholders of a single company.
The CombiMatrix group and the Acacia Technologies group are not separate legal
entities. As a result, stockholders will continue to be subject to all of the
risks of an investment in Acacia Research Corporation and all of our businesses,
assets and liabilities. The issuance of our Acacia Research-CombiMatrix common
stock and our Acacia Research-Acacia Technologies common stock and the
allocation of assets and liabilities and stockholders' equity between the
CombiMatrix group and the Acacia Technologies group did not result in a
distribution or spin-off to stockholders of any of our assets or liabilities and
17
did not affect ownership of our assets or responsibility for our liabilities or
those of our subsidiaries. The assets we attribute to the Acacia Technologies
group could be subject to the liabilities of the CombiMatrix group, whether such
liabilities arise from lawsuits, contracts or indebtedness that we attribute to
the other group, including the $1,964,000 of accounts payable, accrued expenses
and other liabilities attributed to CombiMatrix group for the year ended
December 31, 2004. If we are unable to satisfy one group's liabilities out of
the assets we attribute to it, we may be required to satisfy those liabilities
with assets we have attributed to the other group. However, our business is
conducted by our operating subsidiaries. Creditors of one subsidiary may not
make claims against the assets of another subsidiary, absent a separate guaranty
from the other subsidiaries. None of our subsidiaries currently guaranty the
obligations of other subsidiaries.
Financial effects from one group that affect our consolidated results of
operations or financial condition could, if significant, affect the results of
operations or financial condition of the other group and the market price of the
common stock relating to the other group. In addition, net losses of either
group and dividends or distributions on, or repurchases of, either class of
common stock will reduce the funds we can pay as dividends on each class of
common stock under Delaware law. For these reasons, you should read our
consolidated financial information with the financial information we provide for
each group in our most recent Form 10-K and Form 10-Q incorporated by reference
at page 32 of the accompanying prospectus.
THE MARKET PRICE OF EITHER CLASS OF OUR COMMON STOCK MAY NOT REFLECT THE
SEPARATE PERFORMANCE OF THE GROUP RELATED TO THAT CLASS OF COMMON STOCK.
The market price of our Acacia Research-CombiMatrix common stock or Acacia
Research-Acacia Technologies common stock may not reflect the separate
performance of the business of the group relating to that class of common stock.
The market price of either class of common stock could simply reflect the
performance of Acacia Research Corporation as a whole, or the market price of
either class of common stock could move independently of the performance of the
business of either group. Investors may discount the value of either class of
common stock because it is part of a common enterprise rather than a stand-alone
company.
THE MARKET PRICE OF EITHER CLASS OF OUR COMMON STOCK MAY BE AFFECTED BY FACTORS
THAT DO NOT AFFECT TRADITIONAL COMMON STOCK.
o THE COMPLEX NATURE OF THE TERMS OF OUR ACACIA RESEARCH-COMBIMATRIX
COMMON STOCK AND ACACIA RESEARCH-ACACIA TECHNOLOGIES COMMON STOCK MAY
ADVERSELY AFFECT THE MARKET PRICE OF EITHER CLASS OF COMMON STOCK.
The complex nature of the terms of our two classes of common stock, such as
the convertibility of Acacia Research-CombiMatrix common stock into Acacia
Research-Acacia Technologies common stock, or vice versa, and the potential
difficulties investors may have understanding these terms, may adversely affect
the market price of either class of common stock.
o THE MARKET PRICE OF OUR ACACIA RESEARCH-ACACIA TECHNOLOGIES COMMON
STOCK MAY BE ADVERSELY AFFECTED BY THE FACT THAT HOLDERS HAVE LIMITED
LEGAL INTERESTS IN THE GROUP RELATING TO THE CLASS OF COMMON STOCK.
For example, as described in greater detail in the subsequent risk factors,
holders of either class of common stock generally do not have separate class
voting rights with respect to significant matters affecting either group. In
addition, upon our liquidation or dissolution, holders of either class of common
stock will not have specific rights to the assets of the group relating to the
class of common stock held and will not be entitled to receive proceeds that are
proportional to the relative performance of that group. The voting rights of the
Acacia Research-Acacia Technologies common stock fluctuates based upon the
relative market prices of the Acacia Research-CombiMatrix common stock and the
Acacia Research-Acacia Technologies common stock, as more fully discussed on
pages 22-26 of the accompanying prospectus under the caption, "VOTING RIGHTS."
The record date for our last stockholder meeting was March 14, 2005, and holders
of Acacia Research-Acacia Technologies common stock had 1.665 votes per share,
and holders of Acacia Research-CombiMatrix common stock had one vote per share.
18
o THE MARKET PRICE OF OUR ACACIA RESEARCH-ACACIA TECHNOLOGIES COMMON
STOCK MAY BE ADVERSELY AFFECTED BY EVENTS INVOLVING THE COMBIMATRIX
GROUP OR THE PERFORMANCE OF THE ACACIA RESEARCH-COMBIMATRIX COMMON
STOCK.
Events, such as earnings announcements or other developments concerning one
group that the market does not view favorably and which thus adversely affect
the market price of the class of common stock relating to that group, may
adversely affect the market price of the class of common stock relating to the
other group. Because both classes of common stock are common stock of Acacia
Research Corporation, an adverse market reaction to one class of common stock
may, by association, cause an adverse reaction to the other class of common
stock. This reaction may occur even if the triggering event was not material to
us as a whole.
THE HOLDERS OF ACACIA RESEARCH-COMBIMATRIX COMMON STOCK AND THE HOLDERS OF
ACACIA RESEARCH-ACACIA TECHNOLOGIES COMMON STOCK HAVE ONLY LIMITED SEPARATE
STOCKHOLDER RIGHTS.
Holders of Acacia Research-CombiMatrix common stock and Acacia
Research-Acacia Technologies common stock have the rights customarily held by
common stockholders. They also have these specific rights related to their
corresponding group:
o certain rights with regard to dividends and liquidation;
o requirements for a mandatory dividend, redemption or conversion
upon the disposition of all or substantially all of the assets of
their corresponding group;
o a right to vote on matters as a separate voting class in the
limited circumstances provided under Delaware law, by stock
exchange rules or as determined by our board of directors (such
as an amendment of our certificate of incorporation that changes
the rights, privileges or preferences of the class of stock held
by such stockholders); and
o we will not hold separate stockholder meetings for holders of
Acacia Research-CombiMatrix common stock and Acacia
Research-Acacia Technologies common stock .
THE HOLDERS OF ACACIA RESEARCH-COMBIMATRIX COMMON STOCK AND THE HOLDERS OF
ACACIA RESEARCH-ACACIA TECHNOLOGIES COMMON STOCK WILL HAVE CERTAIN LIMITS ON
THEIR RESPECTIVE VOTING POWERS.
o GROUP COMMON STOCK WITH A MAJORITY OF VOTING POWER CAN CONTROL VOTING
OUTCOMES.
The holders of Acacia Research-CombiMatrix common stock and Acacia
Research-Acacia Technologies common stock will vote together as a single class,
except in limited circumstances. If a separate vote on a matter by the holders
of either our Acacia Research-CombiMatrix common stock or our Acacia
Research-Acacia Technologies common stock is not required under Delaware law or
by stock exchange rules, and if our board of directors does not require a
separate vote, either class of common stock that is entitled to more than the
number of votes required to approve such matter could control the outcome of
such vote - even if the matter involves a divergence or conflict of the
interests between the holders of our Acacia Research-CombiMatrix common stock
and our Acacia Research-Acacia Technologies common stock . In addition, if the
holders of common stock having a majority of the voting power of all shares of
common stock outstanding approve a merger, the terms of which did not require
separate class voting under stock exchange rules, then the merger could be
consummated - even if the holders of a majority of either class of common stock
were to vote against the merger.
19
The last time we determined the floating voting power of our Acacia
Research-Acacia Technologies common stock was at our last annual meeting on May
10, 2005, and our record date for voting purposes was March 14, 2005. As of
March 14, 2005, 27,212,769 shares of Acacia Research-Acacia Technologies common
stock were issued and outstanding. As of March 14, 2005, 31,200,496 shares of
Acacia Research-CombiMatrix common stock were issued and outstanding. For
purposes of the annual meeting, each holder of Acacia Research-Acacia
Technologies common stock had 1.665 votes per share, and each holder of Acacia
Research-CombiMatrix common stock had one vote per share. Collectively, holders
of Acacia Research-Acacia Technologies common stock had a total of 45,309,260
potential votes, or approximately 62.50% of the total available votes. As the
number of issued and outstanding shares of each class of stock increases, and as
the market price of each class of stock fluctuates, the relative voting power
between the classes of stock could change significantly.
o GROUP COMMON STOCK WITH LESS THAN MAJORITY VOTING POWER CAN BLOCK
ACTION IF A CLASS VOTE IS REQUIRED.
If Delaware law, stock exchange rules or our board of directors requires a
separate vote on a matter by the holders of either our Acacia
Research-CombiMatrix common stock or our Acacia Research-Acacia Technologies
common stock , such as a proposal to amend the terms of one class of stock,
those holders could prevent approval of the matter, even if the holders of a
majority of the total number of votes cast or entitled to be cast, voting
together as a class, were to vote in favor of it.
o HOLDERS OF ONLY ONE CLASS OF COMMON STOCK CANNOT ENSURE THAT THEIR
VOTING POWER WILL BE SUFFICIENT TO PROTECT THEIR INTERESTS.
Since the relative voting power per share of Acacia Research-CombiMatrix
common stock and Acacia Research-Acacia Technologies common stock will fluctuate
based on the market values of the two classes of common stock, the relative
voting power of a class of common stock could decrease. As a result, holders of
shares of only one of the two classes of common stock cannot ensure that their
voting power will be sufficient to protect their interests.
OUR RESTATED CERTIFICATE OF INCORPORATION MAY BE AMENDED TO INCREASE OR DECREASE
THE AUTHORIZED SHARES OF EITHER CLASS OF COMMON STOCK WITHOUT THE APPROVAL OF
EACH CLASS VOTING SEPARATELY.
Our restated certificate of incorporation provides that an amendment to our
restated certificate to increase or decrease the number of authorized shares of
either class of common stock will require the approval of the holders of a
majority of the voting power of all shares of common stock, voting together as a
single class, and will not require the approval of each class of stock voting as
a separate class. Accordingly, if the holders of one class of common stock hold
a majority of the voting power of all shares of common stock, then that majority
could approve an amendment to our restated certificate to increase or decrease
the authorized shares of stock of either class without the approval of the
holders of the minority class of stock.
STOCKHOLDERS MAY NOT HAVE ANY REMEDIES FOR BREACH OF FIDUCIARY DUTIES IF ANY
ACTION BY OUR DIRECTORS OR OFFICERS HAS A DISADVANTAGEOUS EFFECT ON EITHER CLASS
OF COMMON STOCK.
Stockholders may not have any remedies if any action or decision of our
directors and officers has a disadvantageous effect on either class of common
stock compared to the other class of common stock. We are not aware of any legal
precedent under Delaware law involving the fiduciary duties of directors and
officers of corporations having two classes of common stock, or separate classes
or series of capital stock, the rights of which, like our Acacia
Research-CombiMatrix common stock and Acacia Research-Acacia Technologies common
stock , are defined by reference to separate businesses of the corporation.
20
Principles of Delaware law established in cases involving differing
treatment of two classes of capital stock or two groups of holders of the same
class of capital stock provide that a board of directors owes an equal duty to
all stockholders regardless of class or series. Under these principles of
Delaware law and the related principle known as the "business judgment rule,"
absent abuse of discretion, a good faith business decision made by a
disinterested and adequately informed board of directors, board of directors'
committee or officer with respect to any matter having different effects on
holders of Acacia Research-CombiMatrix common stock and holders of Acacia
Research-Acacia Technologies common stock would be a defense to any challenge to
such determination made by or on behalf of the holders of either class of common
stock.
NUMEROUS POTENTIAL CONFLICTS OF INTERESTS EXIST BETWEEN OUR ACACIA
RESEARCH-COMBIMATRIX COMMON STOCK AND OUR ACACIA RESEARCH-ACACIA TECHNOLOGIES
COMMON STOCK WHICH MAY BE DIFFICULT TO RESOLVE BY OUR BOARD OR WHICH MAY BE
RESOLVED ADVERSELY TO ONE OF THE CLASSES.
The existence of separate classes of common stock could give rise to
occasions when the interests of the holders of Acacia Research-CombiMatrix
common stock and Acacia Research-Acacia Technologies common stock diverge or
conflict. Examples include determinations by our directors or officers to:
o pay or omit the payment of dividends on Acacia
Research-CombiMatrix common stock or Acacia Research-Acacia
Technologies common stock ;
o allocate consideration to be received by holders of each of the
classes of common stock in connection with a merger or
consolidation involving Acacia Research Corporation;
o convert one class of common stock into shares of the other;
o approve certain dispositions of the assets of either group;
o allocate the proceeds of future issuances of our stock either to
the Acacia Technologies group or the CombiMatrix group;
o allocate corporate opportunities between the groups;
o make other operational and financial decisions with respect to
one group that could be considered detrimental to the other
group; and
o Acacia Technology group may seek to license and enforce its
patented technologies against companies that have business
relationships or potential business relationships with
CombiMatrix group.
When making decisions with regard to matters that create potential
diverging or conflicting interests, our directors and officers will act in
accordance with their fiduciary duties, the terms of our restated certificate of
incorporation, and, to the extent applicable, our management and allocation
policies.
THE PERFORMANCE OF ONE GROUP OR THE DIVIDENDS PAID TO ONE GROUP MAY ADVERSELY
AFFECT THE DIVIDENDS AVAILABLE FOR THE OTHER GROUP.
Our board of directors currently has no intention to pay dividends on our
Acacia Research-CombiMatrix common stock or our Acacia Research-Acacia
Technologies common stock . Determinations as to future dividends on our Acacia
Research-CombiMatrix common stock and our Acacia Research-Acacia Technologies
common stock will be based primarily on the financial condition, results of
operations and business requirements of the relevant group and Acacia Research
Corporation as a whole. Subject to the limitations referred to below, our board
of directors has the authority to declare and pay dividends on our Acacia
Research-CombiMatrix common stock and our Acacia Research-Acacia Technologies
21
common stock in any amount and could, in its sole discretion, declare and pay
dividends exclusively on our Acacia Research-CombiMatrix common stock,
exclusively on our Acacia Research-Acacia Technologies common stock , or on
both, in equal or unequal amounts. Our board of directors will not be required
to consider the amount of dividends previously declared on each class, the
respective voting or liquidation rights of each class or any other factor.
The performance of one group may cause our board of directors to pay more
or less dividends on the common stock relating to the other group than if that
other group was a stand-alone company. In addition, Delaware law and our
restated certificate of incorporation impose limitations on the amount of
dividends which may be paid on each class of common stock.
PROCEEDS OF MERGERS OR CONSOLIDATIONS MAY BE ALLOCATED UNFAVORABLY.
Our restated certificate of incorporation does not contain any provisions
governing how consideration to be received by holders of common stock in
connection with a merger or consolidation involving Acacia Research Corporation
is to be allocated among holders of each class of common stock. Our board of
directors will determine the percentage of the consideration to be allocated to
holders of each class of common stock in any such transaction. Such percentage
may be materially more or less than that which might have been allocated to such
holders had our board of directors chosen a different method of allocation.
HOLDERS OF EITHER CLASS OF COMMON STOCK MAY BE ADVERSELY AFFECTED BY A
CONVERSION OF GROUP COMMON STOCK.
Our board of directors could, in its sole discretion and without
stockholder approval, determine to convert shares of Acacia Research-Acacia
Technologies common stock into shares of Acacia Research-CombiMatrix common
stock, or vice versa, at a time when either or both classes of common stock may
be considered to be overvalued or undervalued. Any such conversion would dilute
the interests in Acacia Research Corporation of the holders of the class of
common stock being issued in the conversion. It could also give holders of
shares of the class of common stock converted a greater or lesser premium than
any premium that might be paid by a third-party buyer of all or substantially
all of the assets of the group whose stock is converted.
HOLDERS OF EITHER CLASS OF COMMON STOCK COULD BE ADVERSELY AFFECTED BY A
DISPOSITION OF THE ASSETS ATTRIBUTED TO THEIR RESPECTIVE GROUPS.
Our board of directors could, in its sole discretion and without
stockholder approval, determine to dispose of all or substantially all the
assets of a group. If a disposition of group assets occurs at a time when those
assets are considered undervalued, then holders of that group's stock would
receive less consideration than they could have received had the assets been
disposed of at a time when they had a higher value.
PROCEEDS OF FUTURE ISSUANCES OF OUR STOCK COULD BE ATTRIBUTED UNFAVORABLY.
We may in the future issue a new class of stock, such as a class of
preferred stock, or additional shares of Acacia Research-CombiMatrix common
stock or Acacia Research-Acacia Technologies common stock . Proceeds from any
future issuance of any class of stock would be attributed among the CombiMatrix
group or the Acacia Technologies group as determined by our board of directors.
There is no requirement that the proceeds from an issuance of Acacia
Research-CombiMatrix common stock or Acacia Research-Acacia Technologies common
stock be attributed to the corresponding group. Such allocations might be
materially more or less for the respective groups than what might have been
attributed had our board of directors chosen a different allocation method.
Also, any designated preferred class may be designed to reflect the performance
of Acacia Research Corporation as a whole, rather than the performance of the
CombiMatrix group or the Acacia Technologies group.
22
ALLOCATION OF CORPORATE OPPORTUNITIES COULD FAVOR ONE GROUP OVER ANOTHER.
Our board of directors may be required to allocate corporate opportunities
between the groups. In some cases, our directors could determine that a
corporate opportunity, such as a business that we are acquiring, should be
shared by the groups. Any such decisions could favor one group at the expense of
the other.
OTHER OPERATIONAL AND FINANCIAL DECISIONS WHICH MAY FAVOR ONE GROUP OVER THE
OTHER.
Our board of directors or our senior officers will review other operational
and financial matters affecting the CombiMatrix group and the Acacia
Technologies group, including the allocation of financing resources and capital,
technology and know-how and corporate overhead, taxes, debt, interest and other
matters. Any decision of our board of directors or our senior officers in these
matters could favor one group at the expense of the other.
OUR BOARD OF DIRECTORS MAY CHANGE OUR MANAGEMENT AND ALLOCATION POLICIES WITHOUT
STOCKHOLDER APPROVAL TO THE DETRIMENT OF EITHER GROUP.
Our board of directors may modify or rescind our policies with respect to
the allocation of corporate overhead, taxes, debt, interest and other matters,
or may adopt additional policies, in its sole discretion without stockholder
approval. A decision to modify or rescind these policies, or adopt additional
policies could have different effects on holders of either class of common stock
or could result in a benefit or detriment to one class of stockholders compared
to the other class. Our board of directors will make any such decision in
accordance with its good faith business judgment that the decision is in the
best interests of Acacia Research Corporation and all of our stockholders as a
whole.
EITHER GROUP MAY FINANCE THE OTHER GROUP ON TERMS UNFAVORABLE TO ONE OF THE
GROUPS.
We may transfer cash and other property between groups to finance their
business activities. The group providing the financing will be subject to the
risks relating to the group receiving the financing. We will account for those
transfers generally as a short-term or long-term loan between groups or as a
repayment of a previous borrowing.
THERE ARE LIMITS ON THE CONSIDERATION WHICH MAY BE RECEIVED BY THE STOCKHOLDERS
IN THE EVENT OF THE DISPOSITION OF ASSETS OF A GROUP.
Our restated certificate of incorporation provides that if a disposition of
all or substantially all of the properties and assets of either group occurs, we
must, subject to certain exceptions:
o distribute through a dividend or redemption to holders of the
class of common stock relating to such group an amount equal to
the net proceeds of such disposition; or
o convert at a 10% premium such common stock into shares of the
class of common stock relating to the other group.
If the group subject to the disposition were a separate, independent
company and its shares were acquired by another person, certain costs of that
disposition, including corporate level taxes, might not be payable in connection
with that acquisition. As a result, stockholders of the separate, independent
company might receive a greater amount than the net proceeds that would be
received by holders of the class of common stock relating to that group if the
assets of such group were sold. In addition, we cannot assure you that the net
23
proceeds per share of the common stock relating to that group will be equal to
or more than the market value per share of such common stock prior to or after
announcement of a disposition.
The term "substantially all of the properties and assets" of a group is
subject to potentially conflicting interpretations. Resolution of such a dispute
could adversely impact the holders of either the class of common stock related
to the assets being disposed or the holders of the other class because the
consideration, if any, to be received by the holders of the class related to the
disposed assets may depend on whether the disposition involved "substantially
all" of the properties and assets of that class.
HOLDERS OF EITHER CLASS OF COMMON STOCK MAY BE ADVERSELY AFFECTED BY A
REDEMPTION OF THEIR COMMON STOCK.
We are entitled to redeem the outstanding common stock relating to a group
when all or substantially all of that group's assets are sold. We can redeem the
assets for cash, securities, a combination of cash and securities or other
property at fair value. A disposition-related redemption could occur when the
assets being disposed of are considered undervalued. If that were the case, the
holders of our common stock related to that group would receive less
consideration for their shares than they may deem reasonable.
We can also redeem on a pro rata basis all of the outstanding shares of a
group's common stock for shares of the common stock of one or more of our wholly
owned subsidiaries. If this were to occur, the holders of the redeemed class of
common stock would no longer have stockholder voting rights in Acacia Research
Corporation or any other benefits to be derived from holding a class of stock in
Acacia Research Corporation. In addition, if the outstanding shares of a class
of our common stock are redeemed for shares that are not publicly traded, the
holders of such redeemed stock will no longer be able to publicly trade their
shares and accordingly their investment will be substantially less liquid.
OUR CAPITAL STRUCTURE AND THE VARIABLE VOTE PER SHARE COULD ENABLE A POTENTIAL
ACQUIRER TO TAKE CONTROL OF OUR COMPANY THROUGH THE ACQUISITION OF ONLY ONE OF
THE CLASSES OF OUR COMMON STOCK.
A potential acquirer could acquire control of Acacia Research Corporation
by acquiring shares of common stock having a majority of the voting power of all
shares of common stock outstanding. Such a majority could be obtained by
acquiring a sufficient number of shares of both classes of common stock or, if
one class of common stock has a majority of such voting power, only shares of
that class. Currently, our Acacia Research-Acacia Technologies common stock has
a majority of the voting power. As a result, currently, it might be possible for
an acquirer to obtain control of Acacia Research Corporation by purchasing only
shares of Acacia Research-Acacia Technologies common stock .
DECISIONS BY DIRECTORS AND OFFICERS THAT AFFECT DIFFERENTLY ONE CLASS OF OUR
COMMON STOCK COMPARED TO THE OTHER COULD ADVERSELY AFFECT THE MARKET VALUE OF
EITHER OR BOTH OF THE CLASSES OF OUR COMMON STOCK.
The relative voting power per share of our Acacia Research-CombiMatrix
common stock and our Acacia Research-Acacia Technologies common stock and the
number of shares of one class of common stock issuable upon the conversion of
the other class of common stock will vary depending upon the relative market
values of our Acacia Research-CombiMatrix common stock and our Acacia
Research-Acacia Technologies common stock . The market value of either or both
classes of common stock could be affected by market reaction to decisions by our
board of directors or our management that investors perceive to affect
differently one class of common stock compared to the other. These decisions
could involve changes to our management and allocation policies, allocations of
corporate opportunities and financing resources between groups, and changes in
dividend policies.
24
INVESTORS MAY NOT VALUE OUR ACACIA RESEARCH-COMBIMATRIX COMMON STOCK AND OUR
ACACIA RESEARCH-ACACIA TECHNOLOGIES COMMON STOCK BASED ON GROUP FINANCIAL
INFORMATION AND POLICIES.
We cannot assure you that investors will value our Acacia
Research-CombiMatrix common stock and our Acacia Research-Acacia Technologies
common stock based on the reported financial results and prospects of the
separate groups or the dividend policies established by our board of directors
with respect to those groups. Holders of Acacia Research-CombiMatrix common
stock and Acacia Research-Acacia Technologies common stock will continue to be
common stockholders of Acacia Research Corporation subject to all the risks
associated with an investment in Acacia Research Corporation as a whole.
Additionally, the separate stockholder rights related to each group are limited
and relate to events that may never occur, such as dividend and liquidation
rights and the disposition of all or substantially all of the assets of a group.
Accordingly, investors may discount the value of Acacia Research-CombiMatrix
common stock and Acacia Research-Acacia Technologies common stock because both
groups are part of a common enterprise rather than a stand-alone entity and each
class of stock has limited separate stockholder rights.
HOLDERS OF ACACIA RESEARCH-COMBIMATRIX COMMON STOCK AND ACACIA RESEARCH-ACACIA
TECHNOLOGIES COMMON STOCK MAY NOT RECEIVE A PREMIUM FROM AN INVESTOR ACQUIRING
CONTROL OF THEIR RESPECTIVE CLASSES OF STOCK.
Control of Acacia Research-CombiMatrix common stock or Acacia
Research-Acacia Technologies common stock may not provide control of Acacia
Research Corporation as a whole. Accordingly, unlike many acquisition
transactions, holders of Acacia Research-CombiMatrix common stock and
AR-Technologies stock may not receive a controlling interest premium from an
investor acquiring control of their respective classes of stock.
THERE ARE CERTAIN PROVISIONS IN OUR TWO-CLASS CAPITAL STRUCTURE THAT COULD HAVE
ANTI-TAKEOVER EFFECTS.
The existence of the two classes of common stock could, under certain
circumstances, prevent stockholders from profiting from an increase in the
market value of their shares as a result of a change in control of Acacia
Research Corporation by delaying or preventing such change in control. The
existence of two classes of common stock could present complexities and could,
in certain circumstances, pose obstacles, financial and otherwise, to an
acquiring person. We could, in the sole discretion of our board of directors and
without stockholder approval, exercise the right to convert the shares of one
class of common stock into shares of the other at a 10% premium over their
respective average market values. This conversion could result in additional
dilution to persons seeking control of Acacia Research Corporation.
Our board of directors could issue shares of preferred stock or common
stock that could be used to create voting or other impediments to discourage
persons seeking to gain control of Acacia Research Corporation, and preferred
stock could also be privately placed with purchasers favorable to our board of
directors in opposing such action.
CAUTIONARY STATEMENT CONCERNING FORWARD-LOOKING INFORMATION
This prospectus supplement contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995 with respect to
the financial condition, results of operations, business strategies, operating
efficiencies or synergies, competitive positions, growth opportunities for
existing patents, technologies, products, plans and objectives of management,
markets for stock of Acacia and other matters. Statements in this prospectus
supplement that are not historical facts are hereby identified as
"forward-looking statements" for the purpose of the safe harbor provided by
Section 21E of the Exchange Act and Section 27A of the Securities Act. Such
forward-looking statements, including, without limitation, those relating to the
future business prospects, revenues and income of Acacia, wherever they occur,
are necessarily estimates reflecting the best judgment of the senior management
25
of our company on the date on which they were made, or if no date is stated, as
of the date of this prospectus supplement. These forward-looking statements are
subject to risks, uncertainties and assumptions, including those described in
the section entitled "Risk Factors," beginning on page 1 that may affect the
operations, performance, development and results of our business. Because the
factors discussed in this prospectus supplement and the accompanying prospectus
could cause actual results or outcomes to differ materially from those expressed
in any forward-looking statements made by us or on our behalf, you should not
place undue reliance on any such forward-looking statements. New factors emerge
from time to time, and it is not possible for us to predict which factors will
arise. In addition, we cannot assess the impact of each factor on our business
or the extent to which any factor, or combination of factors, may cause actual
results to differ materially from those contained in any forward-looking
statements.
You should understand that important factors discussed in the "Risk
Factors" section, could affect our future results and could cause those results
to differ materially from those expressed in such forward-looking statements.
We undertake no obligation to publicly update or revise any forward-looking
statements, whether as a result of new information, future events or any other
reason. All subsequent forward-looking statements attributable to our company or
any person acting on our behalf are expressly qualified in their entirety by the
cautionary statements contained or referred to herein. In light of these risks,
uncertainties and assumptions, the forward-looking events discussed in this
prospectus supplement may not occur. We are required to update this prospectus
supplement, the accompanying prospectus and the registration statement with a
post-effective amendment to include any material information with respect to the
plan of distribution not previously disclosed in the registration statement or
any material change to such information in the registration statement, including
this prospectus supplement.
USE OF PROCEEDS
We estimate that the net proceeds we will receive from this offering will
be approximately $2,863,449 million, after deducting the finder fees and
estimated offering expenses. We will retain broad discretion over the use of the
net proceeds from the sale of our Acacia Research-CombiMatrix common stock
offered hereby. We currently anticipate using the net proceeds from the sale of
our Acacia Research-CombiMatrix common stock hereby primarily for working
capital for our CombiMatrix group, including the CombiMatrix group's
subsidiaries.
The amounts and timing of the CombiMatrix group's expenditures may vary
significantly depending on numerous factors, such as the progress of our
research and development efforts, technological advances and the competitive
environment for our products. We may also use a portion of the net proceeds to
acquire or invest in businesses complementary to the CombiMatrix group's
business, products and technologies. Although we have no specific arrangements
with respect to acquisitions, we evaluate acquisition opportunities and engage
in related discussions from time to time.
LEGAL MATTERS
Certain legal matters in connection with this prospectus will be passed
upon for us by Greenberg Traurig, LLP. Greenberg Traurig, LLP and its attorneys
hold no shares of our Acacia Research-CombiMatrix common stock or other
securities.
PLAN OF DISTRIBUTION
We are offering the shares of our Acacia Research-CombiMatrix common stock
with the assistance of three finders. Subject to the terms and conditions
contained in the finder's fee agreement dated June 5, 2005, we have agreed to
pay to vFinance Investments, Inc. five percent (5%) of the purchase price paid
for the Acacia Research-CombiMatrix common stock offered pursuant to this
prospectus by investors introduced to us by vFinance Investments, Inc. Subject
to the terms and conditions contained in an oral finder's fee agreement, we have
agreed to pay to Brean Murray & Co., Inc. five percent
26
(5%) of the purchase price paid for the Acacia Research-CombiMatrix common stock
offered pursuant to this prospectus by investors introduced to us by Brean
Murray & Co., Inc. Subject to the terms and conditions contained in an oral
finder's fee agreement with Waterford Capital, we have agreed to pay to
Waterford Capital five percent (5%) of the purchase price paid for the Acacia
Research - CombiMatrix common stock offerent pursuant to this prospectus by
investors introducted to us by Waterford Captial. The finders are not purchasing
or selling any shares by this prospectus supplement or accompanying prospectus,
nor are they required to purchase or arrange the purchase or sale of any
specific number or dollar amount of shares. No compensation will be payable to
the finders for sales of shares of our Acacia Research-CombiMatrix common stock
to investors who were not introduced to the company by any finder.
The shares of Acacia Research-CombiMatrix common stock sold in this
offering will be listed on the Nasdaq National Market under the symbol "CBMX."
We expect that the shares of Acacia Research-CombiMatrix common stock will
be delivered only in book-entry form through The Depository Trust Company, New
York, New York on or about July 5, 2005.
It is possible that not all of the shares of our Acacia
Research-CombiMatrix common stock offered pursuant to this prospectus supplement
will be sold at the closing, in which case our net proceeds would be reduced.
The estimated offering expenses payable by us, in addition to the finder's
fee, are approximately $15,000, which includes legal, accounting and printing
costs and various other fees associated with registering and listing the shares
of Acacia Research-CombiMatrix common stock. After deducting certain fees due to
the finder and our estimated offering expenses, we expect the net proceeds from
this offering to be up to approximately $2,863,449.
The following table shows the per unit and total placement fees payable to
each finder in connection with the sale of shares offered pursuant to this
prospectus supplement and the accompanying prospectus.
Per Share Total
--------- -----
vFinance Investments, Inc. $0.1125 $11,250.00
Brean Murray & Co., Inc. $0.1125 $30,000.04
Waterford Capital $0.1125 $ 6,300.00
The finders fee agreements are included as exhibits to our Current Report on
Form 8-K that will be filed with the Securities and Exchange Commission in
connection with the consummation of this offering.
The transfer agent for our common stock is U.S. Stock Transfer Corporation.
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