UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2008
OR
FOR
THE TRANSITION PERIOD
FROM TO .
Commission
File Number 0-26068
ACACIA
RESEARCH CORPORATION
(Exact
name of registrant as specified in its charter)
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DELAWARE
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95-4405754
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(State
or other jurisdiction of
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(I.R.S.
Employer
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incorporation
organization)
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Identification
No.)
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500
NEWPORT CENTER DRIVE, NEWPORT BEACH, CA
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92660
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(Address
of principal executive offices)
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(Zip
Code)
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Registrant’s
telephone number, including area code: (949) 480-8300
Securities
registered pursuant to Section 12(b) of the Act:
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Title of Each
Class
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Name
of Each Exchange on Which Registered
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Common
Stock, $0.001 par value
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The
NASDAQ Stock Market, LLC
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Securities
registered pursuant to Section 12(g) of the Act: None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes ¨ No þ
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ¨ No þ
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to filing requirements for the
past 90 days.
Yes þ No £
Indicate
by check mark that disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. þ
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated filer,”
“accelerated filer” and “smaller reporting company” in Rule 12b-2 of the
Exchange Act.
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Large
accelerated filer ¨
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Accelerated
filer þ
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Non-accelerated
filer ¨ (Do not check if
a smaller reporting company)
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Smaller
reporting company ¨
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Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes ¨ No þ
The
aggregate market value of the registrant’s common stock held by non-affiliates
of the registrant, computed by reference to the last sales prices of such stock
reported on The NASDAQ Global Market, as of June 30, 2008, was approximately
$133,348,669. (All executive officers and directors of the registrant are
considered affiliates.)
As of
February 23, 2009, 31,914,994 shares of common stock were issued and
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE
Portions
of the registrant’s definitive proxy statement for its Annual Meeting of
Stockholders to be filed with the Commission within 120 days after the close of
its fiscal year are incorporated by reference into Part III.
ACACIA
RESEARCH CORPORATION
FORM
10-K ANNUAL REPORT
FISCAL
YEAR ENDED DECEMBER 31, 2008
TABLE
OF CONTENTS
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Item
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Page
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PART
I
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1.
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Business
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1
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1A.
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Risk
Factors
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6
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1B.
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Unresolved
Staff Comments
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15
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2.
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Properties
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15
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3.
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Legal
Proceedings
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15
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4.
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Submission
of Matters to a Vote of Security Holders
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16
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PART
II
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5.
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Market
for Registrant’s Common Equity, Related Stockholder Matters and
Issuer
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Purchases
of Equity Securities
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17
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6.
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Selected
Financial Data
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20
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7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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22
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7A.
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Quantitative
and Qualitative Disclosures About Market Risk
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32
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8.
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Financial
Statements and Supplementary Data
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32
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9.
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Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
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32
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9A.
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Controls
and Procedures
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32
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9B.
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Other
Information
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33
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PART
III
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10.
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Directors,
Executive Officers and Corporate Governance
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34
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11.
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Executive
Compensation
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34
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12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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34
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13.
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Certain
Relationships and Related Transactions, and Director
Independence
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34
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14.
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Principal
Accounting Fees and Services
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34
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PART
IV
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15.
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Exhibits,
Financial Statement Schedules
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35
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PART
I
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
As used
in this Annual Report on Form 10-K, “we,” “us” and “our” refer to Acacia
Research Corporation and/or its wholly owned operating
subsidiaries. All intellectual property acquisition, development,
licensing and enforcement activities are conducted solely by certain of our
wholly owned operating subsidiaries.
This
report contains forward-looking statements within the meaning of the “safe
harbor” provisions of the Private Securities Litigation Reform Act of 1995.
Reference is made in particular to the description of our plans and objectives
for future operations, assumptions underlying such plans and objectives, and
other forward-looking statements included in this report. Such statements may be
identified by the use of forward-looking terminology such as “may,” “will,”
“expect,” “believe,” “estimate,” “anticipate,” “intend,” “continue,” or similar
terms, variations of such terms or the negative of such terms. Such statements
are based on management’s current expectations and are subject to a number of
factors and uncertainties, which could cause actual results to differ materially
from those described in the forward-looking statements. Such statements address
future events and conditions concerning product development, capital
expenditures, earnings, litigation, regulatory matters, markets for products and
services, liquidity and capital resources and accounting matters. Actual results
in each case could differ materially from those anticipated in such statements
by reason of factors such as future economic conditions, changes in consumer
demand, legislative, regulatory and competitive developments in markets in which
we and our subsidiaries operate, and other circumstances affecting anticipated
revenues and costs, as more fully disclosed in our discussion of risk factors
incorporated by reference in Item 1A. of Part I of this
report. We expressly disclaim any obligation or undertaking to release publicly
any updates or revisions to any forward-looking statements contained herein to
reflect any change in our expectations with regard thereto or any change in
events, conditions or circumstances on which any such statement is based.
Additional factors that could cause such results to differ materially from those
described in the forward-looking statements are set forth in connection with the
forward-looking statements.
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Item
1.
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BUSINESS
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General
Our
operating subsidiaries acquire, develop, license and enforce patented
technologies. Our operating subsidiaries generate license fee
revenues and related cash flows from the granting of licenses for the use of
patented technologies that our operating subsidiaries own or
control. Our operating subsidiaries assist patent owners with the
prosecution and development of their patent portfolios, the protection of their
patented inventions from unauthorized use, the generation of licensing revenue
from users of their patented technologies and, if necessary, with the
enforcement against unauthorized users of their patented
technologies.
We are a
leader in licensing patented technologies and have established a proven track
record of licensing success with over 620 license agreements executed to date,
across 48 of our technology license programs. Currently, on a
consolidated basis, our operating subsidiaries own or control the rights to over
100 patent portfolios, which include U.S. patents and certain foreign
counterparts, covering technologies used in a wide variety of
industries.
CombiMatrix Group
Split-Off Transaction and Related Discontinued Operations. In
January 2006, our board of directors approved a plan for our former wholly owned
subsidiary, CombiMatrix Corporation, or CombiMatrix, the primary component of
our life science business, known as the CombiMatrix group, to become an
independent publicly-held company. On August 15, 2007, or the
Redemption Date, CombiMatrix was split-off from us through the redemption of all
outstanding shares of Acacia Research-CombiMatrix common stock in exchange for
the distribution of new shares of CombiMatrix common stock, on a pro-rata basis,
to the holders of Acacia Research-CombiMatrix common stock on the Redemption
Date. We refer to this transaction as the Split-Off
Transaction. Subsequent to the Redemption Date, we no longer own any
equity interests in CombiMatrix and the CombiMatrix group is no longer one of
our business groups. Subsequent
to the Split-Off Transaction, our only business is our intellectual property
licensing business.
Refer to
Note 10A to our consolidated financial statements, included elsewhere herein,
for information regarding presentation of the assets, liabilities, results of
operations and cash flows for the CombiMatrix group as “Discontinued
Operations,” for all periods presented, in accordance with guidance set forth in
Statement of Financial Accounting Standards (“SFAS”) No. 144 “Accounting for the
Impairment or Disposal of Long-Lived Assets,” or SFAS No. 144.
1
Capital
Structure. Pursuant to the terms of the Split-Off Transaction,
all outstanding shares of Acacia Research-CombiMatrix common stock were
redeemed, and all rights of holders of Acacia Research-CombiMatrix common stock
ceased as of the Redemption Date, except for the right, upon the surrender to
the exchange agent of shares of Acacia Research-CombiMatrix common stock, to
receive new shares of CombiMatrix common stock. As a result of, and
immediately following, the consummation of the Split-Off Transaction, our only
class of common stock outstanding was our Acacia Research-Acacia Technologies
common stock.
On May
20, 2008, our stockholders approved an amendment and restatement of our
Certificate of Incorporation to eliminate all references to Acacia
Research-CombiMatrix common stock and all provisions relating to the rights and
obligations of the Acacia Research-CombiMatrix common stock. In
addition, the amendment and restatement changed the name of the “Acacia
Research-Acacia Technologies common stock” to “common stock,” and our common
stock is the only class of common stock authorized and
issuable.
Other
We were
originally incorporated in California in January 1993 and reincorporated in
Delaware in December 1999. Our website address is www.acaciaresearch.com. We
make our filings with the Securities and Exchange Commission, or the SEC,
including our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, and amendments to those reports, available free of
charge on our website as soon as reasonably practicable after we file these
reports. In addition, we post the following information on our
website:
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●
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our
corporate code of conduct, our code of conduct for our board of directors
and our fraud policy; and
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●
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charters
for our audit committee, nominating and corporate governance committee,
disclosure committee and compensation
committee.
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The
public may read and copy any materials that we file with the SEC at the SEC’s
Public Reference Room at 100 F Street, NE, Washington, D.C.
20549. The public may obtain information on the operation of the
Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the
SEC maintains an Internet website that contains reports, proxy and information
statements, and other information regarding issuers, including us, that file
electronically with the SEC. The public can obtain any documents that
we file with the SEC at http://www.sec.gov.
2
BUSINESS
OVERVIEW
Intellectual
Property Licensing Business
Our
operating subsidiaries acquire, develop, license and enforce patented
technologies. Our operating subsidiaries generate license fee
revenues and related cash flows from the granting of licenses for the use of
patented technologies that our operating subsidiaries own or
control. Our operating subsidiaries assist patent owners with the
prosecution and development of their patent portfolios, the protection of their
patented inventions from unauthorized use, the generation of licensing revenue
from users of their patented technologies and, if necessary, with the
enforcement against unauthorized users of their patented technologies.
Currently, on a consolidated basis, our operating subsidiaries own or control
the rights to over 100 patent portfolios, which include U.S. patents and certain
foreign counterparts, covering technologies used in a wide variety of
industries. Refer to “Patented Technologies” below for a partial
summary of patent portfolios owned or controlled by certain of our operating
subsidiaries. We are a leader in patent licensing and our operating
subsidiaries have established a proven track record of licensing success with
more than 620 license agreements executed to date. To date, on a
consolidated basis, we have generated revenues from 48 of our technology
licensing and enforcement programs. Our professional staff includes
in-house patent attorneys, licensing executives, engineers and business
development executives.
Our
partners are primarily individual inventors and small companies who have limited
resources and/or expertise to effectively address the unauthorized use of their
patented technologies, and also include large companies seeking to effectively
and efficiently monetize their portfolio of patented technologies. In a typical
partnering arrangement, our operating subsidiary will acquire a patent
portfolio, or acquire rights to a patent portfolio, with our partner receiving
an upfront payment for the purchase of the patent portfolio or patent portfolio
rights, or receiving a percentage of our operating subsidiaries net recoveries
from the licensing and enforcement of the patent portfolio, or a combination of
the two.
Business
Model and Strategy
The
business model associated with the licensing and enforcement activities
conducted by our operating subsidiaries is summarized in the following
diagram:
Licensing
and Enforcement Business
3
Our
intellectual property acquisition, development, licensing and enforcement
business strategy, conducted solely by our operating subsidiaries, includes the
following key elements:
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Identify Emerging
Growth Areas where Patented Technologies will Play a Vital
Role
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The
patent process breeds, encourages and sustains innovation and invention by
granting a limited monopoly to the inventor in exchange for sharing the
invention with the public. Certain technologies, including several of the
technologies controlled by our operating subsidiaries, some of which are
summarized below, become core technologies in the way products and services are
manufactured, sold and delivered by companies across a wide array of
industries. Our operating subsidiaries identify core, patented
technologies that have been or are anticipated to be widely adopted by third
parties in connection with the manufacture or sale of products and
services.
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Contact and Form
Alliances with Owners of Core, Patented
Technologies
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Often
individual inventors and small companies have limited resources and/or
expertise and are unable to effectively address the unauthorized use of
their patented technologies. Individual inventors and small
companies may lack sufficient capital resources and may also lack in-house
personnel with patent licensing expertise and/or experience, which may
make it difficult to effectively out-license and/or enforce their patented
technologies.
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For
years, many large companies have earned substantial revenue licensing
patented technologies to third parties. Other companies that do
not have internal licensing resources and expertise have continued to
record the capitalized carrying value of their core and or non-essential
intellectual property in their financial statements, without deriving
income from their intellectual property or realizing the potential value
of their intellectual property assets. Securities and financial
reporting regulations require these companies to periodically evaluate and
potentially reduce or write-off these intellectual property assets if they
are unable to substantiate these reported carrying
values.
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Our
operating subsidiaries seek to enter into business agreements with owners of
intellectual property that do not have experience or expertise in the areas of
intellectual property licensing and enforcement or that do not possess the
in-house resources to devote to intellectual property licensing and enforcement
activities.
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Effectively and
Efficiently Evaluate Patented Technologies for Acquisition, Licensing and
Enforcement
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Subtleties
in the language of a patent, recorded interactions with the patent office,
and the evaluation of prior art and literature can make a significant
difference in the potential licensing and enforcement revenue derived from
a patent or patent portfolio. Our specialists are trained and
skilled in these areas. It is important to identify potential
problem areas, if any, and determine whether potential problem areas
can be overcome, prior to acquiring a patent portfolio or launching an
effective licensing program. We have developed processes and
procedures for identifying problem areas and evaluating the strength of a
patent portfolio before the decision is made to allocate resources to an
acquisition or an effective licensing and enforcement
effort.
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Purchase or Acquire
the Rights to Patented
Technologies
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After
evaluation, our operating subsidiaries may elect to purchase the patented
technology, or become the exclusive licensing agent for the patented
technology in all or in specific fields of use. In either case,
the owner of the patent generally retains the rights to a portion of the
net revenues generated from a patent’s licensing and enforcement
program. Our operating subsidiaries generally control the
licensing and enforcement process and utilize experienced in-house
personnel to reduce outside costs and to ensure that the necessary capital
and expertise is allocated and deployed in an efficient and cost effective
manner.
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Successfully License
and Enforce Patents with Significant Royalty
Potential
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As
part of the patent evaluation process employed by our operating
subsidiaries, significant consideration is also given to the
identification of potential infringers, industries within which the
potential infringers exist, longevity of the patented technology, and a
variety of other factors that directly impact the magnitude and potential
success of a licensing and enforcement program. Our specialists
are trained in evaluating potentially infringing technologies and in
presenting the claims of our patents and demonstrating how they apply to
companies we believe are using our technologies in their products or
services. These presentations can take place in a
non-adversarial business setting, but can also occur through the
litigation process, if necessary.
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4
Patented
Technologies
Currently,
on a consolidated basis, our operating subsidiaries own or control the rights to
over 100 patent portfolios, with patent expiration dates ranging from 2009 to
2028, and covering technologies used in a wide variety of industries, including
the following:
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· Aligned
Wafer Bonding
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· Enhanced
Internet Navigation
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· Peer
To Peer Communications
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· Audio
Communications Fraud Detection
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· Enterprise
Content Management
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· Physical
Access Control
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· Audio
Storage and Retrieval System
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· Facilities
Operation Management System
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· Picture
Archiving & Communication Systems
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· Audio
Video Enhancement & Synchronization
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· File
Locking In Shared Storage Networks
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· Pointing
Device
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· Authorized
Spending Accounts
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· Flash
Memory
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· Pop-Up
Internet Advertising
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· Automated
Notification of Tax Return Status
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· Fluid
Flow Control And Monitoring
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· Portable
Storage Devices With Links
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· Automated
Tax Reporting
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· Hearing
Aid ECS
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· Product
Activation
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· Broadcast
Data Retrieval
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· Heated
Surgical Blades
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· Projector
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· Color
Correction For Video Graphics Systems
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· High
Quality Image Processing
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· Purifying
Nucleic Acid
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· Compact
Disk
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· High
Resolution Optics
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· Radio
Communication With Graphics
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· Compiler
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· Image
Resolution Enhancement
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· Relational
Database Access
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· Computer
Graphics
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· Improved
Lighting
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· Remote
Management Of Imaging Devices
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· Computer
Memory Cache Coherency
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· Improved
Printing
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· Remote
Video Camera
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· Computer
Simulations
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· Interactive
Content In A Cable Distribution System
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· Resource
Scheduling
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· Continuous
TV Viewer Measuring
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· Internet
Radio Advertising
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· Rule
Based Monitoring
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· Copy
Protection
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· Interstitial
Internet Advertising
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· Software
License Management
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· Credit
Card Fraud Protection
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· Laparoscopic
Surgery
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· Spreadsheet
Automation
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· Database
Access
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· Laptop
Connectivity
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· Storage
Technology
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· Database
Management
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· Lighting
Ballast
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· Surgical
Catheter
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· Database
Retrieval
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· Location
Based Services
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· Telematics
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· Data
Encryption
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· Manufacturing
Data Transfer
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· Television
Data Display
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· Digital
Newspaper Delivery
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· Medical
Image Stabilization
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· Television
Signal Scrambling
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· Digital
Video Production
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· Medical
Monitoring
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· Text
Auto-Completion
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· DMT®
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· Micromirror
Digital Display
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· Vehicle
Anti-Theft Parking Systems
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· Document
Generation
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· Microprocessor
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· Vehicle
Maintenance
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· Document
Retrieval Using Global Word
Co-Occurrence
Patterns
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· Microprocessor
Enhancement
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· Vehicle
Occupant Sensing
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· DRAM
(Dynamic Random Access Memory)
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· Multi-Dimensional
Database Compression
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· Videoconferencing
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· Dynamic
Manufacturing Modeling
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· Network
Remote Access
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· Virtual
Computer Workspaces
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· Ecommerce
Pricing
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· Online
Ad Tracking
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· Virtual
Server
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· Electronic
Address List Management
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· Online
Auction Guarantees
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· Wireless
Data
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· Electronic
Message Advertising
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· Online
Promotion
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· Wireless
Digital Messaging
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· Embedded
Broadcast Data
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· Optical
Switching
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· Workspace
With Moving Viewpoint
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· Encrypted
Media & Playback Devices
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· Parallel
Processing With Shared Memory
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Patent
Enforcement Litigation
Our
operating subsidiaries are often required to engage in litigation to enforce
their patents and patent rights. Certain of our operating
subsidiaries are parties to ongoing patent enforcement related litigation,
alleging infringement by third parties of certain of the patented technologies
owned or controlled by our operating subsidiaries.
5
Competition
We expect
to encounter increased competition in the area of patent acquisitions and
enforcement. This includes an increase in the number of competitors
seeking to acquire the same or similar patents and technologies that we may seek
to acquire. Entities including Allied Security Trust, Altitude
Capital Partners, Coller IP, Intellectual Ventures, Millennium Partners, Open
Innovation Network, RPX Corporation and Rembrandt IP Management compete in
acquiring rights to patents, and we expect more entities to enter the
market.
We also
compete with venture capital firms and various industry leaders for technology
licensing opportunities. Many of these competitors may have more
financial and human resources than our operating subsidiaries. As we
become more successful, we may find more companies entering the market for
similar technology opportunities, which may reduce our market share in one or
more technology industries that we currently rely upon to generate future
revenue.
Other
companies may develop competing technologies that offer better or less expensive
alternatives to our patented technologies that we may acquire and/or
out-license. Many potential competitors may have significantly
greater resources than the resources that our operating subsidiaries
possess. Technological advances or entirely different approaches
developed by one or more of our competitors could render certain of the
technologies owned or controlled by our operating subsidiaries obsolete and/or
uneconomical.
Employees
As of
December 31, 2008, on a consolidated basis, we had 41 full-time
employees. None of our subsidiaries are a party to any collective
bargaining agreement. We consider our employee relations to be
good.
An
investment in our stock involves a number of risks. Before making a
decision to purchase our securities, you should carefully consider all of the
risks described in this annual report. If any of the risks discussed
in this annual report actually occur, our business, financial condition and
results of operations could be materially adversely affected. If this
were to occur, the trading price of our securities could decline significantly
and you may lose all or part of your investment. All intellectual
property acquisition, development, licensing and enforcement activities are
conducted solely by certain of our wholly owned operating
subsidiaries.
RISKS
RELATED TO OUR BUSINESS
WE
HAVE A HISTORY OF LOSSES AND WILL PROBABLY INCUR ADDITIONAL LOSSES IN THE
FUTURE.
We have
sustained substantial losses since our inception. We may never become
profitable, or if we do, we may never be able to sustain
profitability. As of December 31, 2008, our accumulated deficit was
$109.0 million. As of December 31, 2008, we had approximately $51.5
million in cash and cash
equivalents along with investments and working capital of $42.6
million. We expect to incur significant legal, marketing, general and
administrative expenses. As a result, it is more likely than not that we
will incur losses for the foreseeable future. However, we believe our
current cash and investments on hand will be sufficient to finance anticipated
capital and operating requirements for at least the next twelve
months.
IF
WE, OR OUR SUBSIDIARIES, ENCOUNTER UNFORESEEN DIFFICULTIES AND CANNOT OBTAIN
ADDITIONAL FUNDING ON FAVORABLE TERMS, OUR BUSINESS MAY SUFFER.
Our
consolidated cash and cash equivalents along with investments totaled $51.5
million and $51.4 million at December 31, 2008 and 2007,
respectively. To date, we have relied primarily upon selling of
equity securities and payments from our licensees to generate the funds needed
to finance our operations and the operations of our operating
subsidiaries.
6
We cannot
assure you that we will not encounter unforeseen difficulties, including the
outside influences identified below, that may deplete our capital resources more
rapidly than anticipated. As a result, we and or 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.
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
operating subsidiaries grow, the administrative demands upon us and on our
operating subsidiaries, will grow, and our success will depend upon our ability
to meet those demands. These demands include increased accounting, management,
legal services, staff support, 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.
OUR
REVENUES WILL BE UNPREDICTABLE, AND THIS MAY HARM OUR FINANCIAL
CONDITION.
From
January 2005 to present, certain of our operating subsidiaries have continued to
execute our strategy in the area of patent portfolio and patent portfolio rights
acquisitions. Currently, on a consolidated basis, our operating
subsidiaries own or control the rights to over 100 patent portfolios, which
include U.S. patents and certain foreign counterparts, covering technologies
used in a wide variety of industries. These acquisitions continue to
expand and diversify our revenue generating opportunities. We believe that our
cash and cash equivalent balances, anticipated cash flow from operations and
other external sources of available credit, will be sufficient to meet our cash
requirements through at least March 2010, and for the foreseeable
future. 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.
As a
result, our revenues may vary significantly from quarter to quarter, which could
make our business difficult to manage and cause our quarterly results to be
below market expectations. If this happens, the market price of our common stock
may decline significantly.
OUR
OPERATING SUBSIDIARIES DEPEND UPON RELATIONSHIPS WITH OTHERS TO PROVIDE
TECHNOLOGY-BASED OPPORTUNITIES THAT CAN DEVELOP INTO PROFITABLE ROYALTY-BEARING
LICENSES, AND IF IT IS UNABLE TO MAINTAIN AND GENERATE NEW RELATIONSHIPS, THEN
IT MAY NOT BE ABLE TO SUSTAIN EXISTING LEVELS OF REVENUE OR INCREASE
REVENUE.
Neither
we nor our operating subsidiaries invent new technologies or products but
instead depend on the identification and acquisition of new patents and
inventions through their relationships with inventors, universities, research
institutions, and others. If our operating subsidiaries are unable to
maintain those relationships and continue to grow new relationships, then they
may not be able to identify new technology-based opportunities for growth and
sustainable revenue.
7
We cannot
be certain that current or new relationships will provide the volume or quality
of technologies necessary to sustain our business. In some cases,
universities and other technology sources may compete against us as they seek to
develop and commercialize technologies. Universities may receive
financing for basic research in exchange for the exclusive right to
commercialize resulting inventions. These and other strategies may
reduce the number of technology sources and potential clients to whom we can
market our services. If we are unable to secure new sources of
technology, it could have a material adverse effect on our operating results and
financial condition.
THE
SUCCESS OF OUR OPERATING SUBSIDIARIES DEPENDS IN PART UPON THEIR ABILITY TO
RETAIN THE BEST LEGAL COUNSEL TO REPRESENT THEM IN PATENT ENFORCEMENT
LITIGATION.
The
success of our licensing business depends upon our operating subsidiaries’
ability to retain the best legal counsel to prosecute patent infringement
litigation. As our operating subsidiaries’ 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 subsidiary companies.
OUR
OPERATING SUBSIDIARIES, IN CERTAIN CIRCUMSTANCES, RELY ON REPRESENTATIONS,
WARRANTIES AND OPINIONS MADE BY THIRD PARTIES, THAT IF DETERMINED TO BE FALSE OR
INACCURATE, MAY EXPOSE OUR OPERATING SUBSIDIARIES TO CERTAIN LIABILITIES THAT
COULD BE MATERIAL.
From time
to time, our operating subsidiaries may rely upon representations and warranties
made by third parties from whom certain of our operating subsidiaries acquired
patents or the exclusive rights to license and enforce patents. We also may rely
upon the opinions of purported experts. In certain instances, we may
not have the opportunity to independently investigate and verify the facts upon
which such representations, warranties, and opinions are made. By relying on
these representations, warranties and opinions, our operating subsidiaries may
be exposed to liabilities in connection with the licensing and enforcement of
certain patents and patent rights. It is difficult to predict the
extent and nature of such liabilities which, in some instances, may be
material.
IN
CONNECTION WITH PATENT ENFORCEMENT ACTIONS CONDUCTED BY CERTAIN OF OUR
SUBSIDIARIES, A COURT MAY RULE THAT OUR SUBSIDIARIES HAVE VIOLATED CERTAIN
STATUTORY, REGULATORY, FEDERAL, LOCAL OR GOVERNING RULES OR STANDARDS, WHICH MAY
EXPOSE US AND OUR OPERATING SUBSIDIARIES TO MATERIAL LIABILITIES, WHICH COULD
MATERIALLY HARM OUR OPERATING RESULTS AND OUR FINANCIAL POSITION.
In
connection with any of our patent enforcement actions, it is possible that a
defendant may request and/or a court may rule that we have violated statutory
authority, regulatory authority, federal rules, local court rules, or governing
standards relating to the substantive or procedural aspects of such enforcement
actions. In such event, a court may issue monetary sanctions against
us or our operating subsidiaries or award attorney’s fees and/or expenses to a
defendant(s), which could be material, and if required to be paid by us or our
operating subsidiaries, could materially harm our operating results and our
financial position.
OUR
INVESTMENTS IN AUCTION RATE SECURITIES ARE SUBJECT TO RISKS, INCLUDING THE
CONTINUED FAILURE OF FUTURE AUCTIONS, WHICH MAY CAUSE US TO INCUR LOSSES OR HAVE
REDUCED LIQUIDITY.
At
December 31, 2008, our investments in marketable securities include certain
auction rate securities. Our auction rate securities are investment grade
quality and were in compliance with our investment policy when
purchased. Historically, our auction rate securities were recorded at
cost, which approximated their fair market value due to their variable interest
rates, which typically reset every 7 to 35 days, despite the long-term nature of
their stated contractual maturities. The Dutch auction process that resets
the applicable interest rate at predetermined calendar intervals is intended to
provide liquidity to the holder of auction rate securities by matching buyers
and sellers within a market context enabling the holder to gain immediate
liquidity by selling such interests at par or rolling over their investment. If
there is an imbalance between buyers and sellers the risk of a failed auction
exists. Due to recent liquidity issues in the global credit and
capital markets, these securities experienced several failed auctions since
February 2008. In such case of a failure, the auction rate securities
continue to pay interest, at the maximum rate, in accordance with their terms,
however, we may not be able to access the par value of the invested funds until
a future auction of these investments is successful, the security is called by
the issuer or a buyer is found outside of the auction process.
8
At
December 31, 2008, the par value of auction rate securities collateralized by
student loan portfolios totaled $2.75 million. As a result of the
liquidity issues associated with the failed auctions, we estimate that the fair
value of these auction rate securities no longer approximates their par
value. Due to the estimate that the market for these student loan
collateralized instruments may take in excess of twelve months to fully recover,
we have classified these investments as noncurrent in the accompanying December
31, 2008 consolidated balance sheet. In addition, as a result of our
analysis of the estimated fair value of our student loan collateralized
instruments, as described at Note 7 to the consolidated financial statements
included elsewhere herein, we have recorded an other-than-temporary loss of
$250,000 for our student loan collateralized instruments in the accompanying
consolidated statement of operations and
comprehensive income (loss) (hereinafter “consolidated statements of
operations”) for the year ended December 31, 2008.
At
December 31, 2008, we also held auction rate securities with a par value
totaling $975,000, issued by high credit quality closed-end investment
companies. Despite the reduction in liquidity resulting from the
failure of auctions for these securities since February 2008, the issuers of
these auction rate securities have redeemed, at par, approximately 66% of the
securities held by us since February 2008, and have indicated that they continue
to evaluate ways to provide additional liquidity to their auction rate security
holders. Additionally, these securities continue to be AAA rated and
the underlying funds continue to meet certain specified asset coverage tests
required by the rating agencies, as well as the 200% asset coverage test with
respect to auction rate securities set forth in the Investment Company Act of
1940, as amended. However, due to the impact of the reduced liquidity
associated with these securities as of December 31, 2008, we recorded an
other-than-temporary loss on these auction rate securities of $236,000 in the
accompanying consolidated statement of operations for the year ended December
31, 2008, and have classified our auction rate securities issued by closed-end
investment companies as noncurrent assets in the accompanying December 31, 2008
consolidated balance sheet.
The
capital and credit markets have been experiencing extreme volatility and
disruption for more than 12 months. In recent weeks, the volatility
and disruption have reached unprecedented levels. In several cases, the markets
have exerted downward pressure on stock prices and credit capacity for certain
issuers. Given the deteriorating credit markets, and the sustained
incidence of failure within the auction market since February 2008, there can be
no assurance as to when we would be able to liquidate a particular
issue. Furthermore, if these market conditions were to persist
despite our ability to hold such investments until maturity, we may be required
to record additional impairment charges in a future period. The
systemic failure of future auctions for auction rate securities may result in a
loss of liquidity, substantial impairment to our investments, realization of
substantial future losses, or a complete loss of the investment in the long-term
which may have a material adverse effect on our business, results of operations,
liquidity, and financial condition. Refer to Note 7 to our accompanying
consolidated financial statements, included elsewhere herein, for additional
information about our investments in auction rate securities and the
implementation of SFAS No. 157, “Fair Value Measurements,” or SFAS
No.157.
RISKS
RELATED TO OUR INDUSTRY
BECAUSE
OUR BUSINESS OPERATIONS ARE SUBJECT TO MANY UNCONTROLLABLE OUTSIDE INFLUENCES,
WE MAY NOT SUCCEED.
Our
licensing and enforcement business operations are subject to numerous risks from
outside influences, including the following:
New
legislation, regulations or rules related to obtaining patents or enforcing
patents could significantly increase our operating costs and decrease our
revenue.
Our
operating subsidiaries acquire patents with enforcement opportunities and are
spending a significant amount of resources to enforce those patents. If new
legislation, regulations or rules are implemented either by Congress, the U.S.
Patent and Trademark Office, or USPTO, 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.
9
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.
More
patent applications are filed each year resulting in longer delays in getting
patents issued by the USPTO.
Certain
of our operating subsidiaries hold and continue 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 application 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,”
below.
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.
Any
reductions in the funding of the USPTO could have an adverse impact on the cost
of processing pending patent applications and the value of those pending patent
applications.
The
assets of our operating subsidiaries consist of patent portfolios, including
pending patent applications before the 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.
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.
We expect
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. Entities including Allied Security Trust, Altitude
Capital Partners, Coller IP, Intellectual Ventures, Millennium Partners, Open
Innovation Network, RPX Corporation and Rembrandt IP Management compete in
acquiring rights to patents, and we expect more entities 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.
Our
licensing business also competes with venture capital firms and various industry
leaders for technology licensing opportunities. Many of these
competitors may have more financial and human resources than our
company. As we become more successful, we may find more companies
entering the market for similar technology opportunities, which may reduce our
market share in one or more technology industries that we currently rely upon to
generate future revenue.
10
Our
patented technologies face uncertain market value.
Our
operating subsidiaries have 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. Refer to the related risk factor below.
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.
The
foregoing outside influences may affect other risk factors described in this
annual report.
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” above.
THE
MARKETS SERVED BY OUR OPERATING SUBSIDIARIES ARE SUBJECT TO RAPID TECHNOLOGICAL
CHANGE, AND IF OUR OPERATING SUBSIDIARIES ARE UNABLE TO DEVELOP AND ACQUIRE NEW
TECHNOLOGIES AND PATENTS, ITS REVENUES COULD STOP GROWING OR COULD
DECLINE.
The
markets served by our operating subsidiaries’ licensees 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 our
operating subsidiaries’ intellectual property, are based on continually evolving
industry standards. Our ability to compete in the future will, however, depend
on our 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” above.
THE
RECENT FINANCIAL CRISIS AND CURRENT UNCERTAINTY IN GLOBAL ECONOMIC CONDITIONS
COULD NEGATIVELY AFFECT OUR BUSINESS, RESULTS OF OPERATIONS, AND FINANCIAL
CONDITION
Our
revenue-generating opportunities depend on the use of our patented technologies
by existing and prospective licensees, the overall demand for the products and
services of our licensees, and on the overall economic and financial health of
our licensees. The recent financial crisis affecting the banking
system and financial markets and the current uncertainty in global economic
conditions have resulted in a tightening in the credit markets, a low level of
liquidity in many financial markets, and extreme volatility in the credit,
equity and fixed income markets. If the current worldwide economic downturn
continues, many of our licensees’ customers, which may rely on credit financing,
may delay or reduce their purchases of our licensees’ products and
services. In addition, the use or adoption of our patented
technologies is often based on current and forecasted demand for our licensees’
products and services in the marketplace and may require companies to make
significant initial commitments of capital and other resources. If
the negative conditions in the global credit markets delay or prevent our
licensees’ and their customers’ access to credit, overall consumer spending on
the products and services of our licensees may decrease and the adoption or use
of our patented technologies may slow, respectively. Further, if the
markets in which our licensees’ participate experience further economic
downturns, as well as a slow recovery period, this could negatively impact our
licensees’ long-term sales and revenue generation, margins and operating
expenses, which could impact the magnitude of revenues generated or projected to
be generated by our licensees, which could have a material impact on our
business, license fee generating opportunities, operating results and financial
condition.
11
In
addition, we have significant patent related intangible assets recorded on our
consolidated balance sheet. We will continue to evaluate the recoverability of
the carrying amount of our patent related intangible assets on an ongoing basis,
and we may incur substantial impairment charges, which would adversely affect
our consolidated financial results. There can be no assurance that the
outcome of such reviews in the future will not result in substantial impairment
charges. Impairment assessment inherently involves judgment as to assumptions
about expected future cash flows and the impact of market conditions on
those assumptions. Future events and changing market conditions may impact our
assumptions as to prices, costs, holding periods or other factors that may
result in changes in our estimates of future cash flows. Although we
believe the assumptions we used in testing for impairment are reasonable,
significant changes in any one of our assumptions could produce a significantly
different result.
RISKS
RELATED TO OUR COMMON STOCK
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 operations and or
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 stockholders 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 OUR COMPANY 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:
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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;
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amendment
of our bylaws by the stockholders requires a two-thirds approval of the
outstanding shares;
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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;
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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
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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.
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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.
12
AS A RESULT OF THE REDEMPTION OF
ACACIA RESEARCH-COMBIMATRIX COMMON STOCK FOR THE COMMON STOCK OF COMBIMATRIX
CORPORATION, WE MAY BE SUBJECT TO CERTAIN TAX LIABILITY UNDER THE INTERNAL
REVENUE CODE.
Our
distribution of the common stock of CombiMatrix in the Split-Off Transaction
will be tax-free to us if the distribution qualifies under Sections 368 and 355
of the Internal Revenue Code of 1986, as amended, or the Code. If the
Split-Off Transaction fails to qualify under Section 355 of the Code,
corporate tax would be payable by the consolidated group as of the date of the
Split-Off Transaction, of which we are the common parent, based upon the
difference between the aggregate fair market value of the assets of
CombiMatrix’s business and the adjusted tax bases of such business to us prior
to the redemption.
We
received a private letter ruling from the Internal Revenue Service, or the IRS,
to the effect that, among other things, the redemption would be tax free to us
and the holders of Acacia Research-Acacia Technologies common stock and Acacia
Research-CombiMatrix common stock under Sections 368 and 355 of the Code.
The private letter ruling, while generally binding upon the IRS, was based upon
factual representations and assumptions and commitments on our behalf with
respect to future operations made in the ruling request. The IRS could modify or
revoke the private letter ruling retroactively if the factual representations
and assumptions in the request were materially incomplete or untrue, the facts
upon which the private letter ruling was based were materially different from
the facts at the time of the redemption, or if we do not comply with certain
commitments made.
If the
Split-Off Transaction fails to qualify under Section 355 of the Code, corporate
tax, if any, would be payable by the consolidated group of which we are the
common parent, as described above. As such, the corporate level tax
would be payable by us. CombiMatrix has agreed however, to indemnify us for this
and certain other tax liabilities if they result from actions taken by
CombiMatrix. Notwithstanding CombiMatrix’s agreement to indemnify us,
under the Code’s consolidated return regulations, each member of our
consolidated group, including our company, will be severally liable for these
tax liabilities. Further, we may be liable for additional taxes if we take
certain actions within two years following the redemption, as more fully
discussed in the immediately following risk factor. If we are found
liable to the IRS for these liabilities, the resulting obligation could
materially and adversely affect our financial condition, and we may be unable to
recover on the indemnity from CombiMatrix.
FOLLOWING THE REDEMPTION OF ACACIA
RESEARCH-COMBIMATRIX COMMON STOCK FOR THE COMMON STOCK OF COMBIMATRIX, WE MAY BE
SUBJECT TO CERTAIN TAX LIABILITIES UNDER THE INTERNAL REVENUE CODE FOR ACTIONS
TAKEN BY US OR COMBIMATRIX FOLLOWING THE
REDEMPTION.
Even if
the distribution qualifies under Section 368 and 355 of the Code, it will be
taxable to us if Section 355(e) of the Code applies to the distribution. Section
355(e) will apply if 50% or more of our common stock or CombiMatrix’s common
stock, by vote or value, is acquired by one or more persons, other than the
holders of Acacia Research-CombiMatrix common stock who receive the common stock
of CombiMatrix in the redemption, acting pursuant to a plan or a series of
related transactions that includes the redemption. Any shares of our common
stock, the Acacia Research-CombiMatrix stock or the common stock of CombiMatrix
acquired directly or indirectly within two years before or after the redemption
generally are presumed to be part of such a plan unless we can rebut that
presumption. To prevent applicability of Section 355(e) or to otherwise prevent
the distribution from failing to qualify under Section 355 of the Code,
CombiMatrix has agreed that, until two years after the redemption, it will not
take any of the following actions unless prior to taking such action, it has
obtained, and provided to us, a written opinion of tax counsel or a ruling from
the IRS to the effect that such action will not cause the redemption to be
taxable to us, which we refer to in this report collectively as Disqualifying
Actions:
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merge
or consolidate with another
corporation;
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liquidate
or partially liquidate;
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sell
or transfer all or substantially all of its
assets;
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redeem
or repurchase its stock (except in certain limited circumstances);
or
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take
any other action which could reasonably be expected to cause Section
355(e) to apply to the
distribution.
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13
Further,
if we take any Disqualifying Action, we may be subject to additional tax
liability. Many of our competitors are not subject to similar
restrictions and may issue their stock to complete acquisitions, expand their
product offerings and speed the development of new
technology. Therefore, these competitors may have a competitive
advantage over us. Substantial uncertainty exists on the scope of
Section 355(e), and we may have undertaken, may contemplate undertaking or may
otherwise undertake in the future transactions which may cause Section 355(e) to
apply to the redemption notwithstanding our desire or intent to avoid
application of Section 355(e). Accordingly, we cannot provide you any assurance
that we will not be liable for taxes if Section 355(e) applies to the
redemption.
WE
MAY FAIL TO MEET MARKET EXPECTATIONS BECAUSE OF FLUCTUATIONS IN QUARTERLY
OPERATING RESULTS, WHICH COULD CAUSE THE PRICE OF OUR COMMON STOCK TO
DECLINE.
Our
reported 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, revenues could fall below the expectations of
securities analysts or investors, which could cause the market price of our
common stock to decline. The following are among the factors that could cause
our operating results to fluctuate significantly from period to
period:
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the
dollar amount of agreements executed in each period, which is primarily
driven by the nature and characteristics of the technology being licensed
and the magnitude of infringement associated with a specific
licensee;
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the
specific terms and conditions of agreements executed in each period and
the periods of infringement contemplated by the respective
payments;
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fluctuations
in the total number of agreements
executed;
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fluctuations
in the sales results or other royalty-per-unit activities of our licensees
that impact the calculation of license fees
due;
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the
timing of the receipt of periodic license fee payments and/or reports from
licensees;
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fluctuations
in the net number of active licensees period to
period;
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costs
related to acquisitions, alliances, licenses and other efforts to expand
our operations;
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the
timing of payments under the terms of any customer or license agreements
into which our operating subsidiaries may enter;
and
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expenses
related to, and the timing and results of, patent filings and other
enforcement proceedings relating to intellectual property rights, as more
fully described in this section.
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TECHNOLOGY
COMPANY STOCK PRICES ARE ESPECIALLY VOLATILE, AND THIS VOLATILITY MAY DEPRESS
THE PRICE OF OUR 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 common stock to fluctuate,
perhaps substantially, including, among others, the following:
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announcements
of developments in our patent enforcement
actions;
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developments
or disputes concerning our patents;
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our
or our competitors’ technological
innovations;
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developments
in relationships with licensees;
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variations
in our quarterly operating results;
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our
failure to meet or exceed securities analysts’ expectations of our
financial results;
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a
change in financial estimates or securities analysts’
recommendations;
|
|
●
|
changes
in management’s or securities analysts’ estimates of our financial
performance;
|
|
●
|
changes
in market valuations of similar
companies;
|
|
●
|
announcements
by us or our competitors of significant contracts, acquisitions, strategic
partnerships, joint ventures, capital commitments, new technologies, or
patents; and
|
|
●
|
failure
to complete significant
transactions.
|
For
example, the NASDAQ Computer Index had a range of $582.76 - $1,288.12 during the
52-weeks ended December 31, 2008 and the NASDAQ Composite Index had a range of
$1,295.48 - $2,661.50 over the same period. Over the same period, our
common stock fluctuated within a range of $1.87 - $9.30.
The
financial crisis affecting the banking system and financial markets and the
current uncertainty in global economic conditions, which began in late 2007 and
continued throughout 2008, have resulted in a tightening in the credit markets,
a low level of liquidity in many financial markets, and extreme volatility in
the credit, equity and fixed income markets. As noted above, our stock price,
like many other stocks, has decreased substantially recently and if investors
have concerns that our business, operating results and financial condition will
be negatively impacted by a continuing worldwide economic downturn, our stock
price could further decrease.
In
addition, we believe that fluctuations in our stock price during applicable
periods can also be impacted by court rulings and or other developments 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 our overall business, 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 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 our business and financial results.
Item
1B. UNRESOLVED
STAFF COMMENTS
None.
Item
2. PROPERTIES
We lease
approximately 18,302 square feet of office space in Newport Beach, California,
under a lease agreement that expires in February 2012. Presently, we
are not seeking any additional facilities. We believe that our
facilities are adequate, suitable and of sufficient capacity to support our
immediate needs.
Item
3. LEGAL
PROCEEDINGS
In
the ordinary course of business, we are the subject of, or party to, various
pending or threatened legal actions, including various counterclaims in
connection with our intellectual property enforcement activities. We
believe that any liability arising from these actions will not have a material
adverse effect on our consolidated financial position, results of operations or
cash flows.
15
Item
4. SUBMISSION
OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
16
PART
II
Item
5. MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
Price
Range of Common Stock
Prior to
the Split-Off Transaction described above, we had two classes of common stock
outstanding, our Acacia Research-Acacia Technologies common stock and our Acacia
Research-CombiMatrix common stock. Our Acacia Research-Acacia
Technologies common stock was intended to reflect separately the performance of
our intellectual property licensing business. Our Acacia
Research-CombiMatrix common stock was intended to reflect separately the
performance of our life science business, referred to as the CombiMatrix group,
which was disposed of in connection with the Split-Off Transaction.
As a
result of the Split-Off Transaction, all outstanding shares of Acacia
Research-CombiMatrix common stock were redeemed, and all rights of holders of
Acacia Research-CombiMatrix common stock ceased as of August 15, 2007, except
for the right, upon the surrender to the exchange agent of shares of Acacia
Research-CombiMatrix common stock, to receive new shares of CombiMatrix common
stock. As a result of the consummation of the Split-Off Transaction,
our only class of common stock outstanding is our common stock.
Our
common stock commenced trading on The NASDAQ Global Market on December 16, 2002,
under the symbol “ACTG.” Prior to December 16, 2002, our only class
of common stock began trading under the symbol “ACRI” on the NASDAQ National
Market System on July 8, 1996.
The
markets for securities such as our common stock have historically experienced
significant price and volume fluctuations during certain periods. These broad
market fluctuations and other factors, such as new product developments and
trends in our industry and the investment markets generally, as well as economic
conditions and quarterly variations in the results of our enforcement activities
and our results of operations, may adversely affect the market price of our
common stock.
The high
and low bid prices for our common stock as reported by The NASDAQ Global Market
for the periods indicated are shown in the table below. Such prices are
inter-dealer prices without retail markups, markdowns or commissions and may not
necessarily represent actual transactions.
|
2008
|
2007
|
|||||||||||||||||||||||||||||||
|
Fourth
Quarter |
Third
Quarter |
Second
Quarter |
First
Quarter |
Fourth
Quarter |
Third
Quarter |
Second
Quarter |
First
Quarter |
|||||||||||||||||||||||||
|
High
|
$ | 3.18 | $ | 5.20 | $ | 6.70 | $ | 9.30 | $ | 17.92 | $ | 16.75 | $ | 16.84 | $ | 16.56 | ||||||||||||||||
|
Low
|
$ | 1.87 | $ | 2.98 | $ | 4.20 | $ | 4.58 | $ | 8.42 | $ | 10.87 | $ | 12.76 | $ | 12.23 | ||||||||||||||||
STOCK
PRICE PERFORMANCE GRAPH
The
following stock price performance graph shall not be deemed “filed” for purposes
of Section 18 of the Securities Exchange Act of 1934, as amended, or the
Exchange Act, or otherwise subject to the liabilities under that Section and
shall not be deemed to be incorporated by reference into any of our filings
under the Securities Act of 1933, as amended.
The Stock
Performance Graph depicted below compares the yearly change in our cumulative
total stockholder return for the last five fiscal years with the cumulative
total return of The NASDAQ Stock Market (U.S.) Composite Index.
17
|
2004
|
2005
|
2006
|
2007
|
2008
|
|
|
Acacia
Research Corporation common stock
|
$97
|
$127
|
$246
|
$165
|
$56
|
|
Nasdaq
Composite Index
|
$109
|
$110
|
$121
|
$132
|
$79
|
The graph
covers the period from December 31, 2003 to December 31,
2008. Cumulative total returns are calculated assuming that $100 was
invested on December 31, 2003, in our common stock, and in the NASDAQ Composite
Index, and that all dividends, if any, were reinvested. Refer to our
Dividend Policy below. Stockholder returns over the indicated period
should not be considered indicative of future stock prices or shareholder
returns.
On
February 23, 2009, there were approximately 116 owners of record of our common
stock. The majority of the outstanding shares of our common stock are held by a
nominee holder on behalf of an indeterminable number of ultimate beneficial
owners.
Dividend
Policy
To date,
we have not declared or paid any cash dividends with respect to our common
stock, and the current policy of the board of directors is to retain earnings,
if any, to provide for our growth and the growth of our operating subsidiaries.
Consequently, we do not expect to pay any cash dividends in the foreseeable
future. Further, there can be no assurance that our proposed operations will
generate revenues and cash flow needed to declare a cash dividend or that we
will have legally available funds to pay dividends.
18
Equity
Compensation Plan Information
The
following table provides information with respect to shares of our common stock
issuable under our equity compensation plans as of December 31,
2008:
|
Plan
Category
|
(a)
Number of securities to be issued upon exercise of outstanding
options
|
(b)
Weighted-average exercise price of outstanding
options
|
(c)
Number of securities remaining available for future issuance under equity
compensation plans (excluding securities reflected in column
(a))
|
||||||||||||
|
Equity
compensation plans approved by security holders
|
|||||||||||||||
|
2002
Acacia Technologies Stock Incentive Plan(1)
|
3,606,000 | $5.41 | 1,678,000 | ||||||||||||
|
2007
Acacia Technologies Stock Incentive Plan(2)
|
50,000 | $16.01 | 130,000 | ||||||||||||
|
Subtotal
|
3,656,000 | $5.55 | 1,808,000 | ||||||||||||
|
Equity compensation plans not
approved by security holders(3)
|
|||||||||||||||
| N/A | N/A | N/A | |||||||||||||
|
Total
|
3,656,000 | $5.55 | 1,808,000 | ||||||||||||
_______________
|
(1)
|
Our
2002 Acacia Technologies Stock Incentive Plan, as amended, or the 2002
Plan, allows for the granting of stock options and other awards to
eligible individuals, which generally includes directors, officers,
employees and consultants. The 2002 Plan does not segregate the
number of securities remaining available for future issuance among stock
options and other awards. The shares authorized for future
issuance represents the total number of shares available through any
combination of stock options or other awards. The share reserve
under the 2002 Plan automatically increases on the first trading day in
January each calendar year by an amount equal to three percent (3%) of the
total number of shares of our common stock outstanding on the last trading
day of December in the prior calendar year, but in no event will this
annual increase exceed 500,000 shares and in no event will the total
number of shares of common stock in the share reserve (as adjusted for all
such annual increases) exceed twenty million shares. Column (a)
excludes 439,000 in nonvested restricted stock awards and restricted stock
units outstanding at December 31, 2008. Refer to Note 11 to our
consolidated financial statements included elsewhere
herein.
|
|
(2)
|
Our
2007 Acacia Technologies Stock Incentive Plan, or the 2007 Plan, allows
for the granting of stock options and other awards to eligible
individuals, which generally includes directors, officers, employees and
consultants, and was approved by security holders on May 15,
2007. The 2007 Plan does not segregate the number of securities
remaining available for future issuance among stock options and other
awards. The shares authorized for future issuance represents
the total number of shares available through any combination of stock
options or other awards. The initial share reserve under the
2007 Plan was 560,000 shares of our common stock. The share reserve under
the 2007 Plan automatically increased on January 1, 2008 and 2009, by an
amount equal to two percent (2%) of the total number of shares of our
common stock outstanding on the last trading day of December in the prior
calendar year. After January 1, 2009, no new additional shares will be
added to the 2007 Plan without security holder approval (except for shares
subject to outstanding awards that are forfeited or otherwise returned to
the 2007 Plan). Column (a) excludes 834,000 in nonvested
restricted stock awards outstanding at December 31, 2008. Refer
to Note 11 to our consolidated financial statements included elsewhere
herein.
|
|
(3)
|
We
have not authorized the issuance of equity securities under any plan not
approved by security holders.
|
19
Item
6. SELECTED
FINANCIAL DATA
The
consolidated selected balance sheet data as of December 31, 2008 and 2007
and the consolidated selected statements of operations data for the years ended
December 31, 2008, 2007 and 2006 set forth below have been derived from our
audited consolidated financial statements included elsewhere herein, and should
be read in conjunction with those financial statements (including notes
thereto). The consolidated selected balance sheet data as of
December 31, 2006, 2005 and 2004 and the consolidated selected statements
of operations data for the years ended December 31, 2005 and 2004 have been
derived from unaudited consolidated financial statements not included herein,
but which were previously filed with the SEC.
Consolidating
Statements of Operations Data
(In
thousands, except share and per share data)
|
For
the Years Ended December 31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
License
fee revenues
|
$ | 48,227 | $ | 52,597 | $ | 34,825 | $ | 19,574 | $ | 4,284 | ||||||||||
|
Marketing,
general and administrative expenses (including non-cash stock
compensation expense)
|
24,014 | 20,042 | 14,123 | 8,097 | 5,043 | |||||||||||||||
|
Inventor
royalties and contingent legal fees expense - patents
|
27,424 | 29,224 | 17,159 | 11,331 | - | |||||||||||||||
|
Legal
expenses - patents
|
4,949 | 7,024 | 4,780 | 2,468 | 3,133 | |||||||||||||||
|
Amortization
of patents
|
6,043 | 5,583 | 5,313 | 4,922 | 501 | |||||||||||||||
|
Operating
loss
|
(14,203 | ) | (9,511 | ) | (6,847 | ) | (7,244 | ) | (6,055 | ) | ||||||||||
|
Other
income, net
|
570 | 2,359 | 1,524 | 1,071 | 471 | |||||||||||||||
|
Loss
from continuing operations before income taxes
|
(13,633 | ) | (7,152 | ) | (5,323 | ) | (6,173 | ) | (5,445 | ) | ||||||||||
|
Loss
from continuing operations
|
(13,757 | ) | (7,359 | ) | (5,363 | ) | (6,038 | ) | (5,439 | ) | ||||||||||
|
Discontinued
operations - Split-off of CombiMatrix Corporation and
other
|
- | (8,086 | ) | (20,093 | ) | (12,638 | ) | 606 | ||||||||||||
|
Net
loss
|
$ | (13,757 | ) | $ | (15,445 | ) | $ | (25,456 | ) | $ | (18,676 | ) | $ | (4,833 | ) | |||||
|
Loss
per common share - basic and diluted:
|
||||||||||||||||||||
|
Loss
from continuing operations
|
||||||||||||||||||||
|
Acacia
Research Corporation common stock
|
$ | (0.47 | ) | $ | (0.26 | ) | $ | (0.19 | ) | $ | (0.23 | ) | $ | (0.27 | ) | |||||
|
Discontinued
operations - Split-off of CombiMatrix Corporation
|
||||||||||||||||||||
|
Acacia
Research - CombiMatrix stock
|
$ | - | $ | (0.14 | ) | $ | (0.49 | ) | $ | (0.37 | ) | $ | 0.02 | |||||||
|
Weighted average number of common and potential common
shares used in computation of income (loss) per common share |
||||||||||||||||||||
|
Acacia
Research Corporation common stock:
|
||||||||||||||||||||
|
Basic
and diluted
|
29,423,998 | 28,503,314 | 27,547,651 | 26,630,732 | 19,784,883 | |||||||||||||||
|
Acacia
Research - CombiMatrix stock:
|
||||||||||||||||||||
|
Basic
|
- | 55,862,707 | 40,605,038 | 33,678,603 | 29,962,596 | |||||||||||||||
|
Diluted
|
- | 55,862,707 | 40,605,038 | 33,678,603 | 30,995,663 | |||||||||||||||
Consolidating
Balance Sheet Data
(In
thousands)
|
At
December 31,
|
||||||||||||||||||||
|
2008
|
2007
|
2006
|
2005
|
2004
|
||||||||||||||||
|
Total
assets:
|
||||||||||||||||||||
|
Acacia
Research Corporation
|
$ | 73,074 | $ | 71,051 | $ | 65,770 | $ | 68,893 | $ | 33,058 | ||||||||||
|
Discontinued
operations - Split-off of CombiMatrix Corporation
|
- | - | 44,214 | 52,541 | 55,388 | |||||||||||||||
|
Eliminations
|
- | - | (380 | ) | - | (119 | ) | |||||||||||||
|
Total
|
$ | 73,074 | $ | 71,051 | $ | 109,604 | $ | 121,434 | $ | 88,327 | ||||||||||
|
Total
liabilities:
|
||||||||||||||||||||
|
Acacia
Research Corporation
|
$ | 14,527 | $ | 6,247 | $ | 4,276 | $ | 6,647 | $ | 3,472 | ||||||||||
|
Discontinued
operations - Split-off of CombiMatrix Corporation
|
- | - | 11,399 | 7,443 | 8,560 | |||||||||||||||
|
Eliminations
|
- | - | (380 | ) | - | (119 | ) | |||||||||||||
|
Total
|
$ | 14,527 | $ | 6,247 | $ | 15,295 | $ | 14,090 | $ | 11,913 | ||||||||||
|
Minority
interests:
|
||||||||||||||||||||
|
Acacia
Research Corporation
|
$ | - | $ | - | $ | - | $ | 443 | $ | 778 | ||||||||||
|
Discontinued
operations - Split-off of CombiMatrix Corporation
|
- | - | - | 4 | - | |||||||||||||||
|
Total
|
$ | - | $ | - | $ | - | $ | 447 | $ | 778 | ||||||||||
|
Stockholders'
equity:
|
||||||||||||||||||||
|
Acacia
Research Corporation
|
$ | 58,547 | $ | 64,804 | $ | 61,494 | $ | 61,803 | $ | 28,808 | ||||||||||
|
Discontinued
operations - Split-off of CombiMatrix Corporation
|
- | - | 32,815 | 45,094 | 46,828 | |||||||||||||||
|
Total
|
$ | 58,547 | $ | 64,804 | $ | 94,309 | $ | 106,897 | $ | 75,636 | ||||||||||
20
Factors
Affecting Comparability:
|
●
|
During
the fourth quarter of 2008, pursuant to the terms of the respective
inventor agreement, management elected to terminate its rights to
exclusively license a patent portfolio. As such, the economic
useful life of the patent related intangible asset was reduced, resulting
in the acceleration $1,094,000 of amortization expense for the patent
related asset and an increase in amortization expense in 2008, as compared
to 2007.
|
|
●
|
Effective
January 1, 2006, we adopted the provisions of SFAS No. 123 (revised 2004),
“Share-Based Payment,” or SFAS No. 123R, which sets forth the accounting
requirements for “share-based” compensation payments to employees and
non-employee directors and requires that compensation cost relating to
share-based payment transactions be recognized in the statement of
operations. Refer to Note 2 and Note 11 to our consolidated
financial statements included elsewhere herein, for additional information
and a description of the impact of SFAS No. 123R on our consolidated
statements of operations data presented above. Non-cash stock
compensation expense included in marketing, general and administrative
expense was $7,355,000, $5,908,000 and $3,946,000 in 2008, 2007 and 2006,
respectively.
|
|
●
|
In
2008, we recorded an other than temporary impairment loss of $486,000 on
certain auction rate securities held as of December 31,
2008.
|
|
●
|
As
a result of the conclusion of the V-chip patent litigation, our
subsidiary, Soundview Technologies Inc., recognized $1,500,000 of V-chip
related deferred license fee revenues, $668,000 of V-chip related deferred
legal costs, and a non-cash V-chip related goodwill impairment charge of
$1.6 million in the third quarter of
2004.
|
|
●
|
In
January 2005, our wholly owned subsidiary, Acacia Global Acquisition
Corporation, acquired substantially all of the assets of Global Patent
Holdings, LLC, a privately held patent holding company, which owned 11
patent licensing companies, or the GPH Acquisition. In
connection with the GPH Acquisition, we acquired ownership of companies
that owned or controlled the rights to 27 patent portfolios, which
included 120 U.S. patents and certain foreign counterparts, covering
technologies used in a wide variety of industries. The
aggregate purchase consideration was approximately $25.1 million,
including $5.0 million of cash, the issuance of 3,938,832 shares of Acacia
Research-Acacia Technologies common stock, or AR-Acacia Technologies
stock, valued at $19.3 million (net of estimated common stock registration
costs of $212,000) and acquisition costs, including registration costs, of
$796,000. $25.1 million of the purchase price was allocated to
patent related intangible assets acquired, which are being amortized on a
straight-line basis over a weighted-average estimated economic useful life
of six years. As a result of the GPH Acquisition and subsequent
patent acquisitions through December 31, 2008, amortization expense
totaled $6.0 million, $5.6 million, $5.3 million and $4.9 million in 2008,
2007, 2006 and 2005, respectively, as compared to approximately $501,000
in 2004.
|
|
●
|
As
a result of the Split-Off Transaction, as discussed above, we disposed of
our investment in CombiMatrix. Refer to Note 10A to our
consolidated financial statements, included elsewhere herein, for
information regarding presentation of the assets, liabilities, results of
operations and cash flows for the CombiMatrix group as “Discontinued
Operations,” for all periods presented, in accordance with guidance set
forth in SFAS No. 144.
|
21
|
Item
7.
|
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
|
The
following discussion should be read in conjunction with our consolidated
financial statements included elsewhere in this Form 10-K. This
discussion contains forward-looking statements that involve risks and
uncertainties. Our actual results could differ materially from those
anticipated in these forward-looking statements as a result of various factors
including those set forth under item 1A. “Risk Factors” elsewhere
herein.
General
Our
operating subsidiaries acquire, develop, license and enforce patented
technologies. Our operating subsidiaries generate license fee
revenues and related cash flows from the granting of licenses for the use of
patented technologies that our operating subsidiaries own or
control. Our operating subsidiaries assist patent owners with the
prosecution and development of their patent portfolios, the protection of their
patented inventions from unauthorized use, the generation of licensing revenue
from users of their patented technologies and, if necessary, with the
enforcement against unauthorized users of their patented technologies.
Currently, on a consolidated basis, our operating subsidiaries own or control
the rights to over 100 patent portfolios, which include U.S. patents and certain
foreign counterparts, covering technologies used in a wide variety of
industries.
The
intellectual property acquisition, development, licensing and enforcement
business conducted by our operating subsidiaries, is described more fully in
Item 1, “Business,” of this report.
CombiMatrix Group Split-Off
Transaction and Related Discontinued Operations. As discussed below under
the caption “Discontinued Operations – Split-Off of CombiMatrix Corporation,”
the CombiMatrix group, which was previously presented as a separate reportable
segment, was split-off from us effective August 15, 2007. As such,
the historical results of operations for the CombiMatrix group in the
accompanying consolidated financial statements are presented as part of our
results from discontinued operations in accordance with SFAS No. 144.
As
a result of the Split-Off Transaction, our only business is our intellectual
property licensing business.
Overview
Our
operating activities during 2008, 2007 and 2006, were principally focused on the
continued development, licensing and enforcement of the patent portfolios owned
or controlled by our operating subsidiaries, including the continued pursuit of
multiple ongoing technology licensing and enforcement programs and the
development and commencement of new technology licensing and enforcement
programs. In addition, we continued our focus on business
development, including the acquisition of several additional patent portfolios
by certain of our operating subsidiaries and the continued pursuit of additional
opportunities to partner with patent owners and provide our unique intellectual
property licensing, development and enforcement services.
We
recognized license fee revenues of $48.2 million in 2008, an 8% decrease
compared to 2007 license fee revenues of $52.6 million, and a 38% increase
compared to 2006 license fee revenues of $34.8 million.
Revenues
for 2008 included license fees from 80 new licensing agreements covering 30 of
our technology licensing and enforcement programs, as compared to 91 new
licensing agreements covering 16 of our technology licensing and enforcement
programs in 2007 and 72 new licensing agreements covering 14 of our technology
licensing and enforcement programs in 2006. On a consolidated basis,
our operating subsidiaries generated licensing revenues from 20 new technology
licensing and enforcement programs during 2008, as compared to 8
new programs in 2007 and 7 new programs in 2006. As of December 31,
2008, we have generated revenues from 48 technology licensing and enforcement
programs, as compared to 28 programs as of December 31, 2007 and 20 programs as
of December 31, 2006.
License
fee revenues for 2008 included fees from the licensing of our DMT®
technology, Audio/Video Enhancement and Synchronization technology, Image
Resolution Enhancement technology, Credit Card Fraud Protection technology,
Portable Storage Devices with Links technology, Rule-Based Monitoring
technology, Electronic Address List Management technology, Telematics
technology, Medical Image Stabilization technology, Storage technology,
Ecommerce Pricing technology, Location Based Services technology, File Locking
in Shared Storage Networks technology, Audio Communications Fraud Detection
technology, Picture Archiving & Communications System technology, Remote
Management of Imaging Devices technology, Projector technology, Electronic
Message Advertising technology, Wireless Traffic Information
technology, Pop-up Internet Advertising technology, High Quality Image
Processing technology, Vehicle Anti-Theft Parking Systems technology, Online
Auction Guarantee technology, Web Personalization technology, Vehicle
maintenance technology, Physical Access Control technology, High Resolution
Optics technology, Software License Management technology, Authorized Spending
Accounts technology and Video Editing technology licensing
programs.
22
Our
revenues historically have fluctuated quarterly based on the number of patented
technology portfolios owned or controlled by our operating subsidiaries, the
timing and results of patent filings and other enforcement proceedings relating
to our intellectual property rights, the number of active licensing programs,
and the relative maturity of active licensing programs during the applicable
periods. In addition, revenues fluctuate based on the dollar amount
of agreements executed each period, which is primarily driven by the nature and
characteristics of the technology being licensed and the magnitude of
infringement associated with a specific licensee, the specific terms and
conditions of agreements executed each period and the periods of infringement
contemplated by the respective payments, fluctuations in the total number of
agreements executed, fluctuations in the sales results or other royalty per unit
activities of our licensees that impact the calculation of license fees due, the
timing of the receipt of periodic license fee payments and/or reports from
licensees, and fluctuations in the net number of active licensees period to
period.
We
measure and assess the performance and growth of our patent licensing and
enforcement business conducted by our operating subsidiaries based on
consolidated license fee revenues recognized across all of our technology
licensing and enforcement programs on a trailing twelve-month
basis. Trailing twelve-month revenues totaled $48.2 million as of
December 31, 2008, as compared to $42.0 million as of September 30, 2008, $37.7
million as of June 30, 2008, $36.5 million as of March 31, 2008, $52.6 million
as of December 31, 2007 and $34.8 million as of December 31, 2006.
Operating
expenses increased during 2008, as compared to 2007, and during 2007, as
compared to 2006, due primarily to the hiring of additional patent licensing,
business development and engineering personnel, an increase in patent related
legal, research and consulting expenses incurred in connection with the
continued growth and expansion of our technology licensing and enforcement
business, and an increase in corporate, general and administrative costs related
to ongoing operations. In the aggregate, total inventor royalties and
contingent legal fees expenses decreased in 2008, as compared to 2007, and
increased in 2007, as compared to 2006, primarily due to the related
fluctuations in license fee revenues for the same periods, as discussed above,
and the impact of the varying economic terms related to inventor agreements and
contingent legal fee arrangements associated with the revenue generating patent
portfolios in each period.
Our
operating subsidiaries intend to sustain the long term growth of our
intellectual property licensing and enforcement business through the
identification and acquisition of, or the rights to, additional core patented
technologies, across a wide range of technology areas that have been, or are
anticipated to be, widely adopted by
third parties in connection with the manufacture or sale of products and
services. During 2008, certain of our operating subsidiaries
continued to execute our business strategy in the area of patent portfolio
acquisitions, including, in the fourth quarter of 2008, the acquisition of, or
the acquisition of the rights to, patent portfolios in the Automated Tax
Reporting, Improved Lighting, Vehicle Occupant Sensing and Wireless Data
technology areas. During 2008, we acquired a total of 20 new patent
portfolios with applications over a wide range of technology areas, as compared
to 31 new patent portfolios in 2007 and 20 new patent portfolios in
2006. Refer to “Liquidity and Capital Resources” below for
information regarding the impact of patent and patent rights acquisitions on our
consolidated financial statements for the periods presented.
As of
December 31, 2008, we had several option agreements with third-party patent
portfolio owners regarding the potential acquisition of additional patent
portfolios.
Critical
Accounting Policies
Our
consolidated financial statements are prepared in conformity with accounting
principles generally accepted in the United States of America. In
preparing these financial statements, we make assumptions, judgments and
estimates that can have a significant impact on amounts reported in our
consolidated financial statements. We base our assumptions, judgments and
estimates on historical experience and various other factors that we believe to
be reasonable under the circumstances. Actual results could differ materially
from these estimates under different assumptions or conditions. On a regular
basis, we evaluate our assumptions, judgments and estimates and make changes
accordingly.
23
We
believe that, of the significant accounting policies discussed in Note 2 to our
consolidated financial statements, the following accounting policies require our
most difficult, subjective or complex judgments:
|
●
|
revenue
recognition;
|
|
●
|
stock-based
compensation expense;
|
|
●
|
valuation
of long-lived and intangible assets;
and
|
|
●
|
impairment
of marketable securities;
|
We discuss below the critical
accounting assumptions, judgments and estimates associated with these policies.
Historically, our assumptions, judgments and estimates relative to our critical
accounting policies have not differed materially from actual results. For
further information on our critical accounting policies, refer to Note 2 to
the consolidated financial statements included herein.
Revenue
Recognition
As
described below, significant management judgments must be made and used in
connection with the revenue recognized in any accounting
period. Material differences may result in the amount and timing of
revenue recognized or deferred for any period, if management made different
judgments.
Revenue
is recognized, in accordance with Staff Accounting Bulletin No. 104, “Revenue
Recognition,” or SAB No. 104, when (i) persuasive evidence of an arrangement
exists, (ii) all obligations have been performed pursuant to the terms of the
agreement, (iii) amounts are fixed or determinable and (iv) collectibility of
amounts is reasonably assured.
We make
estimates and judgments when determining whether the collectibility of license
fees receivable from licensees is reasonably assured. We assess the
collectibility of license fees receivable based on a number of factors,
including past transaction history and the credit-worthiness of
licensees. If it is determined that collection is not reasonably
assured, the fee is recognized when collectibility becomes reasonably assured,
assuming all other revenue recognition criteria have been met, which is
generally upon receipt of cash. Management estimates regarding collectibility
impact the actual revenues recognized each period and the timing of the
recognition of revenues. Our assumptions and judgments regarding
future collectibility could differ from actual events, thus materially impacting
our financial position and results of operations.
Certain
license agreements provide for the payment of contractually determined paid-up
license fees to our operating subsidiaries in consideration for the grant of a
non-exclusive, retroactive and future license to manufacture and/or sell
products covered by patented technologies owned or controlled by our operating
subsidiaries. Generally, the execution of these license agreements
also provide for the release of the licensee from certain past and future
claims, and the dismissal of any pending litigation. Pursuant to the
terms of these agreements, our operating subsidiaries have no further obligation
with respect to the grant of the non-exclusive retroactive and future license
and related releases, including no express or implied obligation on our
operating subsidiaries’ part to maintain or upgrade the technology, or provide
future support or services. Generally, the agreements provide for the
grant of the license and releases upon execution of the agreement. As
such, the earnings process is generally complete upon the execution of the
agreement, and revenue is recognized upon execution of the agreement, when
collectibility is reasonably assured, and all other revenue recognition criteria
have been met. Depending on the complexity of the underlying license
agreement and related terms and conditions, significant judgments, assumptions
and estimates may be required to determine when substantial delivery of contract
elements has occurred, whether any significant ongoing obligations exist
subsequent to contract execution, whether amounts due are collectible and the
appropriate period or periods, in which, or during which, respectively, the
completion of the earning process occurs. Depending on the magnitude
of specific license agreements, if different judgments, assumptions and
estimates are made regarding contracts executed in any specific period, our
financial results may be materially affected.
Our
operating subsidiaries are responsible for the licensing and enforcement of
their respective patented technologies and pursue third parties that are
utilizing their intellectual property without a license or who have
under-reported the amount of royalties owed under a license
agreement. As a result of these activities, from time to time, our
operating subsidiaries may recognize royalty revenues in a current period that
relate to infringements by licensees that occurred in prior
periods. These royalty recoveries may cause revenues to be higher
than expected during a particular reporting period and may not occur in
subsequent periods. Differences between amounts initially recognized
and amounts subsequently audited or reported as an adjustment to those amounts,
are recognized in the period such adjustment is determined as a change in
accounting estimate.
24
Stock-based
Compensation Expense
Effective
January 1, 2006, we adopted the provisions of SFAS No. 123R, which is a revision
of SFAS No. 123, “Accounting for Stock-Based Compensation.” SFAS No.
123R supersedes Accounting Principles Board, or APB, Opinion No. 25, Accounting
for Stock Issued to Employees, and amends SFAS No. 95, “Statement of Cash
Flows.” SFAS No. 123R sets forth the accounting requirements for
“share-based” compensation payments to employees and non-employee directors and
requires all share based-payments to be recognized as expense in the statement
of operations. The compensation cost for all stock-based awards is measured at
the grant date, based on the fair value of the award (determined using a
Black-Scholes option pricing model for stock options and intrinsic value on the
date of grant for nonvested restricted stock), and is recognized as an expense
over the employee’s requisite service period (generally the vesting period of
the equity award). Determining the fair value of stock-based awards
at the grant date requires significant estimates and judgments, including
estimating the market price volatility of our common stock, future employee
stock option exercise behavior and requisite service periods.
SFAS No.
123R also requires stock-based compensation expense to be recorded only for
those awards expected to vest using an estimated pre-vesting forfeiture
rate. As such, SFAS No. 123R requires us to estimate pre-vesting
option forfeitures at the time of grant and reflect the impact of estimated
pre-vesting option forfeitures on compensation expense
recognized. Estimates of pre-vesting forfeitures must be periodically
revised in subsequent periods if actual forfeitures differ from those
estimates. We consider several factors in connection with our
estimate of pre-vesting forfeitures including types of awards, employee class,
and historical pre-vesting forfeiture data. The estimation of stock
awards that will ultimately vest requires judgment, and to the extent that
actual results differ from our estimates, such amounts will be recorded as
cumulative adjustments in the period the estimates are revised. If
actual results differ significantly from these estimates, stock-based
compensation expense and our results of operations could be materially
impacted.
Refer to
Notes 2 and 11 to our consolidated financial statements included in Part IV,
Item 15 of this report for more information.
Valuation
of Long-lived and Intangible Assets
We review
long-lived assets, including patent related intangibles, for impairment whenever
events or changes in circumstances indicate that the carrying amount of an asset
may not be recoverable. Factors we consider
important, which could trigger an impairment review include the
following:
|
●
|
significant
underperformance relative to expected historical or projected future
operating results;
|
|
●
|
significant
changes in the manner of our use of the acquired assets or the strategy
for our overall business;
|
|
●
|
significant
negative industry or economic
trends;
|
|
●
|
significant
adverse changes in legal factors or in the business climate, including
adverse regulatory actions or assessments;
and
|
|
●
|
significant
decline in our stock price for a sustained
period.
|
We calculate estimated future
undiscounted cash flows, before interest and taxes, resulting from the use of
the asset and its estimated value at disposal and compare it to its carrying
value in determining whether impairment potentially exists. If a potential
impairment exists, a calculation is performed to determine the fair value of the
long-lived asset. This calculation is based on a valuation model and discount
rate commensurate with the risks involved. Third party appraised values may also
be used in determining whether impairment potentially exists.
As
described above, in assessing the recoverability of intangible assets,
significant judgment is required in connection with estimates of market values,
estimates of the amount and timing of future cash flows, and estimates of other
factors that are used to determine the fair value of the respective assets. If
these estimates or related projections change in future periods, future
intangible asset impairment tests may result in charges to
earnings. Refer to Note 6 to the consolidated financial statements,
included elsewhere herein, for information on impairment charges recorded during
the periods presented.
25
Impairment of Marketable Securities
Effective
January 1, 2008, we adopted SFAS No. 157. SFAS No. 157
establishes a common definition for fair value to be applied to U.S. generally
accepted accounting principles guidance requiring use of fair value, establishes
a framework for measuring fair value, and expands disclosure about such fair
value measurements. SFAS No. 157 defines fair value as the price that
would be received for an asset or the exit price that would be paid to transfer
a liability in the principal or most advantageous market in an orderly
transaction between market participants on the measurement date. SFAS No. 157
also establishes a fair value hierarchy which requires an entity to maximize the
use of observable inputs, where available. SFAS No. 157 established a
three-level hierarchy of valuation techniques used to measure fair value,
defined as follows:
|
●
|
Level
1 - Observable Inputs: Quoted prices in active markets for
identical investments;
|
|
●
|
Level
2 - Pricing Models with Significant Observable Inputs: Other
significant observable inputs, including quoted prices for similar
investments, interest rates, credit risk, etc.;
and
|
|
●
|
Level
3 - Unobservable Inputs: Significant unobservable inputs,
including the entity’s own assumptions in determining the fair value of
investments.
|
SFAS
No. 157 requires the use of observable market inputs (quoted market prices)
when measuring fair value and requires a Level 1 quoted price to be used to
measure fair value whenever possible.
At
December 31, 2008 and 2007, all of our investments are classified as
available-for-sale, which are reported at fair value, in accordance with SFAS
No. 157, with related unrealized gains and losses in the value of such
securities recorded as a separate component of comprehensive income (loss) in
stockholders’ equity until realized.
We review
impairments associated with our investments in marketable securities in
accordance with Emerging Issues Task Force, or EITF, 03-1 and FSP
SFAS 115-1 and 124-1, “The Meaning of Other-Than-Temporary-Impairment and
Its Application to Certain Investments,” to determine the classification of any
impairment as “temporary” or “other-than-temporary.” For
investments classified as available-for-sale, unrealized losses that are other
than temporary are recognized in the consolidated statements of
operations. An impairment is deemed other than temporary unless (a)
we have the ability and intent to hold an investment for a period of time
sufficient for recovery of its carrying amount and (b) positive evidence
indicating that the investment's carrying amount is recoverable within a
reasonable period of time outweighs any evidence to the contrary. All available
evidence, both positive and negative, is considered to determine whether, based
on the weight of that evidence, the carrying amount of the investment is
recoverable within a reasonable period of time.
Refer to
“Consolidated Results of Operations – Other” below for information regarding
other than temporary charges recorded in the consolidated statements of
operations for the year ended December 31, 2008.
Acacia
Research Corporation
Consolidated
Results of Operations
Net
Loss (In thousands)
|
2008
|
2007
|
2006
|
||||||||||
|
Loss
from continuing operations
|
$ | (13,757 | ) | $ | (7,359 | ) | $ | (5,363 | ) | |||
|
Loss
from discontinued operations - Split-off of CombiMatrix Corporation and
other
|
- | (8,086 | ) | (20,093 | ) | |||||||
|
Net
loss
|
$ | (13,757 | ) | $ | (15,445 | ) | $ | (25,456 | ) | |||
The
changes in consolidated loss from continuing operations were primarily due to
operating results and activities, as discussed below.
26
Revenues
(In thousands)
|
2008
|
2007
|
2006
|
||||||||||
|
License
fees
|
$ | 48,227 | $ | 52,597 | $ | 34,825 | ||||||
License Fees. Revenues for
2008 included license fees from 80 new licensing agreements covering 30 of our
technology licensing and enforcement programs, as compared to 91 new licensing
agreements covering 16 of our technology licensing and enforcement programs in
2007, and 72 new licensing agreements covering 14 of our technology licensing
and enforcement programs in 2006. The
increase in license fee revenues in 2008 and 2007, as compared to 2006, reflects
the impact of the increase in patent portfolios owned or controlled by our
operating subsidiaries since 2006, and the related increase in the number of
patent licensing and enforcement programs developed, launched and generating
revenues since 2006. On a consolidated basis, as of December 31,
2008, 48 of our licensing programs had begun generating licensing revenues, up
from 28 as of December 31, 2007 and 20 as of December 31,
2006. License fee revenues recognized by our operating subsidiaries
fluctuate from period to period primarily based on the following
factors:
|
●
|
the
timing and results of patent filings and other enforcement proceedings
relating to our intellectual property
rights;
|
|
●
|
the
dollar amount of agreements executed each period, which is primarily
driven by the nature and characteristics of the technology being licensed
and the magnitude of infringement associated with a specific
licensee;
|
|
●
|
the
specific terms and conditions of agreements executed each period and the
periods of infringement contemplated by the respective
payments;
|
|
●
|
fluctuations
in the total number of agreements
executed;
|
|
●
|
fluctuations
in the sales results or other royalty per unit activities of our licensees
that impact the calculation of license fees due;
|
|
●
|
the timing of the receipt of periodic license fee payments and/or reports from licensees; and |
|
●
|
fluctuations
in the net number of active licensees period to
period.
|
Two
licensees individually accounted for 13% and 12% of license fee revenue
recognized during the year ended December 31, 2008, two licensees
individually accounted for 19% and 12% of license fee revenue recognized during
the year ended December 31, 2007, and one licensee accounted for 14% of license
fee revenue recognized during the year ended December 31, 2006.
Costs
incurred in connection with our operating subsidiaries licensing and enforcement
activities, other than inventor royalties expense, contingent legal fees expense
and patent-related legal expenses, are included in marketing, general and
administrative expenses.
Operating
Expenses (In thousands)
|
2008
|
2007
|
2006
|
||||||||||
|
Marketing,
general and administrative expenses (including non-cash stock
compensation
expense of $7,355
for 2008, $5,908 for 2007 and $3,946 for 2006)
|
$ | 24,014 | $ | 20,042 | $ | 14,123 | ||||||
|
Inventor
royalties and contingent legal fees expense - patents
|
27,424 | 29,224 | 17,159 | |||||||||
|
Legal
expenses - patents
|
4,949 | 7,024 | 4,780 | |||||||||
|
Amortization
of patents
|
6,043 | 5,583 | 5,313 | |||||||||
|
Write-off
of patent-related intangible asset
|
- | 235 | 297 | |||||||||
Marketing, General and
Administrative Expenses. Marketing, general and administrative
expenses include employee compensation and related personnel costs, including
non-cash stock compensation expenses, office and facilities costs, legal and
accounting professional fees, public relations, marketing, stock administration
and other corporate costs, and patent related development, licensing, research,
consulting and maintenance costs.
27
A summary
of the main drivers of the change in marketing, general and administrative
expenses, including the impact of non-cash stock compensation charges, for the
periods presented, is as follows (in thousands):
|
2008
vs. 2007
|
2007
vs. 2006
|
|||||||
|
Addition
of licensing, business development and engineering
personnel
|
$ |
1,510
|
$ | 2,767 | ||||
|
Consulting
expenses paid to former CEO of Global Patent Holdings, LLC
|
(74 | ) | (925 | ) | ||||
|
One
time employee severance charges
|
(129
|
) | 360 | |||||
|
Foreign
taxes paid on licensing fees
|
(27 | ) | 125 | |||||
|
Business
development and licensing related patent research and consulting
costs
|
1,069 | 1,021 | ||||||
|
Corporate,
general and administrative costs
|
176 | 609 | ||||||
|
Non-cash
stock compensation expense
|
1,447 | 1,962 | ||||||
The
overall increase in marketing, general and administrative expenses is reflective
of the continued growth and expansion of our intellectual property acquisition,
licensing and enforcement business conducted by our operating subsidiaries and
related ongoing operations.
Non-cash
stock compensation expense increased during 2008, as compared to 2007 and 2006,
primarily due to an increase in the average fair value of equity-based incentive
awards expensed during the periods presented. The weighted-average
grant date fair value of equity-based incentive awards expensed during 2008,
2007 and 2006, which is generally based on the grant date market value of our
common stock, was approximately $11.66, $9.95 and $4.96,
respectively. The weighted-average grant date fair value of
equity-based awards granted during 2008, 2007 and 2006 was $4.85, $12.74 and
$6.88, respectively. Equity-based awards are generally expensed on a
straight-line basis over a two to three year vesting period. Refer to
Note 11 to our consolidated financial statements, included elsewhere herein, for
additional information on equity-based award grant activity for the periods
presented.
Inventor Royalties and Contingent
Legal Fees Expense. Inventor royalties expense totaled $15.0
million, $12.1 million and $9.6 million in 2008, 2007 and 2006, respectively,
and contingent legal fees expense totaled $12.4 million, $17.2 million and $7.5
million in 2008, 2007 and 2006, respectively. Inventor royalties
expenses and contingent legal fees expenses for the periods presented were
incurred in connection with the recognition of the related license fee revenues,
summarized above. The majority of the patent portfolios owned or
controlled by our operating subsidiaries are subject to patent and patent rights
agreements with inventors containing provisions granting to the original patent
owner the right to receive inventor royalties based on future net revenues, as
defined in the respective agreements, and may also be subject to contingent
legal fee arrangements with external law firms engaged on a contingent fee
basis. The economic terms of the inventor and contingent fee
arrangements, if any, vary across our patent portfolios. Certain
contingent legal fee arrangements employ a graduated fee structure based on the
stage of litigation. As such, inventor royalties and contingent legal
fee expenses fluctuate period to period based on the amount of revenues
recognized each period and the mix of specific patent portfolios, with varying
economic terms, generating revenues each period.
Certain
patent portfolios generating revenues in 2008 had contingent legal arrangements
with lower applicable contingent fee rates, as compared to those patent
portfolios generating revenues in 2007, resulting in the 28% decrease in
contingent legal fees expenses in 2008, versus 2007, as compared to the 8%
decrease in license fee revenues during the same periods. Certain patent
portfolios generating revenues in 2007 had inventor agreements with lower than
average inventor royalty rates, as compared to those patent portfolios
generating revenues in 2008, resulting in the 24% increase in inventor royalties
expenses in 2008, versus 2007, as compared to the 8% decrease in license fee
revenues during the same periods. In addition, the lower contingent
legal fee rates for certain patent portfolios generating revenue in 2008 also
contributed to the period to period increase in inventor royalties expenses as a
percentage of license fee revenues recognized.
Legal Expense – Patents. Patent-related legal
expenses include patent-related prosecution and enforcement costs incurred by
outside law firms engaged on an hourly basis and the out-of-pocket expenses
incurred by outside law firms engaged on a contingent fee
basis. Patent-related legal expenses include case related costs
billed by outside counsel for discovery, depositions, economic analyses, damages
assessments, expert witnesses and other consultants, case related audio/video
presentations for the court, and other litigation support and administrative
costs. Patent-related legal expenses fluctuate from period to period
based on patent enforcement and prosecution activity associated with ongoing
licensing and enforcement programs and the timing of the commencement of new
licensing and enforcement programs in each period.
28
In 2007,
we incurred increased litigation support related out of pocket expenses, third
party technical consulting expenses and professional expert expenses incurred in
connection with certain of our patent portfolios that were further along in the
prosecution of the related litigation and certain of our enforcement actions
that proceeded to trial and concluded, resulting in increased patent –related
legal expenses in 2007, as compared to 2008. During 2008, none of our
ongoing enforcement actions went to trial, despite an increase in the overall
number of outstanding enforcement actions during the period.
The
increase in patent related legal expenses in 2007, as compared to
2006, is primarily due to a net increase in ongoing patent
enforcement litigation and an increase in litigation support related out of
pocket expenses, third party technical consulting expenses and professional
expert expenses incurred in connection with certain of our patent portfolios
that were further along in the prosecution of the related litigation and certain
of our patent portfolios that proceeded to trial and concluded in
2007.
We expect
patent-related legal expenses to continue to fluctuate period to period based on
the factors summarized above, in connection with current and future patent
licensing and enforcement programs.
Amortization of Patents. During
the fourth quarter of 2008, pursuant to the terms of the respective inventor
agreement, management elected to terminate its rights to exclusively license a
patent portfolio. As such, the economic useful life of the patent
related intangible asset was reduced, resulting in the acceleration of
$1,094,000 of amortization expense for the patent related asset and an increase
in amortization expense in 2008, as compared to 2007. This increase was
partially offset by a reduction in scheduled amortization expense resulting from
the completion of amortization on certain portfolios acquired in connection with
the January 2005 GPH Acquisition.
The
increase in 2007, as compared to 2006, was due to additional patent amortization
charges related to certain patent portfolios acquired by our operating
subsidiaries in late 2006 and throughout 2007. Patent amortization
charges will continue to be significant in future periods as we continue to
amortize the acquired patent related costs over a weighted-average remaining
economic useful life of approximately four years. Refer to “Liquidity
and Capital Resources” below for patent portfolio acquisition costs incurred
during the periods presented.
Other
At
December 31, 2008, the par value of auction rate securities collateralized by
student loan portfolios totaled $2.75 million. As a result of the
liquidity issues associated with the failed auctions described in Item 1A. “Risk
Factors” elsewhere herein, we estimate that the fair value of these auction rate
securities no longer approximates their par value. Due to the
estimate that the market for these student loan collateralized instruments may
take in excess of twelve months to fully recover, we have classified these
investments as noncurrent in the accompanying December 31, 2008 consolidated
balance sheet. In addition, we recorded an other-than-temporary loss
on our student loan collateralized auction rate securities of $250,000 in the
accompanying consolidated statement of operations for the year ended December
31, 2008. Refer to Note 7 to our consolidated financial statements
elsewhere herein for information on the valuation of auction rate securities
held as of December 31, 2008.
At
December 31, 2008, we also held auction rate securities with a par value
totaling $975,000, issued by high credit quality closed-end investment
companies. Despite the reduction in liquidity resulting from the
failure of auctions for these securities since February 2008, the issuers of
these auction rate securities have redeemed, at par, approximately 66% of the
securities held by us since February 2008, and have indicated that they continue
to evaluate ways to provide additional liquidity to their auction rate security
holders. Additionally, these securities continue to be AAA rated and
the underlying funds continue to meet certain specified asset coverage tests
required by the rating agencies, as well as the 200% asset coverage test with
respect to auction rate securities set forth in the Investment Company Act of
1940, as amended. However, due to the impact of the reduced liquidity
as of December 31, 2008, we recorded an other-than-temporary loss on our auction
rate securities issued by closed-end investment companies of $236,000 in the
accompanying statement of operations for the year ended December 31, 2008, and
have classified these securities as noncurrent assets in the accompanying
December 31, 2008 consolidated balance sheet.
Discontinued
Operations – Split-Off of CombiMatrix Corporation
On August
15, 2007, or the Redemption Date, CombiMatrix was split-off from us through the
redemption of all outstanding shares of Acacia Research-CombiMatrix common stock
in exchange for the distribution of new shares of CombiMatrix, on a pro-rata
basis, to the holders of Acacia Research-CombiMatrix stock as of the Redemption
Date. Subsequent to the Redemption Date, we no longer own any equity
interests in CombiMatrix and the CombiMatrix group is no longer one of our
business groups.
29
As a
result of the Split-Off Transaction, the assets, liabilities, results of
operations and cash flows of CombiMatrix have been eliminated from our
continuing operations and we do not have any continuing involvement in the
operations of CombiMatrix. As a result of the Split-Off Transaction,
we have disposed of our investment in CombiMatrix, and therefore, in accordance
with guidance set forth in SFAS No. 144, our accompanying consolidated financial
statements for all historical periods presented reflect the assets, liabilities,
results of operations and cash flows for CombiMatrix as discontinued
operations. CombiMatrix was previously presented as a separate
operating segment of us under SFAS No. 131, “Disclosures about Segments of
an Enterprise and Related Information.”
The
Split-Off Transaction was accounted for by us at historical
cost. Accordingly, no gain or loss on disposal was recognized in the
2007 consolidated statement of operations. Included in the December 31, 2007
consolidated balance sheet is a charge to consolidated shareholders’ equity
totaling $35,444,000, reflecting the distribution of our investment in the net
assets of CombiMatrix to holders of Acacia Research-CombiMatrix stock, as of the
Redemption Date. We received a private letter ruling from the IRS
with regard to the U.S. federal income tax consequences of the Split-Off
Transaction to the effect that the Split-Off Transaction will be treated as a
tax-free exchange under Sections 368 and 355 of the Code.
Refer to
Note 10A to our consolidated financial statements included elsewhere herein for
information regarding the revenues and pretax loss included in discontinued
operations for the applicable historical periods presented.
Inflation
Inflation
has not had a significant impact on us or any of our subsidiaries in the current
or prior periods.
Liquidity
and Capital Resources
Our
consolidated cash and cash equivalents and investments totaled
$51.5 million at December 31, 2008, compared to $51.4 million at
December 31, 2007. Working capital at December 31, 2008 was $42.6 million,
compared to $48.1 million at December 31, 2007. The change in
working capital primarily reflects the impact of cash flows used in continuing
operating and investing activities, as discussed below. In addition,
the change in working capital also reflects the reclassification of $2.75
million (par value) of auction rate securities collateralized by student
loans and $975,000 (par value) of auction rate
securities issued by high credit quality closed-end investment companies to
noncurrent assets as of December 31, 2008, as described above.
The net
change in cash and cash equivalents and investments related to continuing
operations for 2008, 2007 and 2006 was comprised of the following (in
thousands):
|
2008
|
2007
|
2006
|
||||||||||
|
Net
cash provided by (used in) continuing operations:
|
||||||||||||
|
Operating
activities
|
$ | 2,598 | $ | 5,166 | $ | 6,608 | ||||||
|
Investing
activities
|
5,070 | (2,145 | ) | 10,513 | ||||||||
|
Financing
activities
|
142 | 5,014 | 1,475 | |||||||||
Operating Activities. License fee payments
received from licensees decreased to $42.1 million in 2008, compared to
$51.4 million in 2007, reflecting the decrease in license fee revenues
recognized in 2008, as compared to 2007, as discussed above. The
decrease in consolidated net cash inflows from operations in 2008, as compared
to 2007, and 2007, as compared to 2006 was primarily due to the related
fluctuations in license fee revenues recognized for the respective periods, and
the increases in business development and licensing related patent research and
consulting costs, personnel expenses, and other corporate, general and
administrative expenses, as described above, and the impact of the timing
of payments to inventors, attorneys and other vendors.
30
Consolidated
accounts receivable increased to $7.4 million at December 31, 2008, compared to
$1.4 million at December 31, 2007. Consolidated royalties and
contingent legal fees payable increased to $10.8 million at December 31, 2008,
compared to $2.3 million at December 31, 2007. The increase in
accounts receivable and royalties and contingent legal fees payable primarily
reflects higher license fee revenues recognized in the fourth quarter of 2008,
as compared to the same period in 2007, and the timing of cash receipts from
licensees and the related payments to the inventors and contingent law firms
with whom we partner. The majority of accounts receivable from
licensees at December 31, 2008 were collected or scheduled to be collected in
the first and second quarter of 2009, in accordance with the terms of the
related underlying license agreements. The majority of
royalties and contingent legal fees payable are scheduled to be paid in the
first and second quarter of 2009, upon receipt by us of the related license fee
payments from licensees, in accordance with the underlying contractual
arrangements.
Investing Activities. The
change in net cash flows used in investing activities for the periods presented
reflects fluctuations in net purchases and sales of available-for-sale
investments in connection with ongoing cash management
activities. Short-term investments represent capital available to
fund current operations and fund capital expenditures. In
addition, certain of our operating subsidiaries incurred patent acquisition
costs of $2.1 million, $3.8 million and $1.0 million in 2008, 2007 and 2006,
respectively, related to the acquisition of additional patent portfolios, as
described earlier.
Financing
Activities. Consolidated net cash inflows from financing
activities in 2008, 2007 and 2006 included stock option exercise proceeds of
$142,000, $5.0 million, and $1.5 million, respectively.
Management
believes that our consolidated cash and cash equivalent balances, anticipated
cash flow from operations and other external sources of available credit, will
be sufficient to meet its cash requirements through at least March 2010 and for
the foreseeable future. However, we may, and our subsidiaries may,
encounter unforeseen difficulties that may deplete our capital resources more
rapidly than anticipated, including those set forth in Item 1A. “Risk Factors”
included elsewhere herein. There can be no assurance that funds from
additional sources will be available when needed or, if available, will be on
terms favorable to us or to our stockholders. If additional funds are
raised by issuing equity securities, the percentage ownership of our
stockholders will be reduced, stockholders may experience additional dilution or
such equity securities may provide for rights, preferences or privileges senior
to those of the holders of our common stock. If we and our
subsidiaries fail to obtain additional funding when needed, they may not be able
to execute their business plans and their businesses may suffer. Refer to the
“Liquidity and Risks” discussion included in Note 1 to our consolidated
financial statements included elsewhere herein for additional
information.
Refer
to Note 7 to our consolidated financial statements elsewhere herein for
information on auction rate securities held as of December 31,
2008.
Off-Balance
Sheet Arrangements
We have
not entered into off-balance sheet financing arrangements, other than operating
leases. We have no significant commitments for capital expenditures
in 2008. We have no committed lines of credit or other committed
funding or long-term debt. The following table lists our material
known future cash commitments as of December 31, 2008, and any material known
commitments arising from events subsequent to year end:
|
Payments
Due by Period (In thousands)
|
||||||||||||||||||||
|
Contractual
Obligations
|
Total
|
Less
than
1 year |
1-3
years
|
3-5
years
|
More
than
5 years |
|||||||||||||||
|
Operating
leases
|
$ | 2,945 | $ | 858 | $ | 1,923 | $ | 164 | - | |||||||||||
|
Total
contractual obligations
|
$ | 2,945 | $ | 858 | $ | 1,923 | $ | 164 | - | |||||||||||
FIN 48
Liability. Effective January 1, 2007, we adopted the
provisions of FASB Interpretation No. 48, or FIN 48, “Accounting for
Uncertainty in Income Taxes,” (refer to Note 2 to the consolidated
financial statements included elsewhere herein). As of December 31, 2008,
the liability for uncertain tax positions, associated primarily with state
income taxes, totaled $75,000, of which none is expected to be paid within one
year. The liability for uncertain tax positions is recorded in other long-term
liabilities in the consolidated balance sheet.
31
Recent
Accounting Pronouncements
Refer to
Note 2 to the Acacia Research Corporation consolidated financial statements
included elsewhere herein.
|
Item
7A.
|
QUANTITATIVE
AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
|
The
primary objective of our investment activities is to preserve principal while
concurrently maximizing the income we receive from our investments without
significantly increasing risk. Some of the securities that we may invest in may
be subject to market risk. This means that a change in prevailing interest rates
may cause the principal amount of the investment to fluctuate. For example, if
we hold a security that was issued with a fixed interest rate at the
then-prevailing rate and the prevailing interest rate later rises, the current
value of the principal amount of our investment will decline. To minimize this
risk in the future, we intend to maintain our portfolio of cash equivalents and
short-term investments in a variety of securities, including commercial paper,
money market funds, high-grade corporate bonds, government and non-government
debt securities and certificates of deposit. In general, money market funds are
not subject to market risk because the interest paid on such funds fluctuates
with the prevailing interest rate. As of December 31, 2008, all of our
investments were in money market funds that invest in U.S. Treasury securities
and obligations issued or guaranteed by the U.S. Government and
certain auction rate securities. A hypothetical 100 basis point
increase in interest rates would not have a material impact on the fair value of
our available-for-sale securities as of December 31, 2008. Refer to
Item 1A. “Risk Factors,” Item 7. “Liquidity and Capital Resources,” and Notes 2
and 3 to our consolidated financial statements included in this report for
additional information. Refer to Note 7 to our consolidated financial
statements elsewhere herein for information on auction rate securities held as
of December 31, 2008.
|
Item
8.
|
FINANCIAL
STATEMENTS AND SUPPLEMENTARY DATA
|
The
financial statements and related financial information required to be filed
hereunder are indexed under Item 15 of this report and are incorporated herein
by reference.
|
Item
9.
|
CHANGES
IN AND DISAGREEMENTS WITH INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
ACCOUNTING AND FINANCIAL DISCLOSURE
|
None.
|
Item
9A.
|
CONTROLS
AND PROCEDURES
|
Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures
Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of our disclosure controls and procedures, as such term is defined
under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934,
as amended, or the Exchange Act. Based on this evaluation, our principal
executive officer and our principal financial officer concluded that, as of the
end of the period covered by this annual report, our disclosure controls and
procedures were effective to ensure that the information required to be
disclosed by us in the reports that we file or submit under the Exchange Act is
accumulated and communicated to management, including our chief executive
officer and chief financial officer, to allow timely decisions regarding
required disclosure, and that such information is recorded, processed,
summarized and reported within the time periods prescribed by the
SEC.
32
Management’s Report on Internal
Control Over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting, as such term is defined in Exchange Act Rule
13a-15(f). Under the supervision and with the participation of our management,
including our principal executive officer and principal financial officer, we
conducted an evaluation of the effectiveness of our internal control over
financial reporting based on the framework in Internal Control - Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission. Based on our evaluation under the framework in Internal Control -
Integrated Framework, our management concluded that our internal control over
financial reporting was effective as of December 31, 2008.
Grant
Thornton, LLP, the independent registered public accounting firm who audited our
consolidated financial statements included in this Annual Report on
Form 10-K, has issued a report on our internal control over financial
reporting, which is included herein.
There
were no changes in our internal control over financial reporting during the
fourth fiscal quarter that have materially affected, or are reasonably likely to
materially affect, our internal control over financial reporting.
|
Item
9B.
|
OTHER
INFORMATION
|
None
33
PART
III
|
Item
10.
|
DIRECTORS,
EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE
|
Except as
provided below, the information required by this Item is incorporated by
reference from the information under the captions entitled “Election of
Directors-Nominees,” “Executive Officers” and “Section 16(a) Beneficial
Ownership Reporting Compliance” in our definitive proxy statement to be filed
with the SEC no later than April 30, 2009.
Code
of Conduct.
We have
adopted a Code of Conduct that applies to all of its employees, including its
chief executive officer, chief financial and accounting officer, president and
any persons performing similar functions. Our Code of Conduct is
provided on our internet website at www.acaciaresearch.com.
|
Item
11.
|
EXECUTIVE
COMPENSATION
|
In
accordance with Instruction G(3) to Form 10-K, the information required by this
Item is incorporated by reference from the information under the caption
entitled “Executive Officer Compensation and Other Information” in our
definitive proxy statement to be filed with the SEC no later than April 30,
2009.
|
Item
12.
|
SECURITY
OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT
|
In
accordance with Instruction G(3) to Form 10-K, the information required by this
Item is incorporated by reference from the information under the caption
entitled “Security Ownership of Certain Beneficial Owners and Management” in our
definitive proxy statement to be filed with the SEC no later than April 30,
2009.
|
Item
13.
|
CERTAIN
RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
INDEPENDENCE
|
In
accordance with Instruction G(3) to Form 10-K, the information required by this
Item is incorporated by reference from the information under the caption
entitled “Certain Transactions” in our definitive proxy statement to be filed
with the SEC no later than April 30, 2009.
|
Item
14.
|
PRINCIPAL
ACCOUNTING FEES AND SERVICES
|
In
accordance with Instruction G(3) to Form 10-K, the information required by this
Item is incorporated by reference from the information under the caption
entitled “Audit Committee Report” in our definitive proxy statement to be filed
with the SEC no later than April 30, 2009.
34
PART
IV
|
Item
15.
|
EXHIBITS,
FINANCIAL STATEMENT SCHEDULES
|
(a) The
following documents are filed as part of this report.
|
(1) Financial
Statements
|
Page
|
|
|
Acacia
Research Corporation Consolidated Financial Statements
|
||
|
Reports
of Independent Registered Public Accounting Firm – Grant Thornton
LLP
|
F-1
|
|
|
Report
of Independent Registered Public Accounting Firm – PricewaterhouseCoopers
LLP
|
F-3
|
|
|
Consolidated
Balance Sheets as of December 31, 2008 and 2007
|
F-4
|
|
|
Consolidated
Statements of Operations and Comprehensive Loss for the Years Ended
December 31, 2008, 2007 and 2006
|
F-5
|
|
|
Consolidated
Statements of Stockholders’ Equity for the Years Ended December 31, 2008,
2007 and 2006
|
F-6
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2008, 2007 and
2006
|
F-7
|
|
|
Notes
to Consolidated Financial Statements
|
F-8
|
|
|
(2) Financial
Statement Schedules
|
||
|
Financial
statement schedules are omitted because they are not applicable or the
required information is shown in the Financial Statements or the Notes
thereto.
|
||
|
(3) Exhibits
|
||
|
Refer
to Item 15(b) below.
|
(b) Exhibits. The
following exhibits are either filed herewith or incorporated herein by
reference:
|
Exhibit
Number
|
Description
|
|
2.1
|
Agreement
and Plan of Merger of Acacia Research Corporation, a California
corporation, and Acacia Research Corporation, a Delaware corporation,
dated as of December 23, 1999 (1)
|
|
2.2
|
Agreement
and Plan of Reorganization by and among Acacia Research Corporation, Combi
Acquisition Corp. and CombiMatrix Corporation dated as of March 20, 2002
(2)
|
|
3.1
|
Amended
and Restated Certificate of Incorporation (3)
|
|
3.2
|
Amended
and Restated Bylaws (13)
|
|
3.2.1
|
Amendment
to Amended and Restated Bylaws (14)
|
|
10.1*
|
Acacia
Research Corporation 1996 Stock Option Plan, as amended
(4)
|
|
10.2*
|
Form
of Option Agreement constituting the Acacia Research Corporation 1996
Executive Stock Bonus Plan (5)
|
|
10.3*
|
2002
Acacia Technologies Stock Incentive Plan (6)
|
|
10.4*
|
2007 Acacia
Technologies Stock Incentive Plan (7)
|
|
10.5*
|
Form
of Acacia Technologies Stock Option Agreement for the 2007 Acacia
Technologies Stock Incentive Plan (8)
|
|
10.6*
|
Form
of Acacia Technologies Stock Issuance Agreement for the 2002 Acacia
Technologies Stock Incentive Plan (8)
|
|
10.7*
|
Form
of Acacia Technologies Stock Issuance Agreement for the 2007 Acacia
Technologies Stock Incentive Plan (8)
|
|
10.8
|
Lease
Agreement dated January 28, 2002, between Acacia Research Corporation and
The Irvine Company (9)
|
35
|
Exhibit
Number
|
Description
|
|
10.10
|
Form
of Indemnification Agreement (10)
|
|
10.11
|
Form
of Subscription Agreement between Acacia Research Corporation and certain
investors (11)
|
|
10.12
|
Third
Amendment to lease dated January 28, 2002 between Acacia Research
Corporation and the Irvine Company (12)
|
|
10.19*
|
Employment
Agreement, dated January 28, 2005, by and between Acacia Technologies
Services Corporation, and Dooyong Lee, as amended (13)
|
|
10.19.1*
|
Amendment
to Employment Agreement, dated December 17, 2008, by and between Acacia
Research Corporation and Dooyong Lee
|
|
10.20*
|
Employment
Agreement, dated April 12, 2004, by and between Acacia Media Technologies
Corporation and Edward Treska (13)
|
|
10.20.1*
|
Addendum
to Employment Agreement with Edward Treska, dated March 31, 2008
(15)
|
|
10.21
|
Fourth
Amendment to lease dated January 28, 2002 between Acacia Research
Corporation and the Irvine Company (13)
|
|
10.22
|
Fifth
Amendment to Lease dated January 28, 2002 between Acacia Research
Corporation and the Irvine Company (13)
|
|
10.23*
|
Employment
Agreement, dated March 31, 2008, by and between Acacia Technologies, LLC
and Paul Ryan (15)
|
|
10.23.1*
|
Amendment
to Employment Agreement, dated December 17, 2008, by and between Acacia
Technologies, LLC and Paul Ryan
|
|
10.24*
|
Employment
Agreement, dated March 31, 2008, by and between Acacia Technologies, LLC
and Robert L. Harris (15)
|
|
10.24.1*
|
Amendment
to Employment Agreement, dated December 17, 2008, by and between Acacia
Research Corporation and Robert L. Harris
|
|
10.25*
|
Amended
Employment Agreement, dated March 31, 2008, by and between Acacia
Technologies, LLC and Clayton J. Haynes (15)
|
|
10.25.1*
|
Amendment
to Amended Employment Agreement, dated December 17, 2008, by and between
Acacia Research Corporation and Clayton J. Haynes
|
|
10.26*
|
Amended
Acacia Research Corporation Executive Severance Policy
|
|
21.1
|
List
of Subsidiaries
|
|
23.1
|
Consent
of Independent Registered Public Accounting Firm - Grant Thornton
LLP
|
|
23.2
|
Consent
of Independent Registered Public Accounting Firm - PricewaterhouseCoopers
LLP
|
|
31.1
|
Certification
of Chief Executive Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
31.2
|
Certification
of Chief Financial Officer Pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
32.1
|
Certification
of the Chief Executive Officer provided pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
|
32.2
|
Certification
of the Chief Financial Officer provided pursuant to 18 U.S.C. Section 1350
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002
|
___________________________
|
*
|
The
referenced exhibit is a management contract, compensatory plan or
arrangement.
|
|
†
|
Portions
of this exhibit have been omitted pursuant to a request for confidential
treatment and have been filed separately with the United States Securities
and Exchange Commission.
|
36
|
(1)
|
Incorporated
by reference from Acacia Research Corporation’s Current Report on Form 8-K
filed on December 30, 1999 (SEC File No.
000-26068).
|
|
(2)
|
Incorporated
by reference as Appendix A to the Proxy Statement/Prospectus which formed
part of Acacia Research Corporation’s Registration Statement on Form S-4
(SEC File No. 333-87654) which became effective on November 8,
2002.
|
|
(3)
|
Incorporated
by reference to Acacia Research Corporation’s Current Report on Form 8-K
filed on June 5, 2008 (SEC File No.
000-26068).
|
|
(4)
|
Incorporated
by reference as Appendix A to the Definitive Proxy Statement on Schedule
14A filed on April 10, 2000 (SEC File No.
000-26068).
|
|
(5)
|
Incorporated
by reference from Acacia Research Corporation’s Definitive Proxy as
Appendix A Statement on Schedule 14A filed on April 26, 1996 (SEC File No.
000-26068).
|
|
(6)
|
Incorporated
by reference as Appendix E to the Proxy Statement/Prospectus which formed
part of Acacia Research Corporation’s Registration Statement on Form S-4
(SEC File No. 333-87654) which became effective on November 8,
2002.
|
|
(7)
|
Incorporated
by reference to Acacia Research Corporation’s Registration Statement on
Form S-8 (SEC File No. 333-144754) which became effective on July 20,
2007.
|
|
(8)
|
Incorporated
by reference to Acacia Research Corporation’s Quarterly Report on Form
10-Q for the period ended September 30, 2007, filed on November 2, 2007
(SEC File No. 000-26068).
|
|
(9)
|
Incorporated
by reference from Acacia Research Corporation’s Annual Report on
Form 10-K for the year ended December 31, 2001 filed on
March 27, 2002 (SEC File
No. 000-26068).
|
|
(10)
|
Incorporated
by reference from Acacia Research Corporation’s Annual Report on Form 10-K
for the year ended December 31, 2002 filed on March 27, 2003 (SEC File No.
000-26068).
|
|
(11)
|
Incorporated
by reference from Acacia Research Corporation’s Current Report on Form 8-K
filed on September 19, 2005 (SEC File No.
000-26068).
|
|
(12)
|
Incorporated
by reference from Acacia Research Corporation’s Quarterly Report on Form
10-Q for the period ended March 31, 2006, filed on May 10, 2006 (SEC File
No. 000-26068).
|
|
(13)
|
Incorporated
by reference from Acacia Research Corporation’s Annual Report on Form 10-K
for the year ended December 31, 2007, filed on March 14, 2008 (File No.
000-26068).
|
37
|
(14)
|
Incorporated
by reference from Acacia Research Corporation’s Current Report on Form 8-K
filed on January 7, 2008 (File No.
000-26068).
|
|
(15)
|
Incorporated
by reference from Acacia Research Corporation’s Current Report on Form 8-K
filed on April 2, 2008 (SEC File No.
000-26068).
|
38
SIGNATURES
Pursuant to the requirements of
Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
Dated: February
26, 2009
|
ACACIA
RESEARCH CORPORATION
|
|
/s/ Paul R. Ryan
|
|
|
Paul
R. Ryan
|
|
|
Chairman
of the Board
|
|
|
and
Chief Executive Officer
|
|
|
(Authorized
Signatory)
|
|
POWER OF ATTORNEY
We, the
undersigned directors and officers of Acacia Research Corporation do hereby
constitute and appoint Paul R. Ryan and Clayton J. Haynes, and each of them, as
our true and lawful attorneys-in-fact and agents with power of substitution, to
do any and all acts and things in our name and behalf in our capacities as
directors and officers and to execute any and all instruments for us and in our
names in the capacities indicated below, which said attorney-in-fact and agent
may deem necessary or advisable to enable said corporation to comply with the
Securities Exchange Act of 1934, as amended, and any rules, regulations and
requirements of the Securities and Exchange Commission, in connection with this
Annual Report on Form 10-K, including specifically but without limitation, power
and authority to sign for us or any of us in our names in the capacities
indicated below, any and all amendments (including post-effective amendments)
hereto; and we do hereby ratify and confirm all that said attorney-in-fact and
agent, shall do or cause to be done by virtue hereof.
Pursuant
to the requirements of the Securities and Exchange Act of 1934, this report has
been signed below by the following persons on behalf of the registrant and the
capacities and on the dates indicated.
|
Signature
|
Title
|
Date
|
||
|
/s/
|
Paul
R. Ryan
|
Chairman
of the Board and
|
February
26, 2009
|
|
|
Paul
R. Ryan
|
Chief
Executive Officer
|
|||
|
(Principal
Chief Executive)
|
||||
|
/s/
|
Robert
L. Harris, II
|
Director
and President
|
February
26, 2009
|
|
|
Robert
L. Harris, II
|
||||
|
/s/
|
Clayton
J. Haynes
|
Chief
Financial Officer and Treasurer
|
February
26, 2009
|
|
|
Clayton
J. Haynes
|
(Principal
Financial Officer)
|
|||
|
/s/
|
Fred
A. de Boom
|
Director
|
February
26, 2009
|
|
|
Fred
A. de Boom
|
||||
|
/s/
|
Edward
W. Frykman
|
Director
|
February
26, 2009
|
|
|
Edward
W. Frykman
|
||||
|
/s/
|
G.
Louis Graziadio, III
|
Director
|
February
26, 2009
|
|
|
G.
Louis Graziadio, III
|
||||
|
/s/
|
William
S. Anderson
|
Director
|
February
26, 2009
|
|
|
William
S. Anderson
|
39
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders
Acacia
Research Corporation
We have
audited the accompanying consolidated balance sheets of Acacia Research
Corporation (a Delaware corporation) as of December 31, 2008 and 2007, and
the related consolidated statements of operations and comprehensive loss,
stockholders’ equity, and cash flows for each for the two years in the period
ended December 31, 2008. These financial statements are the responsibility of
the Company’s management. Our responsibility is to express an opinion on these
financial statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of Acacia Research Corporation
as of December 31, 2008 and 2007, and the results of its operations and its
cash flows for each of the two years in the period ended December 31, 2008, in
conformity with accounting principles generally accepted in the United States of
America.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), Acacia Research Corporation’s internal control
over financial reporting as of December 31, 2008, based on criteria established
in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission and our report dated February 26, 2009 expressed an
unqualified opinion thereon.
/s/ GRANT
THORNTON LLP
Irvine,
California
February
26, 2009
F-1
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders
Acacia
Research Corporation
We have
audited Acacia Research Corporation’s (a Delaware corporation) internal control
over financial reporting as of December 31, 2008, based on criteria established
in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO). Acacia Research Corporation’s management is
responsible for maintaining effective internal control over financial reporting
and for its assessment of the effectiveness of internal control over financial
reporting, included in the accompanying Management’s Report on Internal Control
Over Financial Reporting. Our responsibility is to
express an opinion on Acacia Research Corporation’s internal control over
financial reporting based on our audit.
We
conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether effective
internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, testing
and evaluating the design and operating effectiveness of internal control based
on the assessed risk, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal control over
financial reporting includes those policies and procedures that (1) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect the transactions and dispositions of the assets of the company; (2)
provide reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with generally accepted
accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of
the company; and (3) provide reasonable assurance regarding prevention or timely
detection of unauthorized acquisition, use, or disposition of the company’s
assets that could have a material effect on the financial
statements.
Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. Also, projections of any evaluation of
effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate.
In our
opinion, Acacia Research Corporation maintained, in all material respects,
effective internal control over financial reporting as of December 31, 2008,
based on criteria established in Internal Control—Integrated
Framework issued by COSO.
We also
have audited, in accordance with the standards of the Public Company Accounting
Oversight Board (United States), the consolidated balance sheets of Acacia
Research Corporation as of December 31, 2008 and 2007, and the related
consolidated statements of operations and comprehensive loss, stockholders’
equity, and cash flows for each of the two years in the period ended December
31, 2008 and our report dated February 26, 2009, expressed an unqualified
opinion.
/s/ GRANT
THORNTON LLP
Irvine,
California
February
26, 2009
F-2
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
of Acacia
Research Corporation:
In our
opinion, the consolidated statements of operations and comprehensive loss,
stockholders' equity and cash flows for the year ended December 31, 2006 present
fairly, in all material respects, the results of operations and cash flows of
Acacia Research Corporation and its subsidiaries for the year ended December 31,
2006, in conformity with accounting principles generally accepted in the United
States of America. These financial statements are the responsibility
of the Company's management. Our responsibility is to express an
opinion on these financial statements based on our audit. We
conducted our audit of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, and
evaluating the overall financial statement presentation. We believe
that our audit provides a reasonable basis for our opinion.
/s/
PricewaterhouseCoopers LLP
PricewaterhouseCoopers
LLP
Orange
County, California
March 12,
2007, except for Note 10A, as to which the
date
is March 10, 2008
F-3
ACACIA
RESEARCH CORPORATION
CONSOLIDATED
BALANCE SHEETS
As
of December 31, 2008 and 2007
(In
thousands, except share and per share information)
|
December
31,
|
December
31,
|
|||||||
|
2008
|
2007
|
|||||||
|
ASSETS
|
||||||||
|
Current
assets:
|
||||||||
|
Cash
and cash equivalents
|
$ | 48,279 | $ | 40,467 | ||||
|
Short-term
investments
|
- | 10,966 | ||||||
|
Accounts
receivable
|
7,436 | 1,409 | ||||||
|
Prepaid
expenses and other current assets
|
1,255 | 1,356 | ||||||
|
Total
current assets
|
56,970 | 54,198 | ||||||
|
Property
and equipment, net of accumulated depreciation
|
221 | 323 | ||||||
|
Patents,
net of accumulated amortization
|
12,419 | 16,307 | ||||||
|
Investments
- noncurrent
|
3,239 | - | ||||||
|
Other
assets
|
225 | 223 | ||||||
| $ | 73,074 | $ | 71,051 | |||||
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
||||||||
|
Current
liabilities:
|
||||||||
|
Accounts
payable and accrued expenses
|
$ | 3,240 | $ | 3,462 | ||||
|
Royalties
and contingent legal fees payable
|
10,770 | 2,343 | ||||||
|
Deferred
revenues
|
318 | 321 | ||||||
|
Total
current liabilities
|
14,328 | 6,126 | ||||||
|
Other
liabilities
|
199 | 121 | ||||||
|
Total
liabilities
|
14,527 | 6,247 | ||||||
|
Commitments
and contingencies (Note 12)
|
||||||||
|
Stockholders'
equity:
|
||||||||
|
Preferred
stock, par value $0.001 per share; 10,000,000 shares
authorized; no shares issued or outstanding
|
- | - | ||||||
|
Common
stock, par value $0.001 per share; 100,000,000 shares
authorized; 30,884,994 and 30,102,482 shares issued and
outstanding as of December 31, 2008 and December 31, 2007,
respectively
|
31 | 30 | ||||||
|
Additional
paid-in capital
|
167,468 | 159,972 | ||||||
|
Accumulated
comprehensive income
|
- | (3 | ) | |||||
|
Accumulated
deficit
|
(108,952 | ) | (95,195 | ) | ||||
|
Total
stockholders' equity
|
58,547 | 64,804 | ||||||
| $ | 73,074 | $ | 71,051 | |||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-4
ACACIA
RESEARCH CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands, except share and per share information)
|
2008
|
2007
|
2006
|
||||||||||
|
License
fee revenues
|
$ | 48,227 | $ | 52,597 | $ | 34,825 | ||||||
|
Operating
expenses:
|
||||||||||||
|
Marketing,
general and administrative expenses (including non-cash stock
compensation
expense of $7,355 for 2008, $5,908 for 2007 and $3,946 for 2006) |
24,014 | 20,042 | 14,123 | |||||||||
|
Inventor
royalties and contingent legal fees expense - patents
|
27,424 | 29,224 | 17,159 | |||||||||
|
Legal
expenses - patents
|
4,949 | 7,024 | 4,780 | |||||||||
|
Amortization
of patents
|
6,043 | 5,583 | 5,313 | |||||||||
|
Write-off
of patent-related intangible asset
|
- | 235 | 297 | |||||||||
|
Total
operating expenses
|
62,430 | 62,108 | 41,672 | |||||||||
|
Operating
loss
|
(14,203 | ) | (9,511 | ) | (6,847 | ) | ||||||
|
Other
income (expense):
|
||||||||||||
|
Interest
income
|
1,056 | 2,359 | 1,524 | |||||||||
|
Loss
on investments
|
(486 | ) | - | - | ||||||||
|
Total
other income (expense)
|
570 | 2,359 | 1,524 | |||||||||
|
Loss
from continuing operations before income taxes
|
(13,633 | ) | (7,152 | ) | (5,323 | ) | ||||||
|
Provision
for income taxes
|
(124 | ) | (207 | ) | (40 | ) | ||||||
|
Loss
from continuing operations
|
(13,757 | ) | (7,359 | ) | (5,363 | ) | ||||||
|
Discontinued
operations:
|
||||||||||||
|
Loss
from discontinued operations - Split-off of CombiMatrix
Corporation
|
- | (8,086 | ) | (20,093 | ) | |||||||
|
Net
loss
|
(13,757 | ) | (15,445 | ) | (25,456 | ) | ||||||
|
Unrealized
gains (losses) on short-term investments
|
3 | (21 | ) | 59 | ||||||||
|
Unrealized
gains (losses) from discontinued operations - Split-off of CombiMatrix
Corporation
|
- | 16 | (55 | ) | ||||||||
|
Comprehensive
loss
|
$ | (13,754 | ) | $ | (15,450 | ) | $ | (25,452 | ) | |||
|
Loss
per common share:
|
||||||||||||
|
Acacia
Research Corporation common stock:
|
||||||||||||
|
Net
loss
|
$ | (13,757 | ) | $ | (7,359 | ) | $ | (5,363 | ) | |||
|
Basic
and diluted loss per share
|
(0.47 | ) | (0.26 | ) | (0.19 | ) | ||||||
|
Acacia
Research - CombiMatrix stock - Discontinued Operations - Split-off of
CombiMatrix Corporation:
|
||||||||||||
|
Loss
from discontinued operations - Split-off of CombiMatrix
Corporation
|
$ | - | $ | (8,086 | ) | $ | (20,093 | ) | ||||
|
Basic
and diluted loss per share
|
- | (0.14 | ) | (0.49 | ) | |||||||
|
Weighted-average
shares:
|
||||||||||||
|
Acacia
Research Corporation common stock:
|
||||||||||||
|
Basic
and diluted
|
29,423,998 | 28,503,314 | 27,547,651 | |||||||||
|
Acacia
Research - CombiMatrix stock:
|
||||||||||||
|
Basic
and diluted
|
- | 55,862,707 | 40,605,038 | |||||||||
The
accompanying notes are an integral part of these consolidated financial
statements.
F-5
ACACIA
RESEARCH CORPORATION
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
For
the Years Ended December 31, 2008, 2007 and 2006
(In
thousands, except share information)
|
AR-Acacia
Technologies Common Shares (1) |
AR-CombiMatrix
Common Shares (1) |
AR-Acacia
Technologies Common Stock (1) |
AR-CombiMatrix Common |
Additional Paid-in |
Deferred
Stock Compensation |
Other Comprehensive |
Accumulated Deficit |
Total
|
||||||||||||||||||||||||||||
|
2006
|
||||||||||||||||||||||||||||||||||||
|
Balance
at December 31, 2005
|
27,722,242 | 38,992,402 | $ | 28 | $ | 39 | $ | 315,146 | $ | (1,400 | ) | $ | (2 | ) | $ | (206,914 | ) | $ | 106,897 | |||||||||||||||||
|
Net
loss
|
- | - | - | - | - | - | - | (25,456 | ) | (25,456 | ) | |||||||||||||||||||||||||
|
Stock
options exercised
|
389,959 | - | - | - | 1,475 | - | - | - | 1,475 | |||||||||||||||||||||||||||
|
Units
issued in direct offering, net offering costs
|
- | 11,323,408 | - | 11 | 12,098 | - | - | - | 12,109 | |||||||||||||||||||||||||||
|
Warrant
liability
|
- | - | - | - | (7,104 | ) | - | - | - | (7,104 | ) | |||||||||||||||||||||||||
|
Reclassification
of deferred stock compensation (see Note 2)
|
- | - | - | - | (1,400 | ) | 1,400 | - | - | - | ||||||||||||||||||||||||||
|
Stock
issued to consultant
|
- | 50,000 | - | - | 94 | - | - | - | 94 | |||||||||||||||||||||||||||
|
Compensation
expense relating to stock options and restricted stock
awards
|
119,500 | - | - | - | 6,306 | - | - | - | ||||||||||||||||||||||||||||