acacia_10k-123107.htm
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
x ANNUAL
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
FOR
THE FISCAL YEAR ENDED DECEMBER 31, 2007
OR
FOR
THE TRANSITION PERIOD FROM _________ TO _________.
Commission
File Number 0-26068
ACACIA
RESEARCH CORPORATION
(Exact
name of registrant as specified in its charter)
DELAWARE
|
95-4405754
|
(State
or other jurisdiction of
|
(I.R.S.
Employer
|
incorporation
organization)
|
Identification
No.)
|
|
|
500
NEWPORT CENTER DRIVE, NEWPORT BEACH, CA
|
92660
|
(Address
of principal executive offices)
|
(Zip
Code)
|
Registrant’s
telephone number, including area code: (949) 480-8300
Securities
registered pursuant to Section 12(b) of the Act:
Title of Each
Class
|
Name
of Each Exchange on Which Registered
|
Acacia
Research - Acacia Technologies Common Stock, $0.001 par
value
|
The
NASDAQ Global Market
|
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.
Large
accelerated filer ¨
|
|
Accelerated
filer
þ
|
Non-accelerated
filer ¨ (Do not check if
a smaller reporting company)
|
|
Smaller
reporting company ¨
|
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 Acacia Research - Acacia Technologies
common stock held by non-affiliates of the registrant, computed by reference to
the last sales prices of such stocks reported on The Nasdaq Stock Market, as of
June 29, 2007, was approximately $458,295,628. (All executive
officers and directors of the registrant are considered
affiliates.)
As of
February 25, 2008, 30,132,922 shares of Acacia Research-Acacia Technologies
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, 2007
TABLE
OF CONTENTS
Item
|
|
Page
|
PART
I
|
|
|
|
1.
|
Business
|
1
|
1A.
|
Risk
Factors
|
6
|
1B.
|
Unresolved
Staff Comments
|
13
|
2.
|
Properties
|
13
|
3.
|
Legal
Proceedings
|
13
|
4.
|
Submission
of Matters to a Vote of Security Holders
|
13
|
|
|
|
|
|
|
PART
II
|
|
|
|
5.
|
Market
for Registrant’s Common Equity, Related Stockholder Matters and
Issuer
|
|
|
Purchases
of Equity Securities
|
14
|
6.
|
Selected
Financial Data
|
17
|
7.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
19
|
7A.
|
Quantitative
and Qualitative Disclosures About Market Risk
|
29
|
8.
|
Financial
Statements and Supplementary Data
|
29
|
9.
|
Changes
in and Disagreements With Accountants on Accounting and Financial
Disclosure
|
29
|
9A.
|
Controls
and Procedures
|
29
|
9B.
|
Other
Information
|
29
|
|
|
|
|
|
|
|
|
|
PART
III
|
|
|
|
10.
|
Directors,
Executive Officers and Corporate Governance
|
30
|
11.
|
Executive
Compensation
|
30
|
12.
|
Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
|
30
|
13.
|
Certain
Relationships and Related Transactions, and Director
Independence
|
30
|
14.
|
Principal
Accounting Fees and Services
|
30
|
|
|
|
|
|
|
PART
IV
|
|
|
|
15.
|
Exhibits,
Financial Statement Schedules
|
31
|
PART
I
CAUTIONARY
STATEMENT
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.
As used
in this 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 Acacia Research Corporation’s wholly owned
operating subsidiaries.
OVERVIEW
Acacia
Research Corporation’s 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 91 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, Acacia
Research Corporation’s board of directors approved a plan for its wholly owned
subsidiary, CombiMatrix Corporation, the primary component of Acacia Research
Corporation’s CombiMatrix group, to become an independent public
company. CombiMatrix Corporation’s registration statement on Form S-1
was declared effective by the Securities and Exchange Commission (“SEC”) on June
8, 2007. Following the redemption period required by Acacia Research
Corporation’s Restated Certificate of Incorporation, on August 15, 2007
(the “Redemption Date”), CombiMatrix Corporation was split-off from Acacia
Research Corporation through the redemption of all outstanding shares of Acacia
Research-CombiMatrix common stock in exchange for the distribution of
new shares of CombiMatrix Corporation common stock, on a pro-rata basis, to the
holders of Acacia Research-CombiMatrix common stock on the Redemption Date (the
“Split-off Transaction”). On the Redemption Date, every ten (10) shares of
Acacia Research-CombiMatrix common stock outstanding on August 15, 2007, was
redeemed for one (1) share of common stock of CombiMatrix
Corporation. Subsequent to the Redemption Date, Acacia Research
Corporation no longer owns any equity interests in CombiMatrix Corporation and
the two companies operate independently of each other.
As a
result of the Split-off Transaction, we have disposed of our investment in
CombiMatrix Corporation. Refer to Note 10A to the Acacia Research
Corporation 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 “Accounting for the Impairment or Disposal of Long-Lived Assets”
(“SFAS No. 144”).
Capital
Structure
As a
result of the Split-off Transaction, Acacia Research Corporation no longer owns
any equity interests in CombiMatrix Corporation and the CombiMatrix group
is no longer a business group of Acacia Research
Corporation. Pursuant to the terms of the Split-off Transaction, all
outstanding shares of Acacia Research-CombiMatrix common stock were redeemed,
and hence, 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 Corporation stock pursuant to the exchange
ratio described above. Subsequent to the consummation of the
Split-off Transaction, Acacia Research Corporation’s only class of common stock
outstanding is its Acacia Research-Acacia Technologies common
stock.
Prior to
the Split-off Transaction, Acacia Research Corporation had two classes of common
stock outstanding, its Acacia Research-Acacia Technologies common stock
(“AR-Acacia Technologies stock”) and its Acacia Research-CombiMatrix common
stock (“AR-CombiMatrix stock”). AR-Acacia Technologies stock was
intended to reflect separately the performance of Acacia Research Corporation’s
Acacia Technologies group. AR-CombiMatrix stock was intended to
reflect separately the performance of Acacia Research Corporation’s CombiMatrix
group. Although the AR-Acacia Technologies stock and the
AR-CombiMatrix stock were intended to reflect the performance of our different
business groups, they were both classes of common stock of Acacia Research
Corporation and were not stock issued by the respective groups.
Our Board
of Directors has approved an amendment and restatement of our certificate of
incorporation to remove reference to AR-CombiMatrix stock which was cancelled as
a result of the redemption, to rename AR-Acacia Technologies stock as the only
class of common stock, and to provide that all 100,000,000 shares of AR-Acacia
Technologies stock currently authorized may be issued as a single class of
common stock. The amendment and restatement of our certificate of
incorporation is subject to approval by the stockholders at the next annual
meeting of stockholders, as further described in our proxy statement to be
filed. If adopted, each share of common stock will be entitled to one
vote and the relative voting strength of the common stock will be equal
notwithstanding the trading price of the common stock.
Other
Acacia
Research Corporation, a Delaware corporation, was 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 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:
·
|
our
corporate code of conduct, our board of directors – code of conduct and
our fraud policy;
|
·
|
charters
for our audit committee, nominating and corporate governance committee,
disclosure committee and compensation
committee;
|
The
public may read and copy any materials that Acacia Research Corporation files
with the SEC at the SEC’s Public Reference Room at 450 Fifth Street N.W.,
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 the Acacia Research Corporation, that file
electronically with the SEC. The public can obtain any documents that
Acacia Research Corporation files with the SEC at http://www.sec.gov.
BUSINESS
Intellectual
Property Licensing Business
Acacia
Research Corporation’s 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 91 patent portfolios, which include U.S. patents and certain
foreign counterparts, covering technologies used in a wide variety of
industries. Our operating subsidiaries have established a track
record of licensing success with more than 540 license agreements executed to
date. Our professional staff includes in-house patent attorneys,
licensing executives, engineers and business development
executives.
Our
clients 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
client arrangement, our operating subsidiary will acquire a patent portfolio, or
acquire rights to a patent portfolio, with our clients 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.
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 (“GPH Acquisition”). In connection with the acquisition we
acquired ownership of companies that own or control 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. Refer to
Note 7 to our consolidated financial statements included in this report for
additional information regarding the GPH Acquisition. Subsequent to
the GPH Acquisition, we have continued to execute our business strategy in the
area of patent portfolio acquisitions, including the acquisition of, or the
rights to, a total of 59 additional patent portfolios covering a wide variety of
technologies and with applications across several additional
industries. These and future patent portfolio acquisitions will
continue to expand and diversify our operating subsidiaries' revenue generating
opportunities and accelerate the execution of our overall business strategy, as
we continue to build our leadership position in patent licensing.
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:
Our
intellectual property acquisition, development, licensing and enforcement
business strategy, conducted solely by our operating subsidiaries, includes the
following key elements:
|
Identify Emerging
Growth Areas where Patented Technologies will Play a Vital
Role
|
The
patent process breeds 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. 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.
·
|
Contact and Form
Alliances with Owners of Core, Patented
Technologies
|
|
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.
|
|
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 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.
|
Acacia
Research Corporation’s 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 licensing and enforcement
activities.
·
|
Effectively and
Efficiently Evaluate Patented Technologies for Acquisition, Licensing and
Enforcement
|
|
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 prior to acquisition and commercialization and determine
whether potential problem areas can be overcome, before acquiring a patent
portfolio or launching a 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 a licensing and enforcement
effort.
|
·
|
Purchase or Acquire
the Rights to Patented
Technologies
|
|
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 their experienced in-house
personnel to reduce outside costs and to ensure that the necessary capital
is allocated and deployed in an efficient and cost effective
manner.
|
·
|
Successfully License
and Enforce Patents with Significant Royalty
Potential
|
|
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 generally take place in a
non-adversarial business setting, but can also occur through the
litigation process, if necessary.
|
Patented
Technologies
Currently,
on a consolidated basis, our operating subsidiaries own or control the rights to
91 patent portfolios, with patent expiration dates ranging from 2008 to 2027,
and covering technologies used in a wide variety of industries, including the
following:
· Aligned
Wafer Bonding
|
· Embedded
Broadcast Data
|
· Portable
Storage Devices With Links
|
· Audio
Communications Fraud Detection
|
· Encrypted
Media & Playback Devices
|
· Product
Activation
|
· Audio
Storage and Retrieval System
|
· Enhanced
Internet Navigation
|
· Projector
|
· Audio
Video Enhancement & Synchronization
|
· Facilities
Operation Management System
|
· Purifying
Nucleic Acid
|
· Authorized
Spending Accounts
|
· File
Locking In Shared Storage Networks
|
· Radio
Communication With Graphics
|
· Automated
Notification of Tax Return Status
|
· Flash
Memory
|
· Relational
Database Access
|
· Broadcast
Data Retrieval
|
· Fluid
Flow Control And Monitoring
|
· Remote
Management Of Imaging Devices
|
· Color
Correction For Video Graphics Systems
|
· Graphics
Data Processing
|
· Remote
Video Camera
|
· Compact
Disk
|
· Hearing
Aid ECS
|
· Resource
Scheduling
|
· Compiler
|
· Heated
Surgical Blades
|
· Rule
Based Monitoring
|
· Computer
Graphics
|
· High
Quality Image Processing
|
· Software
Feature Enablement
|
· Computer
Memory Cache Coherency
|
· High
Resolution Optics
|
· Software
License Management
|
· Computer
Simulations
|
· Image
Resolution Enhancement
|
· Spreadsheet
Automation
|
· Computing
Device Performance
|
· Interactive
Content In A Cable Distribution System
|
· Storage
Technology
|
· Continuous
TV Viewer Measuring
|
· Interstitial
Internet Advertising
|
· Surgical
Catheter
|
· Copy
Protection
|
· Laptop
Connectivity
|
· Telematics
|
· Credit
Card Fraud Protection
|
· Location
Based Services
|
· Television
Data Display
|
· Database
Access
|
· Medical
Image Stabilization
|
· Television
Signal Scrambling
|
· Database
Management
|
· Medical
Monitoring
|
· Text
Auto-Completion
|
· Data
Encryption
|
· Micromirror
Digital Display
|
· Vehicle
Anti-Theft Parking Systems
|
· Digital
Newspaper Delivery
|
· Microprocessor
Enhancement
|
· Vehicle
Location
|
· Digital
Video Production
|
· Multi-Dimensional
Bar Codes
|
· Vehicle
Maintenance
|
· DMT®
|
· Multi-Dimensional
Database Compression
|
· Video
Editing
|
· Document
Generation
|
· Online
Ad Tracking
|
· Virtual
Computer Workspaces
|
· Document
Retrieval Using Global Word Co-Occurrence
Patterns
|
· Parallel
Processing With Shared Memory
|
· Virtual
Server
|
· DRAM
(Dynamic Random Access Memory)
|
· Peer
To Peer Communications
|
· Web
Personalization
|
· Dynamic
Manufacturing Modeling
|
· Physical
Access Control
|
· Wireless
Digital Messaging
|
· Ecommerce
Pricing
|
· Picture
Archiving & Communication Systems
|
· Wireless
Traffic Information
|
· Electronic
Address List Management
|
· Pointing
Device
|
· Workspace
With Moving Viewpoint
|
· Electronic
Message Advertising
|
· Pop-Up
Internet Advertising
|
|
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.
Competition
We expect
to encounter increased competition in the area of patent acquisition 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. Companies such as British Technology Group, Rembrandt Management
Group, and Intellectual Ventures LLC are already in the business of acquiring
the rights to patents for the purpose of licensing and enforcement, and we
expect more companies to enter the market. See, Risk Factors on page
6.
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, 2007, on a consolidated basis, Acacia Research Corporation had 45
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. As used in this 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 Acacia Research Corporation’s wholly owned operating
subsidiaries.
GENERAL
RISKS
WE
HAVE A HISTORY OF LOSSES AND WILL PROBABLY INCUR ADDITIONAL LOSSES IN THE
FUTURE.
We have
sustained substantial losses since our inception resulting in a consolidated net
accumulated deficit, as disclosed in the accompanying consolidated financial
statements of Acacia Research Corporation included in Part IV Item 15 of this
report. We may never become profitable, or if we do, we may never be
able to sustain profitability. 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.
BECAUSE
WE HAVE SUSTAINED LOSSES SINCE OUR INCEPTION, WE CANNOT ASSURE THAT OUR
OPERATIONS WILL BE PROFITABLE.
We
commenced operations in 1993 and, we have sustained substantial losses since our
inception resulting in a net consolidated accumulated deficit, as disclosed in
the accompanying consolidated financial statements of Acacia Research
Corporation included in Part IV Item 15 of this report. If we continue to incur
operating losses in future periods, we may not have enough capital to expand our
business and our operating subsidiary companies’ businesses in the
future.
IF
WE, OR OUR SUBSIDIARIES, ENCOUNTER UNFORESEEN DIFFICULTIES AND CANNOT OBTAIN
ADDITIONAL FUNDING ON FAVORABLE TERMS, OUR BUSINESS MAY SUFFER.
Acacia
Research Corporation's consolidated cash and cash equivalents along with
short-term investments totaled $51.4 million and $45.0 million at December 31,
2007 and 2006, respectively. To date, Acacia Research Corporation has
relied primarily upon selling of equity securities and payments from our
licensees to generate the funds needed to finance the operations of Acacia
Research Corporation and our operating subsidiaries.
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, 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
subsidiaries grow, the administrative demands upon Acacia Research Corporation
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.
THE
AVAILABILITY OF SHARES FOR SALE IN THE FUTURE COULD REDUCE THE MARKET PRICE OF
OUR COMMON STOCK.
In the
future, we may issue securities to raise cash for acquisitions. We may also pay
for interests in additional subsidiary companies by using a combination of cash
and our common stock or just our common stock. We may also issue securities
convertible into our common stock. Any of these events may dilute 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 ACACIA RESEARCH CORPORATION THAT MIGHT OTHERWISE
RESULT IN OUR STOCKHOLDERS RECEIVING A PREMIUM OVER THE MARKET PRICE OF THEIR
SHARES.
Provisions
of Delaware law and our certificate of incorporation and bylaws could make the
following more difficult: the acquisition of our company by means of a tender
offer, proxy contest or otherwise, and the removal of incumbent officers and
directors. These provisions include:
·
|
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;
|
·
|
amendment
of our bylaws by the stockholders requires a two-thirds approval of the
outstanding shares;
|
·
|
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;
|
·
|
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
|
·
|
the
division of our board of directors into three classes with staggered terms
for each class, which could make it more difficult for an outsider to gain
control of our board of directors.
|
Such
potential obstacles to a takeover could adversely affect the ability of our
stockholders to receive a premium price for their stock in the event another
company wants to acquire us.
AS A RESULT OF THE
REDEMPTION OF AR-COMBIMATRIX STOCK FOR THE COMMON STOCK OF COMBIMATRIX
CORPORATION, ACACIA RESEARCH CORPORATION MAY BE SUBJECT TO CERTAIN TAX LIABILITY
UNDER THE INTERNAL REVENUE CODE.
Our
distribution of the common stock of CombiMatrix Corporation in the redemption
will be tax-free to Acacia Research Corporation if the distribution qualifies
under Sections 368 and 355 of the Internal Revenue Code. If the
split-off failed to qualify under Section 355 of the Internal Revenue Code,
corporate tax would be payable by the consolidated group of which Acacia
Research Corporation is the common parent, based upon the difference between the
aggregate fair market value of the assets of CombiMatrix Corporation’s business
and the adjusted tax bases of such business to Acacia Research Corporation prior
to the redemption.
Acacia
Research Corporation received a private letter ruling from the IRS to the effect
that, among other things, the redemption would be tax free to Acacia Research
Corporation and the holders of AR-Acacia Technologies stock and AR-CombiMatrix
stock under Sections 368 and 355 of the Internal Revenue 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 meet certain commitments
made.
If the
split-off failed to qualify under Section 355 of the Internal Revenue Code,
corporate tax, if any, would be payable by the consolidated group of which
Acacia Research Corporation is the common parent, as described
above. As such, the corporate level tax would be payable by Acacia
Research Corporation. CombiMatrix Corporation has agreed however, to indemnify
Acacia Research Corporation for this and certain other tax liabilities if they
result from actions taken by CombiMatrix Corporation. Notwithstanding
CombiMatrix Corporation’s agreement to indemnify us, under the Internal Revenue
Code’s consolidated return regulations, each member of the Acacia Research
Corporation consolidated group, including our company, will be severally liable
for these tax liabilities. Further, we may be liable for additional taxes if
Acacia Research Corporation takes 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
Corporation.
FOLLOWING
THE REDEMPTION OF AR-COMBIMATRIX STOCK FOR THE COMMON STOCK OF COMBIMATRIX
CORPORATION, ACACIA RESEARCH CORPORATION MAY BE SUBJECT TO CERTAIN TAX LIABILITY
UNDER THE INTERNAL REVENUE CODE FOR ACTIONS TAKEN BY EITHER OF THEM FOLLOWING
THE REDEMPTION.
Even if
the distribution qualifies under Section 368 and 355 of the Internal Revenue
Code, it will be taxable to Acacia if Section 355(e) of the Internal Revenue
Code applies to the distribution. Section 355(e) will apply if 50% or more of
the AR-Acacia Technologies stock or CombiMatrix Corporation’s common stock, by
vote or value, is acquired by one or more persons, other than the holders of
AR-CombiMatrix stock who receive the common stock of CombiMatrix Corporation in
the redemption, acting pursuant to a plan or a series of related transactions
that includes the redemption. Any shares of the AR-Acacia Technologies stock,
the AR-CombiMatrix stock or the common stock of CombiMatrix Corporation 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 Internal Revenue Code,
CombiMatrix Corporation 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 Internal Revenue Service to the effect that such action will
not cause the redemption to be taxable to us (collectively “Disqualifying
Actions”):
|
•
|
merge
or consolidate with another
corporation;
|
|
•
|
liquidate
or partially liquidate;
|
|
•
|
sell
or transfer all or substantially all of its
assets;
|
|
•
|
redeem
or repurchase its stock (except in certain limited circumstances);
or
|
|
•
|
take
any other action which could reasonably be expected to cause Section
355(e) to apply to the
distribution.
|
Further,
if Acacia Research Corporation takes 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.
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 United
States Patent and Trademark Office, or the courts that impact the patent
application process, the patent enforcement process or the rights of patent
holders, these changes could negatively affect our expenses and revenue. For
example, new rules regarding the burden of proof in patent enforcement actions
could significantly increase the cost of our enforcement actions, and new
standards or limitations on liability for patent infringement could negatively
impact our revenue derived from such enforcement actions. While we are not aware
that any such changes are likely to occur in the foreseeable future, we cannot
assure you that such changes will not occur.
·
|
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 United States Patent and Trademark
Office.
|
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 United States Patent and Trademark Office
could have an adverse impact on the cost of processing pending patent
applications and the value of those pending patent
applications.
|
The
assets of our operating subsidiaries consists of patent portfolios, including
pending patent applications before the U.S. Patent and Trademark Office (USPTO).
The value of our patent portfolios is dependent upon the issuance of patents in
a timely manner, and any reductions in the funding of the USPTO could negatively
impact the value of our assets. Further, reductions in funding from Congress
could result in higher patent application filing and maintenance fees charged by
the USPTO, causing an unexpected increase in our expenses.
·
|
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. Companies such as British Technology Group, Rembrandt
Management Group, and Intellectual Ventures LLC are already in the business of
acquiring the rights to patents for the purpose of licensing and enforcement,
and we expect more companies to enter the market. As new technological advances
occur, many of our patented technologies may become obsolete before they are
completely monetized. If we are unable to replace obsolete technologies with
more technologically advanced patented technologies, then this obsolescence
could have a negative effect on our ability to generate future
revenues.
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.
·
|
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.
WE
MAY FAIL TO MEET MARKET EXPECTATIONS BECAUSE OF FLUCTUATIONS IN QUARTERLY
OPERATING RESULTS, WHICH COULD CAUSE THE PRICE OF ACACIA RESEARCH-ACACIA
TECHNOLOGIES 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
Acacia Research-Acacia Technologies common stock to decline. The following are
among the factors that could cause our operating results to fluctuate
significantly from period to period:
·
|
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;
|
·
|
fluctuations
in the net number of active licensees period to
period;
|
·
|
costs
related to acquisitions, alliances, licenses and other efforts to expand
our operations;
|
·
|
the
timing of payments under the terms of any customer or license agreements
into which our operating subsidiaries may enter;
and
|
·
|
expenses
related to, and the results of, patent filings and other enforcement
proceedings relating to intellectual property rights, as more fully
described in this section.
|
OUR
REVENUES WILL BE UNPREDICTABLE, AND THIS MAY HARM OUR FINANCIAL
CONDITION.
Acacia
Global Acquisition Corporation's acquisition of the assets of Global Patent
Holdings, LLC in 2005, provided us with ownership of companies that control 27
patent portfolios, which include 120 U.S. patents and certain foreign
counterparts. Rights to additional patent portfolios were acquired
subsequent to the acquisition of the assets of Global Patent Holdings, bringing
the current total number of patent portfolios controlled by Acacia Research
Corporation’s operating subsidiaries to approximately 91, covering technologies
used in a wide variety of industries. The acquisitions 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 2009, 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 price of our Acacia
Research-Acacia Technologies 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.
Our
operating subsidiaries do not invent new technologies or products; they depend
on acquiring 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. Further, because we rely upon acquiring technology from
others, we cannot be certain that we will be able to obtain the volume and
quality of available new technologies necessary to sustain our current or future
growth. If we are unable to obtain the necessary volume and quality
of new technologies, then we may need to reduce operations or revise our
business model.
TECHNOLOGY
COMPANY STOCK PRICES ARE ESPECIALLY VOLATILE, AND THIS VOLATILITY MAY DEPRESS
THE PRICE OF OUR ACACIA RESEARCH-ACACIA TECHNOLOGIES COMMON STOCK.
The stock
market has experienced significant price and volume fluctuations, and the market
prices of technology companies have been highly volatile. We believe that
various factors may cause the market price of our Acacia Research-Acacia
Technologies common stock to fluctuate, perhaps substantially, including, among
others, the following:
·
|
announcements
of developments in our patent enforcement
actions;
|
·
|
developments
or disputes concerning our patents;
|
·
|
our
or our competitors’ technological
innovations;
|
·
|
developments
in relationships with licensees;
|
·
|
variations
in our quarterly operating results;
|
·
|
our
failure to meet or exceed securities analysts’ expectations of our
financial results; or
|
·
|
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 $1,008.96 - $1,353.94 during
the 52-weeks ended December 31, 2007 and the Nasdaq Composite Index had a range
of $1,108.49 - $2,892.36 over the same period. Over the same period,
our Acacia Research-Acacia Technologies common stock fluctuated within a range
of $8.42 - $17.92, all of which was experienced in the fourth
quarter. We believe fluctuations in our stock price during this
period could have been impacted by court rulings in our patent enforcement
actions. Court rulings in patent enforcement actions are often difficult to
understand, even when favorable or neutral to the value of our patents and 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 Acacia
Research-Acacia Technologies common stock was the object of securities class
action litigation, it could result in substantial costs and a diversion of
management’s attention and resources, which could materially harm our business
and financial results.
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
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 CERTAIN OF 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.
We invest
our cash balances in high-quality issuers and limit the amount of credit
exposure to any one issuer other than the United States government and its
agencies. At December 31, 2007, our investments in marketable securities consist
of United States Government and Government Agency Bonds, and auction rate
securities. Our auction rate securities are investment grade quality and are in
compliance with our investment policy as of the end of 2007. We believe that the
fair value of these investments continue to approximate their par value;
however, we did experience failed auctions with certain of our issues in
February 2008. Given the deteriorating credit markets, and the
increased incidence of failure within the auction market in February 2008, there
can be no assurance as to when we would be able to liquidate a particular issue.
In such case of a failure, the auction rate securities continue to pay interest
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. Furthermore, if this situation were to persist
despite our ability to hold such investments until maturity, we may be required
to record an impairment charge 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. See Note 2 of our Notes to Consolidated
Financial Statements for additional information about our investments in
marketable securities.
Item
1B. UNRESOLVED STAFF
COMMENTS
None.
Item
2. PROPERTIES
Acacia
Research Corporation leases 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.
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.
Item
4. SUBMISSION OF MATTERS
TO A VOTE OF SECURITY HOLDERS
None.
PART
II
Item
5. MARKET
FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES
OF EQUITY SECURITIES
Recent
Market Prices
Acacia
Research Corporation’s AR-Acacia Technologies stock and AR-CombiMatrix stock
commenced trading on the Nasdaq Stock Market on December 16, 2002, under the
symbols “ACTG” and “CBMX,” respectively. Prior to December 16, 2002,
Acacia Research Corporation’s only class of common stock began trading under the
symbol “ACRI” on the NASDAQ National Market System on July 8, 1996.
As a
result of the Split-off Transaction described above, all outstanding shares of
AR-CombiMatrix stock were redeemed, and hence, all rights of holders of
AR-CombiMatrix stock ceased as of the Redemption Date (August 15, 2007), except
for the right, upon the surrender to the exchange agent of shares of
AR-CombiMatrix stock, to receive new shares of CombiMatrix Corporation stock
pursuant to the exchange ratio described above. Subsequent to the
consummation of the Split-off Transaction, Acacia Research Corporation’s only
class of common stock outstanding is its AR-Acacia Technologies
stock.
Prior to
the Split-off Transaction, Acacia Research Corporation had two classes of common
stock outstanding, its AR-Acacia Technologies stock and its AR-CombiMatrix
stock. AR-Acacia Technologies stock was intended to reflect
separately the performance of Acacia Research Corporation’s “Acacia Technologies
group.” AR-CombiMatrix stock was intended to reflect separately the
performance of Acacia Research Corporation’s “CombiMatrix
group.” Although the AR-Acacia Technologies stock and the
AR-CombiMatrix stock were intended to reflect the performance of our different
business groups, they were both classes of common stock of Acacia Research
Corporation and were not stock issued by the respective groups. As a
result of the Split-off Transaction, the CombiMatrix group is no longer a
business group of Acacia Research Corporation.
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 our results of operations, may adversely
affect the market price of our common stock.
The high
and low bid prices for our two classes of common stock as reported by NASDAQ 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.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acacia
Research-Acacia Technologies stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
$ |
17.92 |
|
|
$ |
16.75 |
|
|
$ |
16.84 |
|
|
$ |
16.56 |
|
|
$ |
15.58 |
|
|
$ |
14.95 |
|
|
$ |
14.65 |
|
|
$ |
9.00 |
|
Low
|
|
$ |
8.42 |
|
|
$ |
10.87 |
|
|
$ |
12.76 |
|
|
$ |
12.23 |
|
|
$ |
11.05 |
|
|
$ |
9.31 |
|
|
$ |
8.85 |
|
|
$ |
6.65 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acacia
Research-CombiMatrix stock(1):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
High
|
|
|
N/A |
|
|
$ |
0.74 |
|
|
$ |
0.81 |
|
|
$ |
1.85 |
|
|
$ |
1.07 |
|
|
$ |
1.68 |
|
|
$ |
2.75 |
|
|
$ |
2.90 |
|
Low
|
|
|
N/A |
|
|
$ |
0.57 |
|
|
$ |
0.50 |
|
|
$ |
0.58 |
|
|
$ |
0.70 |
|
|
$ |
0.96 |
|
|
$ |
1.45 |
|
|
$ |
1.34 |
|
____________________________
1) Reflects
prices of AR-CombiMatrix stock through close of trading on August 14, 2007,
immediately prior to the Redemption.
STOCK
PERFORMANCE GRAPH
This
performance graph shall not be deemed “filed” for purposes of Section 18 of
the Securities Exchange Act of 1934, as amended (the “Exchange Act”) or
otherwise subject to the liabilities under that Section and shall not be deemed
to be incorporated by reference into any filing of Acacia Research Corporation
under the Securities Act of 1933, as amended.
The Stock
Performance Graph depicted below compares the yearly change in Acacia Research
Corporation’s cumulative total stockholder return for the last five fiscal years
with the cumulative total return of the Nasdaq Stock Market (U.S.) Composite
Index and the Nasdaq Biotech Index.
|
|
2003
|
|
|
2004
|
|
|
2005
|
|
|
2006
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AR-Acacia
Technologies stock
|
|
$ |
226 |
|
|
$ |
220 |
|
|
$ |
286 |
|
|
$ |
555 |
|
|
$ |
373 |
|
AR-CombiMatrix
stock
|
|
$ |
92 |
|
|
$ |
109 |
|
|
$ |
38 |
|
|
$ |
22 |
|
|
$ |
16
|
* |
Nasdaq
Composite
Index
|
|
$ |
150 |
|
|
$ |
163 |
|
|
$ |
165 |
|
|
$ |
181 |
|
|
$ |
199 |
|
Nasdaq
Biotech
Index
|
|
$ |
146 |
|
|
$ |
155 |
|
|
$ |
159 |
|
|
$ |
161 |
|
|
$ |
168 |
|
____________________________
*Based on
the closing trading price of AR-CombiMatrix stock on August 14, 2007,
immediately prior to the Redemption.
The graph
covers the period from December 31, 2002 to December 31, 2007, except the
share price of AR-CombiMatrix stock in 2007 is measured as of August 14,
2007. Cumulative total returns are calculated assuming that $100 was
invested on December 31, 2002, in each class of Acacia Research Corporation’s
common stock outstanding as of December 31, 2002, and in each index, and that
all dividends, if any, were reinvested. Refer to Acacia Research Corporation’s
Dividend Policy below. Stockholder returns over the indicated period
should not be considered indicative of future stock prices or shareholder
returns.
On
February 25, 2008, there were approximately 114 owners of record of Acacia
Research Corporation stock. The majority of the outstanding shares of Acacia
Research Corporation 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 capital
stock, and the current policy of the board of directors is to retain earnings,
if any, to provide for the growth of Acacia Research Corporation and 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.
Equity
Compensation Plan Information
The
following table provides information with respect to Acacia Research
Corporation’s common shares issuable under our equity compensation plans as of
December 31, 2007:
|
|
(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)
|
|
4,919,000
|
|
$8.45
|
|
18,000
|
2007
Acacia Technologies Stock Incentive Plan(2)
|
|
|
|
|
|
|
Subtotal
|
|
4,969,000
|
|
$8.52
|
|
189,000
|
Equity compensation plans not
approved by security holders(3) |
|
N/A
|
|
N/A
|
|
N/A
|
Total
|
|
|
|
|
|
|
_________________________
(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 Acacia Research-Acacia Technologies 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 576,000 in nonvested restricted
stock awards outstanding at December 31, 2007. 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 Acacia Research-Acacia Technologies
stock. The share reserve under the 2007 Plan automatically increases on
January 1, 2008 and 2009, by an amount equal to two percent (2%) of the
total number of shares of our Acacia Research-Acacia Technologies stock
outstanding on the last trading day of December in the prior calendar
year, except that the automatic increase in the share reserve will be
three percent (3%) of our outstanding common stock on such January 1, if
our common stock has appreciated by at least thirty percent (30%) 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 339,000
in nonvested restricted stock awards outstanding at December 31,
2007. 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.
|
Item
6. SELECTED
FINANCIAL DATA
The
consolidated selected balance sheet data as of December 31, 2007 and 2006
and the consolidated selected statements of operations data for the years ended
December 31, 2007, 2006 and 2005 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, 2005, 2004 and 2003 and the consolidated selected statements
of operations data for the years ended December 31, 2004 and 2003 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,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
fee revenues
|
|
$ |
52,597 |
|
|
$ |
34,825 |
|
|
$ |
19,574 |
|
|
$ |
4,284 |
|
|
$ |
692 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing,
general and administrative expenses (including non-cash stock compensation
charges)
|
|
|
20,042 |
|
|
|
14,123 |
|
|
|
8,097 |
|
|
|
5,043 |
|
|
|
4,300 |
|
Inventor
royalties and contingent legal fees expense - patents
|
|
|
29,224 |
|
|
|
17,159 |
|
|
|
11,331 |
|
|
|
- |
|
|
|
- |
|
Legal
expenses - patents
|
|
|
7,024 |
|
|
|
4,780 |
|
|
|
2,468 |
|
|
|
3,133 |
|
|
|
1,886 |
|
Amortization
of patents
|
|
|
5,583 |
|
|
|
5,313 |
|
|
|
4,922 |
|
|
|
501 |
|
|
|
502 |
|
Operating
loss
|
|
|
(9,511 |
) |
|
|
(6,847 |
) |
|
|
(7,244 |
) |
|
|
(6,055 |
) |
|
|
(6,013 |
) |
Other
income, net
|
|
|
2,359 |
|
|
|
1,524 |
|
|
|
1,071 |
|
|
|
471 |
|
|
|
408 |
|
Loss
from continuing operations before minority interests
|
|
|
(7,152 |
) |
|
|
(5,323 |
) |
|
|
(6,173 |
) |
|
|
(5,445 |
) |
|
|
(5,468 |
) |
Loss
from continuing operations
|
|
|
(7,359 |
) |
|
|
(5,363 |
) |
|
|
(6,038 |
) |
|
|
(5,439 |
) |
|
|
(5,451 |
) |
Discontinued
operations - Split-off of CombiMatrix Corporation and
other
|
|
|
(8,086 |
) |
|
|
(20,093 |
) |
|
|
(12,638 |
) |
|
|
606 |
|
|
|
(18,969 |
) |
Net
loss
|
|
$ |
(15,445 |
) |
|
$ |
(25,456 |
) |
|
$ |
(18,676 |
) |
|
$ |
(4,833 |
) |
|
$ |
(24,420 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share - basic and diluted:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acacia
Research - Acacia Technologies stock
|
|
$ |
(0.26 |
) |
|
$ |
(0.19 |
) |
|
$ |
(0.23 |
) |
|
$ |
(0.27 |
) |
|
$ |
(0.28 |
) |
Discontinued
operations - Split-off of CombiMatrix Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acacia
Research - CombiMatrix stock
|
|
$ |
(0.14 |
) |
|
$ |
(0.49 |
) |
|
$ |
(0.37 |
) |
|
$ |
0.02 |
|
|
$ |
(0.76 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average number of common and potential common shares used in computation
of income (loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acacia
Research - Acacia Technologies stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
28,503,314 |
|
|
|
27,547,651 |
|
|
|
26,630,732 |
|
|
|
19,784,883 |
|
|
|
19,661,655 |
|
Acacia
Research - CombiMatrix stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
55,862,707 |
|
|
|
40,605,038 |
|
|
|
33,678,603 |
|
|
|
29,962,596 |
|
|
|
24,827,819 |
|
Diluted
|
|
|
55,862,707 |
|
|
|
40,605,038 |
|
|
|
33,678,603 |
|
|
|
30,995,663 |
|
|
|
24,827,819 |
|
Consolidating
Balance Sheet Data
(In
thousands)
|
|
At
December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
2004
|
|
|
2003
|
|
Total
assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acacia
Research Corporation
|
|
$ |
71,051 |
|
|
$ |
65,770 |
|
|
$ |
68,893 |
|
|
$ |
33,058 |
|
|
$ |
39,978 |
|
Discontinued
operations - Split-off of CombiMatrix Corporation
|
|
|
- |
|
|
|
44,214 |
|
|
|
52,541 |
|
|
|
55,388 |
|
|
|
50,161 |
|
Eliminations
|
|
|
- |
|
|
|
(380 |
) |
|
|
- |
|
|
|
(119 |
) |
|
|
(99 |
) |
Total
|
|
$ |
71,051 |
|
|
$ |
109,604 |
|
|
$ |
121,434 |
|
|
$ |
88,327 |
|
|
$ |
90,040 |
|
Total
liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acacia
Research Corporation
|
|
$ |
6,247 |
|
|
$ |
4,276 |
|
|
$ |
6,647 |
|
|
$ |
3,472 |
|
|
$ |
4,188 |
|
Discontinued
operations - Split-off of CombiMatrix Corporation
|
|
|
- |
|
|
|
11,399 |
|
|
|
7,443 |
|
|
|
8,560 |
|
|
|
24,424 |
|
Eliminations
|
|
|
- |
|
|
|
(380 |
) |
|
|
- |
|
|
|
(119 |
) |
|
|
(99 |
) |
Total
|
|
$ |
6,247 |
|
|
$ |
15,295 |
|
|
$ |
14,090 |
|
|
$ |
11,913 |
|
|
$ |
28,513 |
|
Minority
interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acacia
Research Corporation
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
443 |
|
|
$ |
778 |
|
|
$ |
1,127 |
|
Discontinued
operations - Split-off of CombiMatrix Corporation
|
|
|
- |
|
|
|
- |
|
|
|
4 |
|
|
|
- |
|
|
|
- |
|
Total
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
447 |
|
|
$ |
778 |
|
|
$ |
1,127 |
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acacia
Research Corporation
|
|
$ |
64,804 |
|
|
$ |
61,494 |
|
|
$ |
61,803 |
|
|
$ |
28,808 |
|
|
$ |
34,663 |
|
Discontinued
operations - Split-off of CombiMatrix Corporation
|
|
|
- |
|
|
|
32,815 |
|
|
|
45,094 |
|
|
|
46,828 |
|
|
|
25,737 |
|
Total
|
|
$ |
64,804 |
|
|
$ |
94,309 |
|
|
$ |
106,897 |
|
|
$ |
75,636 |
|
|
$ |
60,400 |
|
Factors
Affecting Comparability:
·
|
Effective
January 1, 2006, Acacia Research Corporation adopted the provisions of
Statement of Financial Accounting Standards No. 123 (revised 2004),
“Share-Based Payment” (“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 the Acacia Research
Corporation 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 charges included in
Marketing, General and Administrative expense were $5,908,000, $3,946,000
and $356,000 in 2007, 2006 and 2005,
respectively.
|
·
|
In
September 2007, we recorded a non-cash impairment charge of $235,000,
related to the write-off of a patent-related intangible
asset. In June 2006, we recorded a non-cash charge of $297,000,
related to the write-off of a patent-related intangible
asset. In June 2003, we recorded an impairment charge of
$207,000 for an other-than-temporary decline in the fair value of a cost
method investment.
|
·
|
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, Acacia Global Acquisition Corporation consummated the GPH
Acquisition as described above. 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, 2007, amortization expense
totaled $5.6 million, $5.3 million and $4.9 million in 2007, 2006 and
2005, respectively, as compared to approximately $501,000, and $502,000,
in 2004 and 2003, respectively.
|
·
|
As
a result of the Split-off Transaction, as discussed above, we have
disposed of our investment in CombiMatrix Corporation. Refer to
Note 10A to the Acacia Research Corporation 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
“Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
No. 144”).
|
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
Acacia
Research Corporation’s 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 91 patent portfolios, which include U.S. patents and certain
foreign counterparts, covering technologies used in a wide variety of
industries.
As used
in this 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 Acacia Research Corporation’s wholly owned
operating subsidiaries.
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 Acacia Research Corporation (the “Split-off
Transaction”), effective August 15, 2007 (the “Redemption Date”). As
such, the results of operations for the CombiMatrix group in the accompanying
consolidated financial statements are presented as part of Acacia Research
Corporation’s results from discontinued operations in accordance with SFAS No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” or SFAS
No. 144. Accordingly, the CombiMatrix group’s results of operations
in prior periods have been reclassified to discontinued operations to conform to
the current period presentation.
The
intellectual property acquisition, development, licensing and enforcement
business conducted by Acacia Research Corporation’s operating subsidiaries, is
described more fully in Item 1. “Business,” of this report.
Overview
Our
operating activities during 2007, 2006 and 2005, 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 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.
License
fee revenues recognized in 2007 totaled $52.6 million, representing a 51%
increase over revenues recognized in 2006, which totaled $34.8 million, and a
greater than 100% increase over revenues recognized in 2005, which totaled $19.6
million. The increase in license fee revenues in 2007 and 2006
reflects the impact of the increase in patent portfolios owned or controlled by
our operating subsidiaries, and the increase in the number of patent licensing
and enforcement programs launched and generating revenues since the end of
2005.
Revenues
for 2007 included license fees from 91 new licensing agreements covering 16 of
our technology licensing and enforcement programs, as compared to 72 new
licensing agreements covering 14 of our technology licensing and enforcement
programs in 2006 and 83 new licensing agreements covering 12 of our technology
licensing and enforcement programs in 2005. On a consolidated basis,
our operating subsidiaries generated licensing revenues from 8 new technology
licensing and enforcement programs during 2007, as compared to 7 new programs in
2006 and 11 new programs in 2005. To date, on a consolidated basis,
we have generated revenues from 28 technology licensing and enforcement
programs.
License
fee revenues for 2007 included fees from the licensing of our Color Correction
for Video Graphics Systems technology, DMT® technology, Audio/Video Enhancement
and Synchronization technology, Audio Communications Fraud Detection technology,
Credit Card Fraud Protection technology, Electronic Address List Management
technology, Image Resolution Enhancement technology, Pop-Up Internet Advertising
technology, Portable Storage Devices with Links technology, Multi-dimensional
Bar Codes technology, Product Activation technology, Rule Based Monitoring
technology, Spreadsheet Automation technology, Telematics technology, Vehicle
Magnetic Braking technology and Virtual Computer Workspaces technology licensing
programs.
Management
measures and assesses the performance and growth of the 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 $52.6 million as of
December 31, 2007, as compared to $47.9 million as of September 30, 2007, $46.8
million as of June 30, 2007, $55.3 million as of March 31, 2007, $34.8 million
as of December 31, 2006 and $19.6 million as of December 31, 2005.
Operating
expenses increased during 2007 and 2006, as compared to 2005, 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. Inventor
royalties expenses and contingent legal fees expenses increased in 2007 and
2006, as compared to 2005, primarily due to the related increase in license fee
revenues, 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.
During
2007, certain of our operating subsidiaries continued to execute our business
strategy in the area of patent portfolio acquisitions, including, in the fourth
quarter of 2007, the acquisition of, or the acquisition of the rights to, patent
portfolios in the Authorized Spending Accounts, Compiler, Copy Protection,
Projector, and Virtual Server technology areas. During 2007, we
acquired a total of 31 new patent portfolios with applications over a wide range
of technology areas, as compared to 20 new patent portfolios in 2006 and 8 new
patent portfolios in 2005 (excluding portfolios acquired in connection with the
2005 GPH Acquisition).
In
January 2005, 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 (“GPH
Acquisition”). In connection with the acquisition we acquired
ownership of companies that own or control 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.
Refer to
“Liquidity and Capital Resources” below for information regarding the impact of
patent and patent rights acquisitions on Acacia Research Corporation’s
consolidated financial statements for the periods presented.
As of
December 31, 2007, 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
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.
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:
·
|
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,” (“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 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.
For those
arrangements where royalties cannot be reasonably estimated, our operating
subsidiaries recognize revenue upon the receipt of cash or license fee
statements from their licensees, as described at Note 2 to our consolidated
financial statements contained elsewhere herein. Our operating
subsidiaries recognize certain license fee revenues when earned over the term of
the license agreement in exchange for the grant of non-exclusive licenses to use
certain technologies for which our operating subsidiaries own or control
patents. Our operating subsidiaries recognize revenue for estimates of license
fees earned during the applicable period, based on historical activities of
licensees, historical sales or per unit growth rates of licensees and other
relevant available information regarding licensee activities that factor into
the calculation of periodic license fees due. Revisions, if any, are
made for actual licensee fees received in the following quarter. Historically,
these revisions have not been material to our consolidated financial statements.
Estimates of periodic license fees due could differ from actual events, thus
materially impacting our financial position and results of
operations.
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.
Stock-based
Compensation Expense
Effective
January 1, 2006, Acacia Research Corporation adopted the provisions of Statement
of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment”
(“SFAS No. 123R”), which is a revision of SFAS No. 123, “Accounting for
Stock-Based Compensation.” SFAS No. 123R supersedes Accounting
Principles Board (“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. In
March 2005, the SEC published Staff Accounting Bulletin No. 107 (“SAB 107”),
which requires stock-based compensation to be classified in the same expense
line items as cash compensation (i.e. marketing, general and administrative
expenses). 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), 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 classes of common stock and
employee stock option exercise behavior.
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 Acacia Research Corporation 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 the Acacia Research Corporation 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, estimates
of market values, estimates of the amount and timing of future cash flows, and
estimates of other factors 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 a 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.
Impairment
of Marketable Securities
The fair
value of our investments is determined by quoted market
prices. Realized and unrealized gains and losses are recorded based
on the specific identification method. We review impairments
associated with our investments in marketable securities in accordance with
Emerging Issues Task Force (“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 statement of operations and comprehensive income
(loss) (hereinafter “consolidated statement 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.
We
believe that our investments in certain auction rate securities continue to
approximate their par value; however, such risks, including 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. See Note 2 of our Notes to
Consolidated Financial Statements for additional details about our investments
in auction rate securities and other marketable securities.
Acacia
Research Corporation
Results
of Operations
Net
Loss (In thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(7,359 |
) |
|
$ |
(5,363 |
) |
|
$ |
(6,038 |
) |
Loss
from discontinued operations - Split-off of CombiMatrix Corporation and
other
|
|
|
(8,086 |
) |
|
|
(20,093 |
) |
|
|
(12,638 |
) |
Net
loss
|
|
|
(15,445 |
) |
|
|
(25,456 |
) |
|
|
(18,676 |
) |
The
changes in consolidated net loss were primarily due to operating results and
activities, as discussed below.
Revenues
(In thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
License
fees
|
|
$ |
52,597 |
|
|
$ |
34,825 |
|
|
$ |
19,574 |
|
License Fees. Revenues for
2007 included license fees from 91 new licensing agreements covering 16 of our
technology licensing and enforcement programs, as compared to 72 new licensing
agreements covering 14 of our technology licensing and enforcement programs in
2006, and 83 new licensing agreements covering 12 of our technology licensing
and enforcement programs in 2005. The increase in license fee
revenues in 2007 and 2006, as compared to 2005, reflects the impact of the
increase in patent portfolios owned or controlled by our operating subsidiaries
since 2005, and the related increase in the number of patent licensing and
enforcement programs developed, launched and generating revenues since
2005. On a consolidated basis, as of December 31, 2007, 28 of our
licensing programs had begun generating licensing revenues, up from 20 as of
December 31, 2006 and 13 as of December 31, 2005. License fee
revenues recognized by our operating subsidiaries fluctuate from period to
period primarily based on the following factors:
·
|
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.
|
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)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Marketing,
general and administrative expenses (including non-cash stock
compensation
|
|
|
|
|
|
|
|
|
|
expense
of $5,908 for 2007, $3,946 for 2006 and $356 for 2005)
|
|
$ |
20,042 |
|
|
$ |
14,123 |
|
|
$ |
8,097 |
|
Inventor
royalties and contingent legal fees expense - patents
|
|
|
29,224 |
|
|
|
17,159 |
|
|
|
11,331 |
|
Legal
expenses - patents
|
|
|
7,024 |
|
|
|
4,780 |
|
|
|
2,468 |
|
Write-off
of patent-related intangible asset
|
|
|
235 |
|
|
|
297 |
|
|
|
- |
|
Amortization
of patents
|
|
|
5,583 |
|
|
|
5,313 |
|
|
|
4,922 |
|
Marketing, General and
Administrative Expenses. Marketing, general and administrative
expenses consist of 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, commercialization, research,
consulting and maintenance costs.
Excluding
the impact of non-cash stock compensation charges discussed below, the net
increase for the periods presented was due primarily to the addition of
licensing, business development and engineering personnel and an increase in
other personnel related expenses in each comparable period, a one-time
severance charge for an employee separation under the Acacia Research
Corporation Executive Severance Plan in the first quarter of 2007, an increase
in patent acquisition and business development related research and consulting
costs and an increase in corporate, general and administrative costs, including
an increase in accounting fees related to the CombiMatrix Split-off
Transaction. 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. In 2007, as compared to 2006, these increases were
partially offset by a decrease in consulting expenses due to the expiration of
the consulting agreement with the former CEO of Global Patent Holdings, LLC in
January 2007. The increases in 2006, as compared to 2005, were
partially offset by a reduction in Acacia Research Corporation’s Sarbanes-Oxley
compliance costs.
Non-cash
stock compensation charges increased during 2007, as compared to 2006, due to
the issuance of equity based incentive awards to new and existing employees
during 2007. In addition, the increase in non-cash stock compensation
expense also reflects the increase in the AR-Acacia Technologies stock price
during 2007, as compared to 2006, as illustrated at Item 5. “Recent Market
Prices” above. The weighted average fair value of stock options
granted during 2007 and 2006 was $9.07 and $5.35, respectively. The
weighted average fair value of nonvested restricted shares granted during 2007
and 2006 was $14.04 and $11.87, respectively (see Note 11 to the consolidated
financial statements for information on the determination of fair value for
share based awards under SFAS No. 123R). The increase in non-cash
stock compensation charges in 2006, as compared to 2005, reflects our adoption
of SFAS No. 123R, effective January 1, 2006, which required public companies to
measure all employee stock-based compensation awards using a fair-value method
and record such expense in their consolidated financial statements, as described
under “Critical Accounting Estimates.”
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):
|
|
2007
vs. 2006
|
|
|
2006
vs. 2005
|
|
|
|
|
|
|
|
|
Increase
in personnel expenses
|
|
$ |
2,767 |
|
|
$ |
1,247 |
|
Increase
(decrease) in GPH Acquisition related consulting expenses
|
|
|
(925 |
) |
|
|
96 |
|
One-time
severance charge for employee separation
|
|
|
360 |
|
|
|
- |
|
Increase
in foreign taxes paid on licensing fees
|
|
|
125 |
|
|
|
6 |
|
Increase
in accounting and other professional fees
|
|
|
141 |
|
|
|
392 |
|
Increase
in patent development / commercialization and other
|
|
|
1,021 |
|
|
|
92 |
|
Increase
in office and facilities and other marketing, general and administrative
costs
|
|
|
468 |
|
|
|
603 |
|
Increase
in non-cash stock compensation expense
|
|
|
1,962 |
|
|
|
3,590 |
|
Inventor Royalties and Contingent
Legal Fees Expense. Inventor royalties expense totaled $12.1
million and $9.6 million in 2007 and 2006, respectively, and contingent legal
fees expense totaled $17.2 million and $7.5 million in 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. 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.
The
increase in inventor royalties expense and contingent legal fees expense in 2007
was due in part to the increase in license fee revenues recognized in 2007, as
compared to 2006, as discussed above, and also reflects the impact of the mix of
patent portfolios with varying economic terms generating the revenues during the
respective periods. A portion of 2006 revenues were comprised of
license fees from patent portfolios that were not subject to a contingent legal
fee arrangement, whereas the majority of patent portfolios generating revenues
in 2007 were subject to contingent legal fee arrangements. As a
result, in 2006, no contingent legal fees expense was incurred on a portion of
revenues, resulting in the 128% increase in contingent legal fees expense in
2007, as compared to 2006, as compared to 51% increase in license fee revenues
for the same periods.
Results
in 2005 included $225,000 of V-chip related inventor royalties expense
recognized as a result of the conclusion of all V-chip related litigation
activities in October of 2005.
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 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. 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.
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 are further along in the prosecution of the related litigation and certain
of our patent portfolios that have proceeded to trial and
concluded. The increase in patent related legal expenses in 2006, as
compared to 2005, is primarily due to a net increase in ongoing patent
enforcement litigation in each respective period, and to a lesser extent, an
increase in the number of portfolios where we have engaged outside law firms on
an hourly or discounted hourly basis.
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
commercialization and enforcement programs.
Amortization of
Patents. 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.
The
increase in 2006, as compared to 2005, was due to twelve full months of patent
amortization expense resulting from the GPH Acquisition in 2006, as compared to
11 months of amortization in 2005. Patent amortization expense
related to the GPH Acquisition was $4.7 million and $4.4 million in 2006 and
2005, respectively. In addition, patent amortization expense in 2006
and 2005 includes additional patent amortization charges related to certain of
the patent portfolios acquired by our operating subsidiaries subsequent to the
GPH Acquisition.
Refer to
“Liquidity and Capital Resources” below for patent portfolio acquisition costs
incurred during the periods presented.
Write-off of Patent-related
Intangible Asset. In September 2007, we recorded a non-cash
impairment charge of $235,000, related to the write-off of a patent-related
intangible asset. The related licensing program was completed during
the third quarter of 2007 resulting in the write-off of the remaining carrying
value of the patent-related intangible asset as of September 30,
2007. In June 2006, we recorded a non-cash impairment charge of
$297,000, related to the write-off of a patent-related intangible
asset. During the second quarter of 2006, pursuant to the terms of
the respective license agreement, management elected to terminate its rights to
exclusively license and enforce the patent, resulting in the write-off of the
remaining carrying value of the patent-related intangible asset as of June 30,
2006.
Discontinued
Operations – Split-off of CombiMatrix Corporation
In
January 2006, Acacia Research Corporation’s board of directors approved a plan
for its wholly owned subsidiary, CombiMatrix Corporation, to become an
independent public company. CombiMatrix Corporation’s registration
statement on Form S-1 was declared effective by the SEC on June 8, 2007.
Following the redemption period required by Acacia Research Corporation’s
Restated Certificate of Incorporation, on August 15, 2007 (the “Redemption
Date”), CombiMatrix Corporation was split-off from Acacia Research Corporation
through the redemption of all outstanding shares of AR-CombiMatrix common stock
in exchange for the distribution of new shares of CombiMatrix Corporation, on a
pro-rata basis, to the holders of AR-CombiMatrix stock as of the Redemption Date
(the “Split-off Transaction”). On the Redemption Date, every ten (10)
shares of AR-CombiMatrix stock outstanding on August 15, 2007, was redeemed for
one (1) share of common stock of CombiMatrix Corporation. Subsequent
to the Redemption Date, Acacia Research Corporation no longer owns any equity
interests in CombiMatrix Corporation and the two companies operate independently
of each other.
As a
result of the Split-off Transaction, the assets, liabilities, results of
operations and cash flows of CombiMatrix Corporation have been eliminated from
the continuing operations of Acacia Research Corporation and Acacia Research
Corporation does not have any continuing involvement in the operations of
CombiMatrix Corporation. As a result of the Split-off Transaction, we
have disposed of our investment in CombiMatrix Corporation, and therefore, in
accordance with guidance set forth in SFAS No. 144, Acacia Research
Corporation’s accompanying consolidated balance sheets, statements of operations
and statements of cash flows for the current period presented reflect the
assets, liabilities, results of operations and cash flows for CombiMatrix
Corporation as discontinued operations. Consolidated financial
statements presented for the comparable prior year periods have been restated to
conform to this presentation. CombiMatrix Corporation was previously
presented as a separate operating segment of Acacia Research Corporation under
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related
Information.”
The
Split-off Transaction was accounted for by Acacia Research Corporation at
historical cost. Accordingly, no gain or loss on disposal was
recognized in the accompanying consolidated statements of operations. Included
in the current period 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 Corporation to holders of
AR-CombiMatrix stock, as of the Redemption Date, as described
above. 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-Transaction will be treated as a tax-free exchange under
Sections 368 and 355 of the Internal Revenue Code of 1986, as
amended.
Refer to
Note 10A to the Acacia Research Corporation consolidated financial statements
included elsewhere herein for information regarding the carrying amount(s) of
the major classes of assets, liabilities, revenues and pretax loss included in
discontinued operations for the periods presented.
Other Discontinued
Operations. Results for 2005 include charges, net of minority
interests, of $237,000 related to estimated additional costs to be incurred in
connection with the discontinued operations of Soundbreak.com (originally ceased
operations in February 2001), related primarily to certain noncancellable lease
obligations and a reduction in estimated amounts recoverable from existing
sublease arrangements. The related lease obligations, which were
guaranteed by Acacia Research Corporation, expired in August 2005.
Inflation
Inflation
has not had a significant impact on Acacia Research Corporation or any of our
subsidiaries in the current or prior periods.
Liquidity
and Capital Resources
Acacia
Research Corporation’s consolidated cash and cash equivalents and short-term
investments totaled $51.4 million at December 31, 2007, compared to
$45.0 million at December 31, 2006. Working capital, related to
continuing operations, at December 31, 2007 was $48.1 million, compared to $42.2
million at December 31, 2006.
The net
change in cash and cash equivalents and short-term investments related to
continuing operations for 2007, 2006 and 2005 was comprised of the following (in
thousands):
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) continuing operations:
|
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$ |
5,166 |
|
|
$ |
6,608 |
|
|
$ |
(2,608 |
) |
Investing
activities
|
|
|
(2,145 |
) |
|
|
10,513 |
|
|
|
(13,094 |
) |
Financing
activities
|
|
|
5,014 |
|
|
|
1,475 |
|
|
|
19,836 |
|
Operating Activities. License fee payments
received from licensees increased to $51.4 million in 2007, compared to $38.6
million in 2006, reflecting the increase in license fee revenues recognized in
2007, as compared to 2006, as discussed above. The decrease in
consolidated net cash inflows from operations in 2007, as compared to 2006, was
primarily due to the increases in patent-related legal expenses, 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. Consolidated accounts receivable increased to $1.4 million at
December 31, 2007, compared to $269,000 at December 31, 2006. The
majority of accounts receivable from licensees at December 31, 2007 was
collected in January 2008, in accordance with the terms of the related
underlying license agreements.
The
change to consolidated net cash inflows from operations in 2006, as compared to
net cash outflows from operations in 2005, was primarily due to the increase in
license fee payments received from licensees, which totaled $38.6 million in
2006, compared to $15.6 million in 2005. The increase in license fee
revenues in 2006 was partially offset by increases in inventor royalties
expenses, contingent legal fees expenses, patent-related legal expenses,
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. Consolidated accounts receivable
decreased to $269,000 at December 31, 2006, compared to $4.4 million at December
31, 2005, due to the collection of license fees receivable at December 31, 2005,
during the first quarter of 2006, in accordance with the terms of the related
underlying license agreements.
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 short-term cash management
activities. Short-term investments represent capital available to
fund current operations and fund capital expenditures. Net cash
outflows from investing activities for 2005 also included the impact of cash
consideration and related acquisition and registration costs, totaling $5.8
million, paid by Acacia Global Acquisition Corporation, in connection with the
GPH Acquisition in the first quarter of 2005. In addition, certain of
our operating subsidiaries incurred patent acquisition costs of $3.8
million, $1.0 million and $445,000 in 2007, 2006 and 2005, respectively, related
to the acquisition of additional patent portfolios, as described
earlier.
Financing
Activities. Consolidated net cash inflows from financing
activities in 2005 included net proceeds of approximately $19.5 million, related
to the sale of 3.5 million shares of AR–Acacia Technologies stock in February
2005. Net cash inflows from financing activities in 2007, 2006 and
2005 also included stock option exercise proceeds of $5.0 million, $1.5 million,
and $304,000, respectively.
Management
believes that Acacia Research Corporation’s 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 2009 and for the foreseeable future. Acacia
Research Corporation and its subsidiaries may however 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. Any efforts to seek additional funding could be
made through equity, debt or other external financing and there can be no
assurance that additional funding will be available on favorable terms, if at
all. If Acacia Research Corporation and its 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 the Acacia Research Corporation consolidated
financial statements included elsewhere herein for additional
information.
As of
March 5, 2008, we held $6.3 million of investment grade securities with an
auction reset feature (“auction rate securities”). Our auction rate securities
consist of securities issued by closed-end investment companies with portfolio
asset coverage of at least 200%, and auction rate investments backed by student
loans, issued under programs such as the Federal Family Education Loan Program,
all of which had credit ratings of AAA when purchased. 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.
We have
not experienced a failed auction for any of our securities as of
December 31, 2007. However, we did experience failed auctions
with certain of our issues in February 2008. Given the
deteriorating credit markets, and the increased incidence of failure within the
auction market in February 2008, there can be no assurance as to when we would
be able to liquidate a particular issue. In such case of a failure, the auction
rate securities continue to pay interest 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. Furthermore, if this situation were to persist despite our
ability to hold such investments until maturity, we may be required to record an
impairment charge in a future period.
Management
believes that the fair value of our investments in auction rate securities
continue to approximate their par value and that the underlying
credit quality of the assets backing its auction rate securities investments
have not been impacted by the reduced liquidity of these investments subsequent
to December 31, 2007. We will continue to monitor and evaluate our
investments in auction rate securities for any further reduction in liquidity
and potential impairment in future periods. See Note 2 of our Notes
to Consolidated Financial Statements for additional details about our
investments in auction rate securities and other marketable
securities.
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 Acacia Research
Corporation’s material known future cash commitments as of December 31, 2007,
and any material known commitments arising from events subsequent to year
end:
|
|
Payments
Due by Period (In thousands)
|
|
Contractual
Obligations |
|
|
Total
|
|
|
|
2008
|
|
|
|
2009
|
|
|
|
2010
|
|
|
|
2011
|
|
|
|
2012
|
|
|
|
2013
and Thereafter
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
leases
|
|
$ |
3,850 |
|
|
$ |
868 |
|
|
$ |
903 |
|
|
$ |
939 |
|
|
$ |
977 |
|
|
$ |
163 |
|
|
$ |
- |
|
Total
contractual obligations
|
|
$ |
3,850 |
|
|
$ |
868 |
|
|
$ |
903 |
|
|
$ |
939 |
|
|
$ |
977 |
|
|
$ |
163 |
|
|
$ |
- |
|
FIN 48
Liability. Effective January 1, 2007, we adopted the
provisions of FASB Interpretation No. 48 (“FIN 48”), “Accounting for
Uncertainty in Income Taxes,” (see Note 2 to the consolidated financial
statements included elsewhere herein). As of December 31, 2007, the
liability for uncertain tax positions, associated primarily with state income
taxes, was $115,000, 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.
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, 2007, all of our
investments were in money market funds, high-grade corporate bonds, auction rate
securities, certificates of deposit and U.S. government debt 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, 2007. Refer to Item 1A. “Risk Factors,” Item 7.
“Liquidity and Capital Resources,” and Notes 2 and 3 to the Acacia Research
Corporation consolidated financial statements included in this report for
additional information.
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. 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 Securities Exchange Act of 1934 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.
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, 2007.
Grant
Thornton, LLP, the independent registered public accounting firm who audited the
Company’s consolidated financial statements included in this Form 10-K, has
issued a report on the Company’s internal control over financial reporting,
which is included herein.
Item
9B. OTHER
INFORMATION
None
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 29, 2008.
Code
of Conduct.
Acacia
Research Corporation has 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
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 29, 2008.
Item
12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
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 29, 2008.
Item
13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS,
AND DIRECTOR INDEPENDENCE
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 29,
2008.
Item
14. PRINCIPAL ACCOUNTING FEES AND
SERVICES
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 29,
2008.
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, 2007 and 2006
|
F-4
|
Consolidated
Statements of Operations and Comprehensive Loss for the Years Ended
December 31, 2007, 2006 and 2005
|
F-5
|
Consolidated
Statements of Stockholders’ Equity for the Years Ended December 31, 2007,
2006 and 2005
|
F-6
|
Consolidated
Statements of Cash Flows for the Years Ended December 31, 2007, 2006 and
2005
|
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.
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
|
Restated
Certificate of Incorporation as amended(3)
|
3.2
|
Amended
and Restated Bylaws
|
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)
|
10.9
|
Settlement
Agreement dated September 30, 2002, by and among Acacia Research
Corporation, CombiMatrix Corporation, Donald D. Montgomery, Ph.D. and
Nanogen, Inc.(10)
|
10.10
|
Form
of Indemnification Agreement (11)
|
10.11
|
Form
of Subscription Agreement between Acacia Research Corporation and certain
investors (12)
|
10.12
|
Third
Amendment to lease dated January 28, 2002 between Acacia Research
Corporation and the Irvine Company
(13)
|
Exhibit
Number
|
Description
|
|
|
10.13
|
Standby
Equity Distribution Agreement dated June 14, 2006 between Acacia Research
Corporation and Cornell Capital Partners, L.P. (14)
|
10.14
|
Amendment
to Standby Equity Distribution Agreement dated June 14, 2006 between
Acacia Research Corporation and Cornell Capital Partners, L.P.
(15)
|
10.15
|
Manufacturing
and Supply Agreement between Acacia Research Corporation and Furuno
Electric Company, Ltd. Effective July 1, 2006 (16)
|
10.16
|
Placement
Agency Agreement between Acacia Research Corporation and Oppenheimer &
Co., dated December 7, 2006 (17)
|
10.17
|
Form
of Subscription Agreement (17)
|
10.18
|
Form
of Investors Warrant (17)
|
10.19*
|
Employment
Agreement, dated January 28, 2005, by and between Acacia Technologies
Services Corporation, and Dooyong Lee, as amended
|
10.20*
|
Employment
Agreement, dated April 12, 2004, by and between Acacia Media Technologies
Corporation and Edward Treska.
|
10.21
|
Fourth
Amendment to lease dated January 28, 2002 between Acacia Research
Corporation and the Irvine Company
|
10.22
|
Fifth
Amendment to Lease dated January 28, 2002 between Acacia Research
Corporation and the Irvine Company
|
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.
|
(1)
|
Incorporated
by reference from Acacia Research Corporation’s 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 Quarterly Report Amendment
No. 1 on Form 10-Q/A for the period ended June 30, 2006, filed on June 5,
2007.
|
(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.
|
(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 as Appendix D 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.
|
(11)
|
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).
|
(12)
|
Incorporated
by reference from Acacia Research Corporation’s Report on Form 8-K filed
on September 19, 2005 (SEC File No.
000-26068).
|
(13)
|
Incorporated
by reference from Acacia Research Corporation’s Quarterly Report on Form
10-Q filed on May 10, 2006 (SEC File No.
000-26068).
|
(14)
|
Incorporated
by reference from Acacia Research Corporation’s Report on Form 8-K filed
on June 15, 2006 (SEC File No.
000-26068).
|
(15)
|
Incorporated
by reference from Acacia Research Corporation’s Report on Form 8-K filed
on June 22, 2006 (SEC File No.
000-26068).
|
(16)
|
Incorporated
by reference from Acacia Research Corporation’s Quarterly Report on Form
10-Q filed on November 9, 2006 (SEC File No.
000-26068).
|
(17)
|
Incorporated
by reference from Acacia Research Corporation’s Report on Form 8-K filed
on December 13, 2006 (SEC File No.
000-26068).
|
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: March
14, 2008 |
ACACIA
RESEARCH CORPORATION
/s/ Paul R.
Ryan
Paul
R. Ryan
Chairman
of the Board
and
Chief Executive Officer
(Authorized
Signatory)
|
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
|
March
14, 2008
|
Paul
R. Ryan
|
Chief
Executive Officer
|
|
|
(Principal
Chief Executive)
|
|
|
|
|
/s/ Robert
L. Harris,
II
|
Director
and President
|
March
14, 2008
|
Robert
L. Harris, II
|
|
|
|
|
|
|
|
|
/s/ Clayton
J.
Haynes
|
Chief
Financial Officer and Treasurer
|
March
14, 2008
|
Clayton
J. Haynes
|
(Principal
Financial Officer)
|
|
|
|
|
|
|
|
/s/ Fred A.
de
Boom
|
Director
|
March
14, 2008
|
Fred
A. de Boom
|
|
|
|
|
|
|
|
|
/s/ Edward
W.
Frykman
|
Director
|
March
14, 2008
|
Edward
W. Frykman
|
|
|
|
|
|
|
|
|
/s/ G.
Louis Graziadio,
III
|
Director
|
March
14, 2008
|
G.
Louis Graziadio, III
|
|
|
|
|
|
|
|
|
/s/ William
S.
Anderson
|
Director
|
March
14, 2008
|
William
S. Anderson
|
|
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders of
Acacia
Research Corporation
We have
audited the accompanying consolidated balance sheet of Acacia Research
Corporation (a Delaware corporation) as of December 31, 2007, and the
related consolidated statements of operations and comprehensive loss,
stockholders’ equity, and cash flows for the year then ended. 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 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 audit provides 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, 2007, and the results of its operations and its cash
flows for the year then ended 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, 2007, based on criteria established
in Internal Control—Integrated
Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO)
and our report dated March 12, 2008 expressed an unqualified opinion
thereon.
/s/ GRANT
THORNTON LLP
Irvine,
California
March 12,
2008
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and Stockholders of
Acacia
Research Corporation
We have
audited Acacia Research Corporation’s internal control over financial reporting
as of December 31, 2007, 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, 2007,
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 sheet of Acacia
Research Corporation as of December 31, 2007 and the related consolidated
statements of operations and comprehensive loss, stockholders’ equity, and cash
flows for the year then ended and our report dated March 12, 2008, expressed an
unqualified opinion on these financial statements.
/s/ GRANT
THORNTON LLP
Irvine,
California
March 12,
2008
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the
Board of Directors and Stockholders
of Acacia
Research Corporation:
In our
opinion, the consolidated balance sheet as of December 31, 2006 and the related
consolidated statements of operations and comprehensive loss, shareholders'
equity and cash flows for each of the two years in the period ended December 31,
2006, present fairly, in all material respects, the financial position of Acacia
Research Corporation and its subsidiaries at December 31, 2006, and the results
of their operations and their cash flows for each of the two years in the period
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 audits. We conducted our audits 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 audits provide a reasonable basis
for our opinion.
As
discussed in Note 2 to the consolidated financial statements, the Company
changed the manner in which it accounts for share-based compensation in
2006.
/s/
PricewaterhouseCoopers
LLP
PricewaterhouseCoopers
LLP
Orange
County, California
March 12,
2007, except for the last paragraph
in
Note 9, and Note 10A, as to which the
date
is March 10, 2008
ACACIA
RESEARCH CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
As
of December 31, 2007 and 2006
(In
thousands, except share and per share information)
|
|
December
31,
|
|
|
December
31,
|
|
|
|
2007
|
|
|
2006
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$ |
40,467 |
|
|
$ |
32,215 |
|
Short-term
investments
|
|
|
10,966 |
|
|
|
12,783 |
|
Accounts
receivable
|
|
|
1,409 |
|
|
|
269 |
|
Prepaid
expenses and other current assets
|
|
|
1,356 |
|
|
|
1,187 |
|
Total
current assets related to discontinued operations - Split-off of
CombiMatrix Corporation
|
|
|
- |
|
|
|
15,552 |
|
|
|
|
|
|
|
|
|
|
Total
current assets
|
|
|
54,198 |
|
|
|
62,006 |
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation
|
|
|
323 |
|
|
|
221 |
|
Patents,
net of accumulated amortization
|
|
|
16,307 |
|
|
|
18,515 |
|
Other
assets
|
|
|
223 |
|
|
|
200 |
|
Total
non-current assets related to discontinued operations - Split-off of
CombiMatrix Corporation
|
|
|
- |
|
|
|
28,662 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
71,051 |
|
|
$ |
109,604 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$ |
3,462 |
|
|
$ |
2,201 |
|
Royalties
and contingent legal fees payable
|
|
|
2,343 |
|
|
|
1,684 |
|
Deferred
revenues
|
|
|
321 |
|
|
|
360 |
|
Total
current liabilities related to discontinued operations - Split-off of
CombiMatrix Corporation
|
|
|
- |
|
|
|
3,211 |
|
|
|
|
|
|
|
|
|
|
Total
current liabilities
|
|
|
6,126 |
|
|
|
7,456 |
|
|
|
|
|
|
|
|
|
|
Other
liabilities
|
|
|
121 |
|
|
|
31 |
|
Total
non-current liabilities related to discontinued operations - Split-off of
CombiMatrix Corporation
|
|
|
- |
|
|
|
7,808 |
|
|
|
|
|
|
|
|
|
|
Total
liabilities
|
|
|
6,247 |
|
|
|
15,295 |
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 12)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
stockholders' equity:
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
|
|
|
|
|
|
Acacia
Research Corporation, par value $0.001 per share; 10,000,000 shares
authorized;
|
|
|
|
|
|
|
|
|
no
shares issued or outstanding
|
|
|
- |
|
|
|
- |
|
Common
stock
|
|
|
|
|
|
|
|
|
Acacia
Research - Acacia Technologies stock, par value $0.001 per share;
100,000,000
|
|
|
|
|
|
|
|
|
shares
authorized; 28,231,701 shares issued and outstanding as of December 31,
2006
|
|
|
- |
|
|
|
28 |
|
Acacia
Research - CombiMatrix stock, par value $0.001 per share; 100,000,000
shares
|
|
|
|
|
|
|
|
|
authorized; 50,365,810
shares issued and outstanding as of December 31, 2006
|
|
|
- |
|
|
|
50 |
|
Additional
paid-in capital |
|
|
|
|
|
|
326,599 |
|
Accumulated
comprehensive income |
|
|
|
|
|
|
2 |
|
Accumulated
deficit |
|
|
|
|
|
|
(232,370 |
) |
|
|
|
|
|
|
|
|
|
Stockholders'
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock
|
|
|
|
|
|
|
|
|
Acacia
Research Corporation, par value $0.001 per share; 10,000,000 shares
authorized;
|
|
|
|
|
|
|
|
|
no
shares issued or outstanding
|
|
|
- |
|
|
|
- |
|
Common
stock
|
|
|
|
|
|
|
|
|
Acacia
Research - Acacia Technologies stock, par value $0.001 per share;
100,000,000
|
|
|
|
|
|
|
|
|
shares
authorized; 30,102,482 shares issued and outstanding as of December 31,
2007
|
|
|
30 |
|
|
|
- |
|
Additional
paid-in capital
|
|
|
159,972 |
|
|
|
- |
|
Accumulated
comprehensive income
|
|
|
(3 |
) |
|
|
- |
|
Accumulated
deficit
|
|
|
(95,195 |
) |
|
|
- |
|
|
|
|
|
|
|
|
|
|
Total
stockholders' equity
|
|
|
64,804 |
|
|
|
94,309 |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
71,051 |
|
|
$ |
109,604 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ACACIA
RESEARCH CORPORATION
CONSOLIDATED
STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS
For
the Years Ended December 31, 2007, 2006 and 2005
(In
thousands, except share and per share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
License
fee revenues
|
|
$ |
52,597 |
|
|
$ |
34,825 |
|
|
$ |
19,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing,
general and administrative expenses (including non-cash stock
compensation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
expense
of $5,908 for 2007, $3,946 for 2006 and $356 for 2005)
|
|
|
20,042 |
|
|
|
14,123 |
|
|
|
8,097 |
|
|
Inventor
royalties and contingent legal fees expense - patents
|
|
|
29,224 |
|
|
|
17,159 |
|
|
|
11,331 |
|
|
Legal
expenses - patents
|
|
|
7,024 |
|
|
|
4,780 |
|
|
|
2,468 |
|
|
Write-off
of patent-related intangible asset
|
|
|
235 |
|
|
|
297 |
|
|
|
- |
|
|
Amortization
of patents
|
|
|
5,583 |
|
|
|
5,313 |
|
|
|
4,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
operating expenses
|
|
|
62,108 |
|
|
|
41,672 |
|
|
|
26,818 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
loss
|
|
|
(9,511 |
) |
|
|
(6,847 |
) |
|
|
(7,244 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
and investment income
|
|
|
2,359 |
|
|
|
1,524 |
|
|
|
1,071 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations before income taxes
|
|
|
(7,152 |
) |
|
|
(5,323 |
) |
|
|
(6,173 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Provision)
benefit for income taxes
|
|
|
(207 |
) |
|
|
(40 |
) |
|
|
135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
|
(7,359 |
) |
|
|
(5,363 |
) |
|
|
(6,038 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued
operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations - Split-off of CombiMatrix
Corporation
|
|
|
(8,086 |
) |
|
|
(20,093 |
) |
|
|
(12,401 |
) |
Loss
on disposal of discontinued operations - Soundbreak.com
|
|
|
- |
|
|
|
- |
|
|
|
(237 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
loss from discontinued operations
|
|
|
(8,086 |
) |
|
|
(20,093 |
) |
|
|
(12,638 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
(15,445 |
) |
|
|
(25,456 |
) |
|
|
(18,676 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized
gains (losses) on short-term investments
|
|
|
(21 |
) |
|
|
59 |
|
|
|
(36 |
) |
|
Unrealized
gains (losses) from discontinued operations - Split-off of CombiMatrix
Corporation
|
|
|
16 |
|
|
|
(55 |
) |
|
|
111 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive
loss
|
|
$ |
(15,450 |
) |
|
$ |
(25,452 |
) |
|
$ |
(18,601 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acacia
Research - Acacia Technologies stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from continuing operations
|
|
$ |
(7,359 |
) |
|
$ |
(5,363 |
) |
|
$ |
(6,038 |
) |
Basic
and diluted loss per share
|
|
|
(0.26 |
) |
|
|
(0.19 |
) |
|
|
(0.23 |
) |
Loss
on disposal of discontinued operations
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
(237 |
) |
Basic
and diluted loss per share
|
|
|
- |
|
|
|
- |
|
|
|
(0.01 |
) |
Net
loss
|
|
$ |
(7,359 |
) |
|
$ |
(5,363 |
) |
|
$ |
(6,275 |
) |
Basic
and diluted loss per share
|
|
|
(0.26 |
) |
|
|
(0.19 |
) |
|
|
(0.24 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acacia
Research - CombiMatrix stock - Discontinued Operations - Split-off of
CombiMatrix Corporation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations - Split-off of CombiMatrix
Corporation
|
|
$ |
(8,086 |
) |
|
$ |
(20,093 |
) |
|
$ |
(12,401 |
) |
Basic
and diluted loss per share
|
|
|
(0.14 |
) |
|
|
(0.49 |
) |
|
|
(0.37 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
Acacia
Research - Acacia Technologies stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
28,503,314 |
|
|
|
27,547,651 |
|
|
|
26,630,732 |
|
Acacia
Research - CombiMatrix stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
55,862,707 |
|
|
|
40,605,038 |
|
|
|
33,678,603 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ACACIA
RESEARCH CORPORATION
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY
For
the Years Ended December 31, 2007, 2006 and 2005
(In
thousands, except share information)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
AR-Acacia
|
|
|
AR-
|
|
|
AR-Acacia
|
|
|
AR-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Technologies
|
|
|
CombiMatrix
|
|
|
Technologies
|
|
|
CombiMatrix
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Redeemable
|
|
|
Redeemable
|
|
|
Redeemable
|
|
|
Redeemable
|
|
|
Additional
|
|
|
Deferred
|
|
|
Other
|
|
|
|
|
|
|
|
|
|
Common
|
|
|
Common
|
|
|
Common
|
|
|
Common
|
|
|
Paid-in
|
|
|
Stock
|
|
|
Comprehensive
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Shares
|
|
|
Stock
|
|
|
Stock
|
|
|
Capital
|
|
|
Compensation
|
|
|
Income
(Loss)
|
|
|
Deficit
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2005
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2004
|
|
|
19,811,524 |
|
|
|
31,200,496 |
|
|
$ |
20 |
|
|
$ |
31 |
|
|
$ |
263,900 |
|
|
$ |
- |
|
|
$ |
(77 |
) |
|
$ |
(188,238 |
) |
|
$ |
75,636 |
|
Net
loss
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(18,676 |
) |
|
|
(18,676 |
) |
Stock
options exercised
|
|
|
133,986 |
|
|
|
5,555 |
|
|
|
|
|
|
|
|
|
|
|
315 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
315 |
|
Stock
issued for the acquisition of Global Patent Holdings, net of registration
costs (Note 7)
|
|
|
3,938,832 |
|
|
|
|
|
|
|
4 |
|
|
|
|
|
|
|
19,289 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,293 |
|
Units
issued in direct offering, net offering costs
|
|
|
3,500,000 |
|
|
|
7,786,351 |
|
|
|
4 |
|
|
|
8 |
|
|
|
32,244 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
32,256 |
|
Warrant
liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,194 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,194 |
) |
Deferred
stock compensation
|
|
|
337,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,713 |
|
|
|
(1,713 |
) |
|
|
|
|
|
|
|
|
|
|
- |
|
Compensation
expense relating to stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(121 |
) |
|
|
313 |
|
|
|
|
|
|
|
|
|
|
|
192 |
|
Unrealized
gain on short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2 |
|
|
|
|
|
|
|
2 |
|
Unrealized
gain on foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73 |
|
|
|
|
|
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2005
|
|
|
27,722,242 |
|
|
|
38,992,402 |
|
|
$ |
28 |
|
|
$ |
39 |
|
|
$ |
315,146 |
|
|
$ |
(1,400 |
) |
|
$ |
(2 |
) |
|
$ |
(206,914 |
) |
|
$ |
106,897 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,306 |
|
Unrealized
gain on short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
61 |
|
|
|
|
|
|
|
61 |
|
Unrealized
loss on foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(57 |
) |
|
|
|
|
|
|
(57 |
) |
Other
|
|
|
|
|
|
|
- |
|
|
|
|
|
|
|
- |
|
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(16 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2006
|
|
|
28,231,701 |
|
|
|
50,365,810 |
|
|
$ |
28 |
|
|
$ |
50 |
|
|
$ |
326,599 |
|
|
$ |
- |
|
|
$ |
2 |
|
|
$ |
(232,370 |
) |
|
$ |
94,309 |
|
(continued
below)
ACACIA
RESEARCH CORPORATION
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)
For
the Years Ended December 31, 2007, 2006 and 2005
(In
thousands, except share information)
|
|
AR-Acacia
Technologies
Common
Shares
|
|
AR-
CombiMatrix
Common
Shares
|
|
AR-Acacia
Technologies
Common
Stock
|
|
AR-
CombiMatrix
Common
Stock
|
|
Additional
Paid-in
Capital
|
|
Deferred
Stock
Compensation
|
|
Other
Comprehensive
Income
(Loss)
|
|
Accumulated
Deficit
|
|
Total
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activities
related to continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss from continuing operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,359 |
) |
|
|
(7,359 |
) |
Stock
options exercised
|
|
|
1,062,513 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
5,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,014 |
|
Compensation
expense relating to stock options and restricted stock
awards
|
|
|
808,268 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
5,908 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,909 |
|
Unrealized
loss on short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(21 |
) |
|
|
|
|
|
|
(21 |
) |
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(55 |
) |
|
|
(55 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activities
related to discontinued operations - Split-off of CombiMatrix
Corporation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss
from discontinued operations - Split-off of CombiMatrix
Corporation
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,086 |
) |
|
|
(8,086 |
) |
Stock
options and warrants exercised and units issued in direct offering, net
offering costs
|
|
|
|
|
|
|
9,203,959 |
|
|
|
|
|
|
|
10 |
|
|
|
480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
490 |
|
Compensation
expense relating to stock options
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
726 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
726 |
|
Warrant
liability
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,089 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
9,089 |
|
Stock
issued to consultant
|
|
|
|
|
|
|
306,000 |
|
|
|
|
|
|
|
|
|
|
|
208 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
208 |
|
Unrealized
gain on short-term investments
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
|
|
|
|
13 |
|
Other
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11 |
|
Discontinued
operations - Split-off of CombiMatrix Corporation
|
|
|
|
|
|
|
(59,875,769 |
) |
|
|
|
|
|
|
(60 |
) |
|
|
(188,062 |
) |
|
|
|
|
|
|
3 |
|
|
|
152,675 |
|
|
|
(35,444 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at December 31, 2007
|
|
|
30,102,482 |
|
|
|
- |
|
|
$ |
30 |
|
|
$ |
- |
|
|
$ |
159,972 |
|
|
$ |
- |
|
|
$ |
(3 |
) |
|
$ |
(95,195 |
) |
|
$ |
64,804 |
|
The
accompanying notes are an integral part of these consolidated financial
statements.
ACACIA
RESEARCH CORPORATION
CONSOLIDATED
STATEMENTS OF CASH FLOWS
For
the Years Ended December 31, 2007, 2006 and 2005
(In
thousands)
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Cash
flows from operating activities:
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(15,445 |
) |
|
$ |
(25,456 |
) |
|
$ |
(18,676 |
) |
Discontinued
operations - Split-off of CombiMatrix Corporation
|
|
|
8,086 |
|
|
|
20,093 |
|
|
|
12,401 |
|
Adjustments
to reconcile net loss to net cash provided by (used in)
operating
|
|
|
|
|
|
|
|
|
|
|
|
|
activities
from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation
and amortization
|
|
|
5,702 |
|
|
|
5,392 |
|
|
|
4,981 |
|
Minority
interests
|
|
|
- |
|
|
|
- |
|
|
|
(2 |
) |
Non-cash
stock compensation
|
|
|
5,908 |
|
|
|
3,946 |
|
|
|
356 |
|
Deferred
income taxes
|
|
|
- |
|
|
|
(36 |
) |
|
|
(143 |
) |
Loss
on disposal of discontinued operations - Soundbreak.com
|
|
|
- |
|
|
|
- |
|
|
|
237 |
|
Write-off
of patent-related intangible asset
|
|
|
235 |
|
|
|
297 |
|
|
|
- |
|
Other
|
|
|
112 |
|
|
|
(96 |
) |
|
|
- |
|
Changes
in assets and liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
receivable
|
|
|
(1,140 |
) |
|
|
4,152 |
|
|
|
(4,228 |
) |
Prepaid
expenses and other assets
|
|
|
(193 |
) |
|
|
(150 |
) |
|
|
(774 |
) |
Accounts
payable and accrued expenses
|
|
|
1,281 |
|
|
|
819 |
|
|
|
(729 |
) |
Royalties
and contingent legal fees payable
|
|
|
659 |
|
|
|
(2,074 |
) |
|
|
3,758 |
|
Deferred
revenues
|
|
|
(39 |
) |
|
|
(279 |
) |
|
|
211 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) operating activities from continuing
operations
|
|
|
5,166 |
|
|
|
6,608 |
|
|
|
(2,608 |
) |
Net
cash used in operating activities from discontinued
operations
|
|
|
(7,782 |
) |
|
|
(15,261 |
) |
|
|
(14,078 |
) |
Net
cash used in operating activities
|
|
|
(2,616 |
) |
|
|
(8,653 |
) |
|
|
(16,686 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from investing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchase
of property and equipment
|
|
|
(223 |
) |
|
|
(179 |
) |
|
|
(75 |
) |
Purchase
of available-for-sale investments
|
|
|
(13,035 |
) |
|
|
(16,409 |
) |
|
|
(39,919 |
) |
Sale
of available-for-sale investments
|
|
|
14,873 |
|
|
|
28,147 |
|
|
|
33,141 |
|
Business
acquisition
|
|
|
- |
|
|
|
(16 |
) |
|
|
(5,796 |
) |
Patent
acquisition costs
|
|
|
(3,760 |
) |
|
|
(1,030 |
) |
|
|
(445 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by (used in) investing activities from continuing
operations
|
|
|
(2,145 |
) |
|
|
10,513 |
|
|
|
(13,094 |
) |
Net
cash provided by (used in) investing activities from discontinued
operations
|
|
|
(5,199 |
) |
|
|
4,628 |
|
|
|
3,390 |
|
Net
cash provided by (used in) investing activities
|
|
|
(7,344 |
) |
|
|
15,141 |
|
|
|
(9,704 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
flows from financing activities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds
from the sale of common stock, net of issuance costs
|
|
|
- |
|
|
|
- |
|
|
|
19,532 |
|
Proceeds
from the exercise of stock options
|
|
|
5,014 |
|
|
|
1,475 |
|
|
|
304 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
cash provided by financing activities from continuing
operations
|
|
|
5,014 |
|
|
|
1,475 |
|
|
|
19,836 |
|
Net
cash provided by financing activities from discontinued
operations
|
|
|
5,369 |
|
|
|
11,917 |
|
|
|
12,735 |
|
Net
cash provided by financing activities
|
|
|
10,383 |
|
|
|
13,392 |
|
|
|
32,571 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect
of exchange rate on cash related to discontinued operations - Split-off
of
|
|
|
|
|
|
|
|
|
|
|
|
|
CombiMatrix
Corporation
|
|
|
- |
|
|
|
- |
|
|
|
73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Increase
in cash and cash equivalents
|
|
|
423 |
|
|
|
19,880 |
|
|
|
6,254 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning (including cash and cash equivalents
related to discontinued
|
|
|
|
|
|
|
|
|
|
|
|
|
operations
- split-off of CombiMatrix Corporation of $7,829, $5,666 and $2,985,
respectively)
|
|
|
40,044 |
|
|
|
20,164 |
|
|
|
13,910 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, ending
|
|
|
40,467 |
|
|
|
40,044 |
|
|
|
20,164 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Cash and cash equivalents of discontinued operations,
ending
|
|
|
- |
|
|
|
(7,829 |
) |
|
|
(5,666 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents of continuing operations, ending
|
|
$ |
40,467 |
|
|
$ |
32,215 |
|
|
$ |
14,498 |
|
The accompanying notes are an
integral part of these consolidated financial statements.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION
OF BUSINESSES
Description of Business.
Acacia Research Corporation is comprised of Acacia Research Corporation,
and its wholly owned operating subsidiaries. As used herein, “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 Acacia Research Corporation’s wholly owned operating
subsidiaries.
Acacia
Research Corporation’s 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 91 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, Acacia Research Corporation’s board of directors approved a plan for its
wholly owned subsidiary, CombiMatrix Corporation, the primary component of
Acacia Research Corporation’s CombiMatrix group, to become an independent public
company. CombiMatrix Corporation’s registration statement on Form S-1
was declared effective by the Securities and Exchange Commission (“SEC”) on June
8, 2007. Following the redemption period required by Acacia Research
Corporation’s Restated Certificate of Incorporation, on August 15, 2007
(the “Redemption Date”), CombiMatrix Corporation was split-off from Acacia
Research Corporation through the redemption of all outstanding shares of Acacia
Research-CombiMatrix common stock in exchange for the distribution of new shares
of CombiMatrix Corporation common stock, on a pro-rata basis, to the holders of
Acacia Research-CombiMatrix common stock on the Redemption Date (the “Split-off
Transaction”). On the Redemption Date, every ten (10) shares of Acacia
Research-CombiMatrix common stock outstanding on August 15, 2007, was redeemed
for one (1) share of common stock of CombiMatrix
Corporation. Subsequent to the Redemption Date, Acacia Research
Corporation no longer owns any equity interests in CombiMatrix Corporation and
the two companies operate independently of each other.
As a
result of the Split-off Transaction, we have disposed of our investment in
CombiMatrix Corporation. Refer to Note 10A for information regarding
presentation of the assets, liabilities, results of operations and cash flows
for the CombiMatrix group as discontinued operations in the accompanying
consolidated financial statements for all periods presented, in accordance with
guidance set forth in SFAS No. 144 “Accounting for the Impairment or Disposal of
Long-Lived Assets” (“SFAS No. 144”).
Capital Structure. As a result of the
Split-off Transaction, the CombiMatrix group is no longer a business group of
Acacia Research Corporation. Pursuant to the Split-off Transaction,
all outstanding shares of Acacia Research-CombiMatrix common stock were
redeemed, and hence, 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 Corporation stock pursuant to the
exchange ratio described above. Subsequent to the consummation of the
Split-off Transaction, Acacia Research Corporation’s only class of common stock
outstanding is its Acacia Research-Acacia Technologies common
stock.
Prior to
the Split-off Transaction, Acacia Research Corporation had two classes of common
stock outstanding, its Acacia Research-Acacia Technologies common stock
(“AR-Acacia Technologies stock”) and its Acacia Research-CombiMatrix common
stock ("AR-CombiMatrix stock"). AR-Acacia Technologies stock was
intended to reflect separately the performance of Acacia Research Corporation’s
Acacia Technologies group. AR-CombiMatrix stock was intended to
reflect separately the performance of Acacia Research Corporation’s CombiMatrix
group. Although the AR-Acacia Technologies stock and the
AR-CombiMatrix stock were intended to reflect the performance of our different
business groups, they were both classes of common stock of Acacia Research
Corporation and were not stock issued by the respective groups.
We were
incorporated on January 25, 1993 under the laws of the State of California. In
December 1999, we changed our state of incorporation from California to
Delaware.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Liquidity
and Risks
Management
believes that Acacia Research Corporation’s consolidated cash and cash
equivalent and short-term investment balances, anticipated cash flow from
operations and other external sources of available credit will be sufficient to
meet Acacia Research Corporation’s cash requirements, on a consolidated basis,
through at least March 2009. To date, we and our subsidiaries have
relied primarily upon selling equity securities and payments from our licensees
to generate the funds needed to finance the implementation of our plans of
operation for our subsidiaries.
There can
be no assurance that Acacia Research Corporation will be able to implement its
future plans. Failure by management to achieve its plans would have a
material adverse effect on Acacia Research Corporation’s ability to achieve its
intended business objectives. We may be required to obtain additional
financing. There can be no assurance that additional funding will be
available on favorable terms, if at all. If we fail to obtain additional funding
when needed, we may not be able to execute our business plans and our businesses
may suffer.
The
timing of the receipt of revenues by Acacia Research Corporation’s operating
subsidiaries are subject to certain risks and uncertainties,
including:
|
·
|
market
acceptance of our operating subsidiaries’ patented technologies and
services;
|
|
·
|
business
activities and financial results of our
licensees;
|
|
·
|
technological
advances that may make our patented technologies obsolete or less
competitive;
|
|
·
|
increases
in operating costs, including costs for legal services, engineering and
research and personnel;
|
|
·
|
the
availability and cost of capital;
and
|
|
·
|
governmental
regulation that may restrict Acacia Research Corporation’s
business.
|
Acacia
Research Corporation’s success also depends on its operating subsidiaries’
ability to protect their intellectual property. Our operating
subsidiaries rely on their proprietary rights and their
protection. Although reasonable efforts will be taken to protect our
operating subsidiaries’ proprietary rights, the complexity of international
trade secret, copyright, trademark and patent law, and common law, coupled with
limited resources and the demands of quick delivery of technologies to market,
create risk that these efforts will prove inadequate. Accordingly, if
our operating subsidiaries are unsuccessful with litigation to protect their
intellectual property rights, the future consolidated revenues of Acacia
Research Corporation could be adversely affected.
2. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
Accounting Principles and Fiscal
Year End. The consolidated financial statements and
accompanying notes are prepared on the accrual basis of accounting in accordance
with generally accepted accounting principles in the United States of
America. We have a December 31 year end.
Principles of
Consolidation. The accompanying consolidated financial
statements include the accounts of Acacia Research Corporation and its wholly
owned subsidiaries. Material intercompany transactions and balances
have been eliminated in consolidation. The cost method is used where we maintain
ownership interests of less than 20% and do not exercise significant influence
over the investee.
Revenue
Recognition. We recognize revenue in accordance with Staff
Accounting Bulletin No. 104, “Revenue Recognition” (“SAB No. 104”) and related
authoritative pronouncements. Revenue is recognized when (i)
persuasive evidence of an arrangement exists, (ii) all obligations have been
substantially performed pursuant to the terms of the license agreement, (iii)
amounts are fixed or determinable and (iv) collectibility of amounts is
reasonably assured.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Under the
terms of our license agreements, our operating subsidiaries grant non-exclusive
licenses for the use of patented technologies, which they own or
control. In general, pursuant to the terms of the agreements with
licensees, upon the grant of the licenses, we have no further obligations with
respect to the licenses granted. License fees paid to and recognized
as revenue by our subsidiaries are non-refundable.
Revenues
generated from license agreements are generally recognized as revenue in the
period earned, provided that amounts are fixed or determinable and
collectibility is reasonably assured.
Certain
license agreements provide for the payment of contractually determined paid-up
license fees 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. Certain of the agreements also provide for future
royalties or additional required payments based on future
activities. Generally, the execution of these license agreements also
provide for the release of the licensee from certain 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 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. Refer to Note 12 for information on inventor royalties and
contingent legal fees.
Certain
license agreements provide for the calculation of license fees based on a
licensee’s actual quarterly sales or actual per unit activity, applied to a
contractual royalty rate. Licensees that pay license fees on a
quarterly basis generally report actual quarterly sales or actual per unit
activity information and related quarterly license fees due within 30 to 45 days
after the end of the quarter in which such sales or activity takes
place. The amount of license fees due under these license agreements
each quarter cannot be reasonably estimated by
management. Consequently, our operating subsidiaries recognize
revenue from these licensing agreements on a three-month lag basis, in the
quarter following the quarter of sales or per unit activity, provided amounts
are fixed or determinable and collectibility is reasonably assured. The lag
method described above allows for the receipt of licensee royalty reports prior
to the recognition of revenue.
Certain
license agreements provide for the payment of a minimum upfront annual license
fee at the inception of each annual license term. Minimum upfront
annual license fees are generally determined based on a licensee’s estimated
annual sales or a licensee’s base level of per unit activity. These
minimum upfront annual license fee payments are deferred and amortized to
revenue on a straight-line basis over the annual license term. To the
extent actual annual royalties, determined and reported in accordance with the
terms of the respective agreements, exceed the minimum upfront annual license
fees paid, the additional royalties are recognized in revenue in the quarter
following the quarter in which the base per unit activity was exceeded or the
quarter following the annual license term, depending on the terms of the
respective agreement, provided that amounts are fixed or determinable and
collectibility is reasonably assured. Amounts of additional royalties
due under these license agreements cannot be reasonably estimated by
management.
License
fee payments received that do not meet the revenue recognition criteria
described above are deferred until the revenue recognition criteria are
met. We assess the collectibility of license fees receivable based on
a number of factors, including past transaction history and 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.
Cash and Cash
Equivalents. We consider all highly liquid, short-term
investments with original maturities of three months or less when purchased to
be cash equivalents.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Short-term
Investments. Our short-term investments are held in a variety
of interest bearing instruments including U.S. government debt securities,
high-grade corporate bonds, commercial paper, auction rate securities, money
market accounts, certificates of deposit and other high-credit quality
marketable securities. Investments in securities with original
maturities of greater than three months and less than one year and other
investments representing amounts that are available for current operations are
classified as short-term investments. Investments are classified into
categories in accordance with the provisions of Statement of Financial
Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in
Debt and Equity Securities” (“SFAS No. 115”). At December 31, 2007
and 2006, all of our investments are classified as available-for-sale, which are
reported at fair value 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.
The cost
of debt securities is adjusted for amortization of premiums and accretion of
discounts to maturity. Such amortization is included in interest
income (expense). Interest and dividends on all securities are
included in interest income.
At
December 31, 2007 and 2006, we held $10,660,000 and $7,288,000,
respectively of investment grade securities with an auction reset feature
(“auction rate securities”). At December 31, 2007, our auction rate securities
consist of securities issued by closed-end investment companies with portfolio
asset coverage of at least 200%, and auction rate investments backed by student
loans, issued under programs such as the Federal Family Education Loan Program,
all of which had credit ratings of AAA when purchased. As of March 5,
2008, we held $6,250,000 in auction rate securities investments.
Our
investments in these securities are recorded at cost, which approximates 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.
As a result, we had no cumulative gross unrealized holding gains (losses)
or gross realized gains (losses) from these investments for the periods
presented. All income generated from these current investments was
recorded as interest income.
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.
We have
not experienced a failed auction for any of our securities as of
December 31, 2007. However, we did experience failed auctions
with certain of our issues in February 2008. Given the
deteriorating credit markets, and the increased incidence of failure within the
auction market in February 2008, there can be no assurance as to when we would
be able to liquidate a particular issue. In such case of a failure, the auction
rate securities continue to pay interest 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. Furthermore, if this situation were to persist despite our
ability to hold such investments until maturity, we may be required to record an
impairment charge in a future period.
Management
believes that the fair value of our investments in auction rate securities
continue to approximate their par value and that the underlying
credit quality of the assets backing its auction rate securities investments
have not been impacted by the reduced liquidity of these investments subsequent
to December 31, 2007. We will continue to monitor and evaluate our
investments in auction rate securities for any further reduction in liquidity
and potential impairment in future periods.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Concentration of Credit
Risks. Financial instruments that potentially subject Acacia
Research Corporation to concentrations of credit risk are cash equivalents and
short-term investments. We place our cash equivalents and short-term
investments primarily in investment grade, short-term debt
instruments. Cash equivalents are also invested in deposits with
certain financial institutions and may, at times, exceed federally insured
limits. We have not experienced any significant losses on our deposits of cash
and cash equivalents.
Two
licensees accounted for 19% and 12% of the license fee revenues recognized
during the year ended December 31, 2007. One licensee represented 14%
of the license fee revenues recognized during the year ended December 31, 2006
and three licensees accounted for 19%, 15% and 15% of license fee revenues
recognized during the year ended December 31, 2005. One licensee represented
approximately 89% of accounts receivable at December 31, 2007. Three
licensees represented approximately 37%, 24% and 13% of accounts receivable at
December 31, 2006.
Acacia
Research Corporation performs regular credit evaluations of its significant
licensees and customers and has not experienced any significant credit
losses.
Property and
Equipment. Property and equipment are recorded at cost. Major
additions and improvements that materially extend useful lives of property and
equipment are capitalized. Maintenance and repairs are charged against the
results of operations as incurred. When these assets are sold or
otherwise disposed of, the asset and related depreciation are relieved, and any
gain or loss is included in the consolidated statement of operations for the
period of sale or disposal. Depreciation is computed on a straight-line basis
over the following estimated useful lives of the assets:
Furniture
and fixtures
|
3
to 5 years
|
Computer
hardware and software
|
3
to 5 years
|
Leasehold
improvements
|
2
to 5 years (Lesser of lease term or useful life of
improvement)
|
Rental
payments on operating leases are charged to expense in the consolidated
statement of operations on a straight-line basis over the lease
term.
Organization
Costs. Costs of start-up activities, including organization
costs, are expensed as incurred.
Patents. Patents, once
issued or purchased, are amortized on the straight-line method over their
remaining economic useful lives, ranging from two to seven years.
Impairment of Long-lived
Assets. We review long-lived assets and intangible assets for potential
impairment annually and when events or changes in circumstances indicate the
carrying amount of an asset may not be recoverable. In the event the sum of the
expected undiscounted future cash flows resulting from the use of the asset is
less than the carrying amount of the asset, an impairment loss equal to the
excess of the asset’s carrying value over its fair value is
recorded. If an asset is determined to be impaired, the loss is
measured based on quoted market prices in active markets, if
available. If quoted market prices are not available, the estimate of
fair value is based on various valuation techniques, including a discounted
value of estimated future cash flows.
Fair Value of Financial
Instruments. The carrying value of cash and cash equivalents,
accounts receivables, accounts payable and accrued expenses approximate fair
value due to their short-term maturity. Refer to “Short-term Investments” above
for information on the fair value of short-term investments.
Stock-Based Compensation.
Effective January 1, 2006, Acacia Research Corporation adopted the
provisions of Statement of Financial Accounting Standards No. 123 (revised
2004), “Share-Based Payment” (“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.
The compensation cost for all stock-based awards is measured at the grant date,
based on the fair value of the award, and is recognized as an expense, on a
straight-line basis, over the employee’s requisite service period (generally the
vesting period of the equity award) which is generally two to four
years.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The fair
value of each option award is estimated on the date of grant using a
Black-Scholes option valuation model. The fair value of restricted
stock awards is determined by the product of the number of shares granted and
the grant date market price of the underlying common
stock.
SFAS No.
123R requires stock-based compensation expense to be recorded only for those
awards expected to vest using an estimated forfeiture rate. Acacia
Research Corporation estimates pre-vesting option forfeitures at the time of
grant and reflects the impact of estimated pre-vesting option forfeitures on
compensation expense recognized. 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.
We
adopted SFAS No. 123R using the modified prospective transition
method. Under this transition method, compensation cost recognized
for the periods presented includes: (i) compensation cost for all
stock-based awards granted prior to, but not yet vested as of January 1,
2006 (based on the grant-date fair value estimated in accordance with the
original provisions of SFAS No. 123 and previously presented in the pro
forma footnote disclosures), and (ii) compensation cost for all stock-based
awards granted subsequent to January 1, 2006 (based on the grant-date fair
value estimated in accordance with the new provisions of SFAS
No. 123R).
The
fair value of stock options granted during the years ended December 31, 2007 and
2006 were estimated using the Black-Scholes option-pricing model, based on the
following weighted-average assumptions:
|
For
the Year Ended
|
|
December
31,
|
|
2007
|
|
2006
|
|
|
|
|
Risk
Free Interest Rate
|
4.64%
|
|
4.30%
|
Term
|
5.71
years
|
|
6
years
|
Volatility
|
68%
|
|
75%
|
Option
awards granted prior to Acacia Research Corporation’s implementation of SFAS No.
123R were accounted for using the intrinsic value method pursuant to the
recognition and measurement principles of Accounting Principles Board Opinion
No. 25, “Accounting for Stock Issued to Employees” (“APB No. 25”), and related
interpretations. Accordingly, no stock-based employee compensation cost related
to option awards was reflected in the accompanying consolidated statements of
operations for the year ended December 31, 2005, because all options granted
under Acacia Research Corporation’s plans had exercise prices equal to the
market value of the underlying common stock on the date of
grant. Stock-based compensation expense reflected in the accompanying
consolidated statement of operations for the year ended December 31, 2005
related to restricted stock awards originally granted in 2005.
The
following table illustrates the pro forma effect on loss from continuing
operations and loss per share from continuing operations for the year ended
December 31, 2005, if we had applied the fair value recognition provisions of
SFAS No. 123 to share-based awards, prior to the adoption of SFAS No. 123R (in
thousands, except per share data):
Loss
from continuing operations, as reported
|
|
$ |
(6,038 |
) |
Add:
Stock-based compensation, intrinsic value method reported in net
loss
|
|
|
356 |
|
Deduct:
Pro forma stock-based compensation fair value method
|
|
|
(2,103 |
) |
Loss
from continuing operations, pro forma
|
|
$ |
(7,785 |
) |
|
|
|
|
|
Basic
and diluted loss per share from continuing operations, as
reported
|
|
$ |
(0.23 |
) |
Basic
and diluted loss per share from continuing operations, pro
forma
|
|
$ |
(0.29 |
) |
|
|
|
|
|
Weighted
Average Assumptions used(1):
|
|
|
|
|
Risk
free interest rate
|
|
|
3.90% |
|
Volatility
|
|
|
91% |
|
Expected
term
|
|
5
years
|
|
__________________________
(1)
|
The fair value of stock options
was determined using the Black-Scholes option-pricing
model. The fair value calculations assume no expected
dividends.
|
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SFAS No.
123R does not require the recording of deferred stock compensation charges in
stockholder’s equity on the grant date of a stock-based award. As
such, all deferred stock compensation charges previously recorded under APB No.
25, totaling $1,400,000 at December 31, 2005, related to restricted stock
awards, were reversed upon adoption of SFAS No. 123R, with a corresponding
reduction being recorded in consolidated additional paid-in
capital.
Acacia
Research Corporation adopted the alternative transition method provided in FASB
Staff Position No. 123(R)-3, “Transition Election Related to Accounting for Tax
Effects of Share-Based Payment Awards.” The alternative transition
method includes a simplified method to establish the beginning balance of the
additional paid-in-capital pool (“APIC pool”) related to the tax effects of
employee stock-based compensation which is available to absorb tax deficiencies
recognized subsequent to the adoption of SFAS 123(R).
Income
Taxes. Income taxes are accounted for using an asset and
liability approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that have been
recognized in Acacia Research Corporation’s consolidated financial statements or
consolidated tax returns. A valuation allowance is established to reduce
deferred tax assets if all, or some portion, of such assets will more than
likely not be realized.
Effective
January 1, 2007, Acacia Research Corporation adopted FASB Interpretation
No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes,” which
clarifies the accounting for uncertainty in income taxes recognized in the
financial statements in accordance with FASB Statement No. 109, “Accounting
for Income Taxes.” FIN 48 provides guidance on the financial statement
recognition and measurement of a tax position taken or expected to be taken in a
tax return. FIN 48 also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosures, and
transition. In accordance with FIN 48, a tax position is a position
in a previously filed tax return or a position expected to be taken in a future
tax filing that is reflected in measuring current or deferred income tax assets
and liabilities. Tax positions shall be recognized only when it is more likely
than not (likelihood of greater than 50%), based on technical merits, that the
position will be sustained upon examination. Tax positions that meet the more
likely than not threshold should be measured using a probability weighted
approach as the largest amount of tax benefit that is greater than 50% likely of
being realized upon settlement. The adoption of FIN 48 did not have a
material impact on our consolidated financial position, results of operations or
cash flows.
The total
amount of unrecognized tax benefits as of January 1, 2007 and December 31, 2007
was $56,000 and $115,000, respectively, all of which, if recognized, would
affect the effective tax rate.
Acacia
Research Corporation recognizes interest and penalties with respect to
unrecognized tax benefits in income tax expense. We have identified no
uncertain tax position for which it is reasonably possible that the total amount
of unrecognized tax benefits will significantly increase or decrease within 12
months.
Acacia
Research Corporation is subject to taxation in the U.S. and various state
jurisdictions. With no material exceptions, Acacia Research Corporation is no
longer subject to U.S. federal or state examinations by tax authorities for
years before 2001.
At
December 31, 2007, Acacia Research Corporation had U.S. federal and state income
tax net operating loss carryforwards as summarized at Note 9. Due to
uncertainties surrounding our ability to generate future taxable income to
realize these assets, a full valuation allowance has been established to offset
our net deferred tax assets. All NOLs and tax credits generated by
the continuing operations of Acacia Research Corporation and its operating
subsidiaries have been retained by Acacia Research Corporation subsequent to the
Split-off Transaction. Subsequent to the Split-off Transaction, all
NOLs and tax credits generated by CombiMatrix Corporation and its subsidiaries
have been retained by CombiMatrix Corporation and are not available to Acacia
Research Corporation.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Utilization
of the NOL and R&D credit carryforwards may be subject to a substantial
annual limitation due to ownership change limitations that may have occurred or
that could occur in the future, as required by Section 382 of the Internal
Revenue Code of 1986, as amended (the “Code”), as well as similar state
provisions. These ownership changes may limit the amount of NOL and R&D
credit carryforwards that can be utilized annually to offset future taxable
income and tax, respectively. In general, an “ownership change” as defined by
Section 382 of the Code results from a transaction or series of transactions
over a three-year period resulting in an ownership change of more than 50
percentage points of the outstanding stock of a company by certain stockholders
or public groups. Since Acacia Research Corporation’s formation, we
have raised capital through the issuance of capital stock on several occasions
(both before and after its public offering) which, combined with the purchasing
stockholders’ subsequent disposition of those shares, may have resulted in such
an ownership change, or could result in an ownership change in the future upon
subsequent disposition.
We have
not completed a study to assess whether an ownership change has occurred or
whether there have been multiple ownership changes since our formation due to
the complexity and cost associated with such a study, and the fact that there
may be additional such ownership changes in the future. If we have experienced
an ownership change at any time since our formation, utilization of the NOL or
R&D credit carryforwards would be subject to an annual limitation under
Section 382 of the Code, which is determined by first multiplying the value of
Acacia Research Corporation's stock at the time of the ownership change by the
applicable long-term, tax-exempt rate, and then could be subject to additional
adjustments, as required. Any limitation may result in expiration of a portion
of the NOL or R&D credit carryforwards before utilization. Further, until a
study is completed and any limitation known, no amounts are being considered as
an uncertain tax position or disclosed as an unrecognized tax benefit under FIN
48. Due to the existence of a full valuation allowance, future changes in our
unrecognized tax benefits will not impact our effective tax rate. Any
carryforwards that will expire prior to utilization as a result of such
limitations will be removed from deferred tax assets with a corresponding
reduction of the valuation allowance.
Comprehensive Income
(Loss). Comprehensive income (loss) is the change in equity
from transactions and other events and circumstances other than those resulting
from investments by owners and distributions to owners.
Segment
Reporting. We use the management approach, which designates
the internal organization that is used by management for making operating
decisions and assessing performance as the basis of Acacia Research
Corporation’s reportable segments.
Use of
Estimates. The preparation of financial statements in
conformity with generally accepted accounting principles in the United States of
America requires management to make estimates and assumptions that affect the
reported amount of assets and liabilities and disclosure of contingent assets
and liabilities at the date of the consolidated financial statements and the
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from these estimates. We believe that, of the
significant accounting policies described herein, the accounting policies
associated with revenue recognition, stock-based compensation expense, valuation
of long-lived and intangible assets and impairment of marketable securities,
require our most difficult, subjective or complex judgments.
Earnings (Loss) Per
Share.
Basic earnings per share for each
class of common stock is computed by dividing the income or loss allocated to
each class of common stock by the weighted-average number of outstanding shares
of that class of common stock. Diluted earnings per share is computed by
dividing the income or loss allocated to each class of common stock by the
weighted-average number of outstanding shares of that class of common stock,
including the dilutive effect of common stock equivalents. Potentially dilutive
common stock equivalents primarily consist of employee stock options, unvested
restricted stock, restricted stock unit grants and common stock purchase
warrants (AR-CombiMatrix stock only).
The
earnings or losses allocated to each class of common stock are determined by
Acacia Research Corporation’s board of directors. This determination is
generally based on the net income or loss amounts of the corresponding group
determined in accordance with accounting principles generally accepted in the
United States of America, consistently applied. We believe this
method of allocation to be systematic and reasonable.
As a
result of the Split-off Transaction, earnings or losses allocated to the
CombiMatrix group are presented as discontinued operations in the accompanying
consolidated financial statements. Subsequent to the Split-off Transaction,
Acacia Research Corporation’s only class of common stock outstanding is its
AR-Acacia Technologies stock.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
following table presents the weighted-average number of common shares
outstanding used in basic and diluted loss per share:
|
|
For
the Year Ended December 31,
|
|
|
|
2007
|
|
|
2006
|
|
|
2005
|
|
Acacia Research -
Acacia Technologies stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average number of common shares
outstanding
|
|
|
28,503,314 |
|
|
|
27,547,651 |
|
|
|
26,630,732 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
All
outstanding stock options and nonvested restricted stock excluded from the
computation of
|
|
|
|
|
|
|
|
|
|
|
|
|
diluted
loss per share because the effect of inclusion would have been
anti-dilutive
|
|
|
5,884,934 |
|
|
|
6,385,810 |
|
|
|
6,315,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acacia Research - CombiMatrix stock -
Discontinued Operations - Split-off of CombiMatrix
Corporation (1)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average number of common shares
outstanding
|
|
|
55,862,707 |
|
|
|
40,605,038 |
|
|
|
33,678,603 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
stock options excluded from the computation of diluted loss per
share
|
|
|
|
|
|
|
|
|
|
|
|
|
because
the effect of inclusion would have been anti-dilutive
|
|
|
7,003,390 |
|
|
|
8,068,139 |
|
|
|
6,925,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrants
excluded from the computation of diluted loss per share
because
|
|
|
|
|
|
|
|
|
|
|
|
|
the
option exercise price was greater than the average market price of the
common shares
|
|
|
23,838,648 |
|
|
|
14,090,279 |
|
|
|
1,879,888 |
|
____________
(1)
Reflects activity and amounts outstanding as of the Redemption
Date.
Recent Accounting Pronouncements. In December 2007, the
FASB issued SFAS No. 141 (revised 2007), Business Combinations
(“SFAS No. 141R”). SFAS 141R establishes principles and requirements
for how an acquirer recognizes and measures in its financial statements the
identifiable assets acquired, the liabilities assumed, any noncontrolling
interest in the acquiree and the goodwill acquired. SFAS No. 141R also
establishes disclosure requirements to enable the evaluation of the nature and
financial effects of business combinations. SFAS No. 141R is effective for
Acacia Research Corporation as of January 1, 2009. We are currently
evaluating the potential impact of the adoption of SFAS 141R on our
consolidated financial position, results of operations or cash
flows.
In
December 2007, the FASB issued SFAS No. 160, Noncontrolling Interests in
Consolidated Financial Statements—an amendment of Accounting Research Bulletin
No. 51 (“SFAS No. 160”). SFAS 160 establishes accounting and
reporting standards for ownership interests in subsidiaries held by parties
other than the parent, the amount of consolidated net income attributable to the
parent and to the noncontrolling interest, changes in a parent’s ownership
interest, and the valuation of retained noncontrolling equity investments when a
subsidiary is deconsolidated. SFAS No. 160 also establishes disclosure
requirements that clearly identify and distinguish between the interests of the
parent and the interests of the noncontrolling owners. SFAS No. 160 is effective
for Acacia Research Corporation beginning January 1, 2009. We are
currently evaluating the potential impact of the adoption of SFAS 160 on
our consolidated financial position, results of operations or cash
flows.
In
December 2007, the FASB ratified the Emerging Issues Task Force consensus
on EITF Issue No. 07-1, Accounting for Collaborative Arrangements (EITF
Issue No. 07-1”) that discusses how parties to certain collaborative
arrangements should account for various activities. The consensus indicates that
costs incurred and revenues generated from transactions with third parties
should be reported by the collaborators on the respective line items in their
income statements pursuant to EITF Issue No. 99-19, “Reporting Revenue
Gross as a Principal Versus Net as an Agent.” Additionally, the consensus
provides that income statement characterization of payments between the
participants in a collaborative arrangement should be based upon existing
authoritative pronouncements; analogy to such pronouncements if not within their
scope; or a reasonable, rational, and consistently applied accounting policy
election. EITF Issue No. 07-1 is effective for Acacia Research Corporation
beginning January 1, 2009 and is to be applied retrospectively to all
periods presented for collaborative arrangements existing as of the date of
adoption. We do not expect EITF Issue No. 07-1 to have a material impact on
our consolidated financial position, results of operations or cash
flows.
In February 2007, the
FASB issued SFAS No. 159, The Fair Value Option for Financial Assets and
Financial Liabilities Including an Amendment of FASB Statement No. 115 (“SFAS
No. 159”). SFAS No. 159 permits entities to choose to measure many
financial instruments and certain other items at fair value, with unrealized
gains and losses related to these financial instruments reported in earnings at
each subsequent reporting date. SFAS No. 159 is
effective for Acacia Research Corporation beginning January 1, 2008. We do
not expect the adoption of SFAS No. 159 to have a material impact, if any, on
our consolidated financial position, results of operations and cash
flows.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements (“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 is effective for
fiscal years beginning after November 15, 2007. In February 2008, the
FASB issued FSP SFAS No. 157–1 which amends SFAS No. 157 to exclude FASB
Statement No. 13, Accounting for Leases, and other accounting pronouncements
that address fair value measurements for purposes of lease classification or
measurement under Statement 13. In February 2008, the FASB issued FSP
SFAS No. 157-2 (“FSP 157-2”) which would delay the effective date of
SFAS No. 157 for all nonfinancial assets and nonfinancial liabilities,
except those that are recognized or disclosed at fair value in the financial
statements on a recurring basis (at least annually). FSP 157-2 partially defers
the effective date of SFAS No. 157 to fiscal years beginning after
November 15, 2008, and interim periods within those fiscal years for items
within the scope of FSP 157-2. We do not expect the adoption of SFAS
No. 157 to have a material impact, if any, on our consolidated financial
position, results of operations and cash flows.
3. SHORT-TERM
INVESTMENTS
Short-term
investments consists of the following at December 31, 2007 and 2006 (in
thousands):
|
|
|
|
|
|
|
|
|
Amortized
|
|
|
Fair
|
|
|
Amortized
|
|
|
Fair
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale
securities:
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate
and municipal bonds and notes
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
975 |
|
|
$ |
1,000 |
|
Auction
rate securities
|
|
|
10,660 |
|
|
|
10,660 |
|
|
|
7,288 |
|
|
|
7,288 |
|
U.S.
government securities
|
|
|
300 |
|
|
|
300 |
|
|
|
4,502 |
|
|
|
4,495 |
|
Corporate
securities
|
|
|
9 |
|
|
|
6 |
|
|
|
- |
|
|
|
- |
|
|
|
$ |
10,969 |
|
|
$ |
10,966 |
|
|
$ |
12,765 |
|
|
$ |
12,783 |
|
Gross
unrealized gains and losses related to available-for-sale securities were not
material for the periods presented. Except for investments in auction
rate securities, all investments classified as available-for-sale at December
31, 2007 and 2006 have contractual maturities of one year or
less. For auction rate securities, contractual maturity dates
range up to thirty-five years, or are perpetual, with reset dates every 7 to 63
days. Refer to Note 2 for more information.
4. PROPERTY
AND EQUIPMENT
Property
and equipment consists of the following at December 31, 2007 and 2006 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Furniture
and fixtures
|
|
$ |
309 |
|
|
$ |
256 |
|
Computer
hardware and software
|
|
|
401 |
|
|
|
298 |
|
Leasehold
improvements
|
|
|
141 |
|
|
|
78 |
|
|
|
|
851 |
|
|
|
632 |
|
Less: accumulated
depreciation
|
|
|
(528 |
) |
|
|
(411 |
) |
|
|
$ |
323 |
|
|
$ |
221 |
|
Depreciation
expense was $119,000, $79,000 and $59,000 for the years ended December 31, 2007,
2006 and 2005, respectively.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
5. ACCOUNTS
PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses
consists of the following at December 31, 2007 and 2006 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accounts
payable
|
|
$ |
361 |
|
|
$ |
150 |
|
Payroll
and other employee benefits
|
|
|
371 |
|
|
|
223 |
|
Accrued
vacation
|
|
|
365 |
|
|
|
286 |
|
Accrued
legal expenses - patent
|
|
|
2,082 |
|
|
|
1,131 |
|
Accrued
consulting and other professional fees
|
|
|
108 |
|
|
|
371 |
|
Other
accrued liabilities
|
|
|
175 |
|
|
|
40 |
|
|
|
$ |
3,462 |
|
|
$ |
2,201 |
|
6.
PATENTS
Acacia
Research Corporation’s only identifiable intangible assets are patents and
patent rights, with estimated remaining economic useful lives up to seven
years. The gross carrying amounts and accumulated amortization
related to acquired intangible assets as of December 31, 2007 and 2006 are as
follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross
carrying amount – patents
|
|
$ |
33,607 |
|
|
$ |
30,317 |
|
Accumulated
amortization
|
|
|
(17,300 |
) |
|
|
(11,802 |
) |
Patents,
net
|
|
$ |
16,307 |
|
|
$ |
18,515 |
|
The
weighted-average remaining estimated economic useful life of Acacia Research
Corporation’s patents is four years. Aggregate patent amortization
expense was $5,583,000, $5,313,000 and $4,922,000 in 2007, 2006 and 2005,
respectively. Annual aggregate amortization expense for each of the
next five years through December 31, 2012 is estimated to be $4,403,000 in 2008,
$3,885,000 in 2009, $3,676,000 in 2010, $2,766,000 in 2011 and $755,000 in
2012.
For the
years ended December 31, 2007 and 2006, our operating subsidiaries incurred and
capitalized patent acquisition costs totaling $3,760,000 and $1,030,000,
respectively, in connection with the acquisition of the rights to several
additional patent portfolios. The patents have estimated economic
useful lives ranging from five to seven years and are being amortized over a
weighted-average economic useful life of seven years for 2007 acquisitions and
six years for 2006 acquisitions. At December 31, 2007 and 2006, all
of Acacia Research Corporation’s acquired intangible assets were subject to
amortization.
In
September 2007, we recorded a non-cash impairment charge of $235,000, related to
the write-off of a patent-related intangible asset. The related
licensing program was completed during the third quarter of 2007 resulting in
the write-off of the remaining carrying value of the patent-related intangible
asset as of September 30, 2007. In June 2006, we recorded a non-cash
impairment charge of $297,000, related to the write-off of a patent-related
intangible asset. During the second quarter of 2006, pursuant to the
terms of the respective license agreement, management elected to terminate its
rights to exclusively license and enforce the patent, resulting in the write-off
of the remaining carrying value of the patent-related intangible asset as of
June 30, 2006.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
7. ACQUISITIONS
On
January 28, 2005, Acacia Global Acquisition Corporation, a wholly owned
subsidiary of Acacia Research Corporation, acquired substantially all of the
assets of Global Patent Holdings, LLC. The acquisition provided us
with sole ownership of 11 patent licensing companies that own or control the
rights to 27 patent portfolios, which include 120 U.S. patents and certain
foreign counterparts, and cover technologies used in a wide variety of
industries.
The
acquisition was accounted for using the purchase method of
accounting. Under the purchase method of accounting, the purchase
consideration is allocated to the assets acquired, including tangible assets,
patents and other identifiable intangibles and liabilities assumed, based on
their estimated fair market values at the date of acquisition. The
statement of operations for the year ended December 31, 2005 includes the
results of the acquired companies beginning on January 28, 2005, the date of
acquisition. The aggregate purchase consideration was approximately
$25,105,000, including $5.0 million of cash, the issuance of 3,938,832 shares of
AR-Acacia Technologies stock valued at $19,293,000 (net of estimated common
stock registration costs of $228,000) and other acquisition costs, including
registration costs, totaling $812,000. The value of the common shares
issued was determined based on the average market price of AR-Acacia
Technologies stock, as reported on NASDAQ, over the 5-day period before and
after the terms of the acquisition were agreed to and announced.
The
following table summarizes the total purchase consideration and the allocation
of the consideration paid to the estimated fair value of the assets acquired and
liabilities assumed (in thousands):
|
|
|
|
Purchase
Consideration:
|
|
|
|
Cash
paid
|
|
$ |
5,000 |
|
Fair
value of AR-Acacia Technologies stock issued
|
|
|
19,293 |
|
Acquisition
and registration
costs
|
|
|
812 |
|
Total purchase
consideration
|
|
$ |
25,105 |
|
|
|
|
|
|
Purchase
Price Allocation:
|
|
|
|
|
Fair
value of net tangible assets acquired at January 28, 2005
|
|
$ |
(26 |
) |
Intangible
assets acquired - patents and patent
rights
|
|
|
25,131 |
|
Total
|
|
$ |
25,105 |
|
Management
was primarily responsible for determining the fair value of the tangible and
identifiable intangible assets acquired and liabilities assumed at the date of
acquisition. Management considered a number of factors, including
reference to an independent valuation. The patents and patent rights acquired
were valued using a discounted cash flow model on a patent portfolio by
portfolio basis, which estimated the future net cash flows expected to result
from the licensing of each portfolio, taking into account potential infringers
of the patents, usage of the underlying technologies, estimated license fee
revenues, contingent legal fee arrangements, inventor royalties due to former
patent holders, other estimated costs, tax implications and other
factors. A discount rate consistent with the risks associated with
achieving the estimated net cash flows was used to estimate the present value of
future estimated net cash flows. Management’s valuation resulted in
an estimated fair value of patent related assets acquired of approximately
$27,000,000, resulting in approximately $1,900,000 of excess fair value over the
cost of net assets acquired, which has been allocated as a pro rata reduction to
the amounts that otherwise would have been assigned to the assets acquired, in
accordance with the purchase method of accounting.
In
connection with the acquisition described above, Acacia Global Acquisition
Corporation entered into a consulting agreement with the former CEO of
Global Patent Holdings, LLC. The agreement required the payment of
$2,000,000 in consulting fees over a two-year period, and certain reimbursable
consulting related expenses, commencing on the date of acquisition. Marketing,
general and administrative expenses for the years ended December 31, 2007, 2006
and 2005 include $103,000, $1,087,000 and $1,009,000, respectively, in expenses
related to the consulting agreement. The consulting agreement expired
in January 2007.
The
acquisition was treated for tax purposes as a taxable asset acquisition and, as
such, there were no book/tax basis differences associated with the
acquisition. As such, Acacia Research Corporation did not record any
deferred income taxes in connection with the application of the purchase method
of accounting.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
8.
STOCKHOLDERS’ EQUITY
Capital
Stock
As of
December 31, 2007, the authorized capital stock of Acacia Research Corporation
consists of 210,000,000 shares, of which 100,000,000 shares is a class of common
stock designated as “AR–Acacia Technologies stock,” having a par value of $0.001
per share, 100,000,000 shares is a class of common stock designated as
“AR–CombiMatrix stock,” having a par value of $0.001 per share, and 10,000,000
is a class of preferred stock having a par value of $0.001 per share (the
“Preferred Stock”) and issuable in one or more series as determined by the board
of directors pursuant to Acacia Research Corporation’s restated certificate of
incorporation.
Holders
of our classes of common stock vote together as a single class (except in
certain limited circumstances). Subsequent to the consummation of the
Split-off Transaction on August 15, 2007, as described above at Note 1, Acacia
Research Corporation’s only class of common stock outstanding is its AR-Acacia
Technologies stock. Holders of each class of common stock are
entitled to receive ratably such dividends, if any, as may be declared by the
board of directors out of funds legally available therefore.
Under our
restated certificate of incorporation, in the event of our dissolution,
liquidation or winding up, after payment or provision for payment of the debts
and other liabilities and full preferential amounts to which holders of any
preferred stock are entitled, the holders of our common stock will be entitled
to receive our assets remaining for distribution to holders of common stock on a
per share basis in proportion to the liquidation units per share of such
class. Holders of each class of common stock have no preemptive,
subscription, redemption or conversion rights.
Acacia
Research Corporation’s board of directors, subject to state laws and limits in
our restated certificate of incorporation, including those discussed above, are
able to declare dividends on our common stock in its discretion. To
date, Acacia Research Corporation has never paid or declared cash dividends on
shares of our stock, nor do we anticipate paying cash dividends on either of the
two classes of stock in the foreseeable future.
In
connection with the consummation of the Split-off Transaction on August 15,
2007, the Redemption Date, CombiMatrix Corporation was split-off from Acacia
Research Corporation through the redemption of all outstanding shares of
AR-CombiMatrix common stock in exchange for the distribution of new shares of
CombiMatrix Corporation common stock. Subsequent to the consummation
of the Split-off Transaction, Acacia Research Corporation’s only class of common
stock outstanding is its AR-Acacia Technologies common
stock. Pursuant to Acacia Research Corporation’s amended and
restated certificate of incorporation, neither class of common stock is
redeemable as of and subsequent to the Redemption Date. As such, we
no longer label the common stock in the accompanying consolidated balance sheet
as of December 31, 2007 and statement of stockholders’ equity for the year
ended December 31, 2007 as “redeemable.”
In
February 2008, our Board of Directors approved an amendment and restatement of
our certificate of incorporation to remove reference to AR-CombiMatrix stock
which was cancelled as a result of the redemption described above, to rename
AR-Acacia Technologies stock as the only class of common stock, and to provide
that all 100,000,000 shares of AR-Acacia Technologies stock currently authorized
may be issued as a single class of common stock. The amendment and
restatement of our certificate of incorporation is subject to approval by the
stockholders at the next annual meeting of stockholders. If adopted,
each share of common stock will be entitled to one vote and the relative voting
strength of the common stock will be equal notwithstanding the trading price of
the common stock.
Other
In
February 2005, Acacia Research Corporation raised gross proceeds of $19,600,000
through the sale of 3,500,000 shares of AR-Acacia Technologies stock at a price
of $5.60 per share in a registered direct offering. Proceeds raised,
net of related issuance costs, totaled approximately $19,532,000.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
9.
INCOME TAXES
Acacia
Research Corporation’s provision (benefit) for income taxes consists of the
following (in thousands):
|
|
|
|
|
|
|
|
|
|
Current:
|
|
|
|
|
|
|
|
|
|
U.S.
Federal tax
|
|
$ |
- |
|
|
$ |
- |
|
|
$ |
- |
|
State
taxes
|
|
|
207 |
|
|
|
76 |
|
|
|
8 |
|
|
|
|
207 |
|
|
|
76 |
|
|
|
8 |
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S.
Federal tax
|
|
|
- |
|
|
|
(36 |
) |
|
|
(143 |
) |
State
taxes
|
|
|
- |
|
|
|
- |
|
|
|
- |
|
|
|
|
- |
|
|
|
(36 |
) |
|
|
(143 |
) |
|
|
$ |
207 |
|
|
$ |
40 |
|
|
$ |
(135 |
) |
The tax
effects of temporary differences and carryforwards that give rise to significant
portions of deferred assets and liabilities consist of the following at December
31, 2007 and 2006 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Basis
in affiliates
|
|
$ |
495 |
|
|
$ |
495 |
|
Depreciation
and amortization
|
|
|
3,632 |
|
|
|
2,292 |
|
State
taxes
|
|
|
3 |
|
|
|
- |
|
Deferred
revenue
|
|
|
127 |
|
|
|
142 |
|
Stock
compensation
|
|
|
2,451 |
|
|
|
1,672 |
|
Accrued
liabilities and other
|
|
|
153 |
|
|
|
140 |
|
Write-off
of investments
|
|
|
1,344 |
|
|
|
1,250 |
|
Net
operating loss and capital loss carryforwards and credits
|
|
|
22,938 |
|
|
|
22,075 |
|
|
|
|
|
|
|
|
|
|
Total
deferred tax assets
|
|
|
31,143 |
|
|
|
28,066 |
|
Less: valuation
allowance
|
|
|
(30,816 |
) |
|
|
(27,562 |
) |
|
|
|
|
|
|
|
|
|
Net
deferred tax assets, net of valuation allowance
|
|
|
327 |
|
|
|
504 |
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Intangibles
|
|
|
(327 |
) |
|
|
(504 |
) |
|
|
|
|
|
|
|
|
|
Net
deferred tax liability
|
|
$ |
- |
|
|
$ |
- |
|
A
reconciliation of the federal statutory income tax rate and the effective income
tax rate is as follows:
|
|
|
|
|
|
|
Statutory
federal tax rate
|
|
|
(34 |
%) |
|
|
(34 |
%) |
|
|
(34 |
%) |
State
income taxes, net of federal tax effect
|
|
|
3 |
% |
|
|
1 |
% |
|
|
- |
|
Equity
compensation
|
|
|
1 |
% |
|
|
6 |
% |
|
|
- |
|
Non
deductible permanent items
|
|
|
1 |
% |
|
|
- |
|
|
|
1 |
% |
Capital
loss carryforwards
|
|
|
6 |
% |
|
|
- |
|
|
|
- |
|
Valuation
allowance
|
|
|
26 |
% |
|
|
27 |
% |
|
|
31 |
% |
|
|
|
3 |
% |
|
|
- |
|
|
|
(2 |
%) |
At
December 31, 2007, we had established a full valuation allowance against our net
deferred tax assets, due to management’s determination that the criteria for
recognition have not been met.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
At
December 31, 2007, Acacia Research Corporation had U.S. federal and state income
tax net operating loss carry forwards (“NOLs”), totaling approximately
$58,258,000 and $41,961,000, expiring between 2010 and 2027, and 2008 and 2017,
respectively. In addition, Acacia Research Corporation had tax credit
carryforwards of approximately $40,000.
As of
December 31, 2007, approximately $11,762,000 of the valuation allowance related
to the tax benefits of stock option deductions included in Acacia Research
Corporation’s NOLs. At such time as the valuation allowance is released, the
benefit will be credited to additional paid-in capital. Income taxes
paid during the periods presented were not material.
During
the year ended December 31, 2007, we determined that certain of our deferred tax
assets, principally “Basis in affiliates,” and the related full valuation
allowance were overstated for the period since December 31, 1996 through
December 31, 2006. The Basis in affiliates amount of approximately
$28 million was frozen prior to 2004 since we had acquired the remaining
minority interest of the affiliate. We retroactively corrected our
deferred tax asset balances and the related valuation allowance in the deferred
tax asset table by approximately $30 million. The correction had no
impact on the consolidated balance sheet, statements of operations,
stockholders’ equity or cash flows for any period and there was no other impact
to the consolidated financial statements. Management concluded this
correction was not material to the consolidated financial
statements.
10. ACCOUNTING
FOR THE SPLIT-OFF OF COMBIMATRIX CORPORATION
In
January 2006, Acacia Research Corporation’s board of directors approved a plan
for its wholly owned subsidiary, CombiMatrix Corporation, to become an
independent public company. CombiMatrix Corporation’s registration
statement on Form S-1 was declared effective by the SEC on June 8,
2007. Following the redemption period required by Acacia Research
Corporation’s Restated Certificate of Incorporation, on August 15, 2007
(the “Redemption Date”), CombiMatrix Corporation was split-off from Acacia
Research Corporation through the redemption of all outstanding shares of
AR-CombiMatrix stock in exchange for the distribution of new shares of
CombiMatrix Corporation common stock, on a pro-rata basis, to the holders of
AR-CombiMatrix stock as of the Redemption Date (the “Split-off
Transaction”). On the Redemption Date, every ten (10) shares of
AR-CombiMatrix stock outstanding on August 15, 2007, was redeemed for one (1)
share of common stock of CombiMatrix Corporation. Subsequent to the
Redemption Date, Acacia Research Corporation no longer owns any equity interests
in CombiMatrix Corporation and the two companies operate independently of each
other.
As a
result of the Split-off Transaction, the CombiMatrix group is no longer a
business group of Acacia Research Corporation. As a result of the
Split-off Transaction, all outstanding shares of AR-CombiMatrix stock were
redeemed, and hence, all rights of holders of AR-CombiMatrix stock ceased as of
the Redemption Date, except for the right, upon the surrender to the exchange
agent of shares of AR-CombiMatrix stock, to receive new shares of CombiMatrix
Corporation stock pursuant to the exchange ratio described above.
The
Split-off Transaction was accounted for by Acacia Research Corporation at
historical cost. Accordingly, no gain or loss on disposal was
recognized in the accompanying consolidated statements of operations. Included
in the current period 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 Corporation to holders of
AR-CombiMatrix stock, as of the Redemption Date, as described
above. 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-Transaction will be treated as a tax-free exchange under
Sections 368 and 355 of the Internal Revenue Code of 1986, as
amended.
For the
period from January 1, 2007 through August 15, 2007, revenues and pre-tax loss
related to CombiMatrix Corporation included in discontinued operations were
$2,968,000 and $8,086,000, respectively. Net loss from discontinued
operations for the year ended December 31, 2007, includes direct costs incurred
in connection with the Split-off Transaction, originally included in Acacia
Research Corporation corporate accounts, totaling $136,000 for the year ended
December 31, 2007.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
10A.
DISCONTINUED OPERATIONS – SPLIT-OFF OF COMBIMATRIX CORPORATION
In
January 2006, Acacia Research Corporation’s board of directors approved a plan
for its wholly owned subsidiary, CombiMatrix Corporation, to become an
independent public company. CombiMatrix Corporation’s registration
statement on Form S-1 was declared effective by the SEC on June 8, 2007.
As a
result of the Split-off Transaction, the CombiMatrix group is no longer a
business group of Acacia Research Corporation. As a result of the
consummation of the Split-off Transaction, the assets, liabilities, results of
operations and cash flows of CombiMatrix Corporation have been eliminated from
the continuing operations of Acacia Research Corporation and Acacia Research
Corporation does not have any continuing involvement in the operations of
CombiMatrix Corporation. As a result of the Split-off Transaction, we
have disposed of our investment in CombiMatrix Corporation, and therefore, in
accordance with guidance set forth in SFAS No. 144, Acacia Research
Corporation’s accompanying consolidated balance sheets, statements of operations
and statements of cash flows for the current period presented reflect the
assets, liabilities, results of operations and cash flows for CombiMatrix
Corporation as discontinued operations. Consolidated financial
statements presented for the comparable prior year periods have been restated to
conform to this presentation. CombiMatrix Corporation was previously
presented as a separate operating segment of Acacia Research Corporation under
SFAS No. 131, “Disclosures about Segments of an Enterprise and Related
Information.”
The
carrying amounts of the major classes of assets and liabilities and revenues and
pretax loss included in discontinued operations for the following periods were
as follows (in thousands):
|
|
December
31, 2006
|
|
|
|
|
|
Cash
and available-for-sale investments
|
|
|
14,342 |
|
Accounts
receivable, inventory and other asset
|
|
|
1,210 |
|
Property
and equipment, net of accumulated depreciation
|
|
|
1,785 |
|
Intangible
assets and goodwill
|
|
|
24,210 |
|
Other
assets
|
|
|
2,667 |
|
Accounts
payable and accrued expenses
|
|
|
(2,846 |
) |
Deferred
revenues
|
|
|
(1,441 |
) |
Warrant
liability
|
|
|
(6,732 |
) |
|
|
Revenues
|
|
|
Pre-tax Loss
|
|
For
the year ended December 31, 2006
|
|
|
5,740 |
|
|
|
(20,127 |
) |
For
the year ended December 31, 2005
|
|
|
8,033 |
|
|
|
(12,568 |
) |
Net loss
from discontinued operations related to CombiMatrix Corporation includes direct
costs incurred in connection with the Split-off Transaction, originally included
in Acacia Research Corporation corporate accounts, totaling $133,000 for the
year ended December 31, 2006.
11. STOCK-BASED
INCENTIVE PLANS
The 2002 Acacia Technologies Stock
Incentive Plan (“2002 Plan”) and the 2007 Acacia Technologies Stock Incentive
Plan (“2007 Plan”) (collectively, the “Plans”) were approved by the stockholders
of Acacia Research Corporation in December 2002 and May 2007, respectively. Both
Plans allow grants of stock options, stock awards and performance shares with
respect to AR-Acacia Technologies stock to eligible individuals, which generally
includes directors, officers, employees and consultants. Except as
noted below, the terms and provisions of the Plans are identical in all material
respects.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Acacia Research Corporation’s
compensation committee administers the discretionary option grant and stock
issuance programs. The compensation committee determines which
eligible individuals are to receive option grants or stock issuances under those
programs, the time or times when the grants or issuances are to be made, the
number of shares subject to each grant or issuance, the status of any granted
option as either an incentive stock option or a non-statutory stock option under
the federal tax laws, the vesting schedule to be in effect for the option grant
or stock issuance and the maximum term for which any granted option is to remain
outstanding. The exercise price of options is generally equal to the
fair market value of the AR-Acacia Technologies stock on the date of
grant. Options generally begin to be exercisable six months to one
year after grant and generally expire ten years after grant. Stock
options generally vest over two to three years and restricted shares generally
vest in full after two to three years (generally represents the requisite
service period in accordance with SFAS No. 123R).
Programs
The Plans
provide for the following separate programs:
|
·
|
Discretionary Option Grant
Program. Under the discretionary option grant program,
our compensation committee may grant (1) non-statutory options to purchase
shares of AR-Acacia Technologies stock to eligible individuals in the
employ or service of Acacia Research Corporation or our subsidiaries
(including employees, non-employee board members and consultants) at an
exercise price not less than 85% of the fair market value of those shares
on the grant date and (2) incentive stock options to purchase shares of
AR-Acacia Technologies stock to eligible employees at an exercise price
not less than 100% of the fair market value of those shares on the grant
date (not less than 110% of fair market value if such employee actually or
constructively owns more than 10% of our voting stock or the voting stock
of any of our subsidiaries).
|
|
·
|
Stock Issuance
Program. Under the stock issuance program, eligible
individuals may be issued shares of AR-Acacia Technologies stock directly,
upon the attainment of performance milestones or the completion of a
specified period of service or as a bonus for past
services. Under this program, the purchase price for the shares
shall not be less than 100% of the fair market value of the shares on the
date of issuance, and payment may be in the form of cash or past services
rendered.
|
|
·
|
Automatic Option Grant Program
(2002 Plan only). Under the automatic option grant
program, option grants will automatically be made at periodic intervals to
eligible non-employee members of our board of directors to purchase shares
of AR-Acacia Technologies stock at an exercise price equal to 100% of the
fair market value of those shares on the grant date. Each
individual who first becomes a non-employee board member at any time after
the date of the adoption of the incentive plans by our board of directors
will automatically receive an option to purchase 20,000 shares of
AR-Acacia Technologies stock on the date the individual joins the board of
directors. In addition, on the first business day in each
calendar year following the adoption of the incentive plans by our board
of directors, each non-employee board member then in office, including
each of our current non-employee board members who is then in office, will
automatically be granted an option to purchase 15,000 shares of AR-Acacia
Technologies stock, provided that the individual has served on the board
of directors for at least six
months.
|
Commencing
in fiscal 2008, in lieu of the option grants described above, each non-employee
director will receive restricted stock units for the number of shares determined
by dividing the annual retainer by the closing price of the common stock on the
grant date, provided that such individual has served as a non-employee director
for at least 6 months. In addition, as of May 2007, each new non-employee
director will receive restricted stock units for the number of shares determined
by dividing the annual Board of Directors retainer by the closing price of the
common stock on the commencement date.
The
number of shares of common stock available for issuance under the 2002 Plan
automatically increases on the first trading day of January each calendar year
during the term of the Plan by an amount equal to three percent (3%) of the
total number of shares of common stock outstanding on the last trading day in
December of the immediately preceding calendar year, but in no event shall any
such annual increase exceed 500,000 shares. The aggregate number of
shares of common stock available for issuance under the 2002 Plan shall not
exceed 20,000,000 shares. At December 31, 2007, there were 18,000
shares available for grant under the 2002 Plan.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
initial share reserve under the 2007 Plan was 560,000 shares. The
number of shares of common stock available for issuance under the 2007 Plan
automatically increases 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, except that the
automatic increase in the share reserve will be three percent (3%) of our
outstanding common stock on such January 1, if our common stock has appreciated
by at least thirty percent (30%) in the prior calendar year. After January 1,
2009, no new additional shares will be added to the 2007 Plan without
stockholder approval (except for shares subject to outstanding awards that
are forfeited or otherwise returned to the 2007 Plan). At December 31,
2007, there were 171,000 shares available for grant under the 2007
Plan.
The Plans
do 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. Upon the exercise of
stock options or the granting of restricted stock, it is Acacia Research
Corporation’s policy to issue new shares of the respective class of common
stock.
Our board
of directors may amend or modify the Plans at any time, subject to any required
stockholder approval. The Plans will terminate no later than the
tenth anniversary of the approval of the incentive plans by our
stockholders.
The
following table summarizes stock option activity for the Plans for the year
ended December 31, 2007:
|
|
|
Weighted-Average
|
|
|
|
|
|
|
|
Remaining
|
|
Aggregate
|
|
|
|
Exercise
Price
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at December 31, 2006
|
5,958,000
|
|
$7.93
|
|
|
|
|
Granted
|
300,000
|
|
$14.20
|
|
|
|
|
Exercised
|
(1,063,000)
|
|
$4.72
|
|
|
|
|
Forfeited
|
|
|
$18.20
|
|
|
|
|
Outstanding
at December 31, 2007
|
4,969,000
|
|
$8.52
|
|
4.8
years
|
|
$14,528,000
|
Vested
and expected to vest at December 31, 2007
|
4,956,000
|
|
$8.52
|
|
4.8
years
|
|
$14,518,000
|
Exercisable
at December 31, 2007
|
4,577,000
|
|
$8.32
|
|
4.5
years
|
|
$14,197,000
|
The
weighted-average grant date fair value of stock options granted during the years
ended December 31, 2007, 2006 and 2005 was $9.07, $5.35 and $4.17,
respectively. The total intrinsic value of options exercised during
the years ended December 31, 2007, 2006 and 2005 was $10,812,000, $3,463,000 and
$464,000, respectively. The fair value of options vested during the
years ended December 31, 2007, 2006 and 2005 was $3,520,000, $3,960,000, and
$1,455,000, respectively. As of December 31, 2007, the total
unrecognized compensation expense related to nonvested stock option awards was
$2,435,000, which is expected to be recognized over a weighted-average term of
approximately 2 years.
The
following table summarizes nonvested restricted share activity for the year
ended December 31, 2007:
|
|
Nonvested
Restricted
Shares
|
|
|
Weighted
Average
Grant Date Fair Value
|
|
|
|
|
|
|
|
|
Nonvested
restricted stock at December 31, 2006
|
|
|
428,000 |
|
|
|
$7.10
|
|
Granted
|
|
|
846,000 |
|
|
|
$14.04
|
|
Vested
|
|
|
(324,000 |
) |
|
|
$6.04
|
|
Forfeited
|
|
|
(35,000 |
) |
|
|
$6.22
|
|
Nonvested
restricted stock at December 31, 2007
|
|
|
915,000 |
|
|
|
$13.92
|
|
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
The
weighted-average grant date fair value of nonvested restricted stock granted
during the years ended December 31, 2007, 2006 and 2005 was $14.04, $11.87 and
$5.07, respectively. The fair value of nonvested restricted stock
vested during the years ended December 31, 2007, 2006 and 2005 was $1,954,000,
$215,000, and $0, respectively. As of December 31, 2007, the total
unrecognized compensation expense related to nonvested restricted stock awards
was $9,422,000, which is expected to be recognized over a weighted-average
period of approximately 2 years.
As of
December 31, 2007, 6,073,000 shares of AR-Acacia Technologies common stock are
reserved for issuance under the Plans.
12.
COMMITMENTS AND CONTINGENCIES
Operating
Leases
Acacia
Research Corporation leases certain office space under various operating lease
agreements expiring in 2012. Minimum annual rental commitments for
operating leases of continuing operations having initial or remaining
noncancellable lease terms in excess of one year are as follows (in
thousands):
Year
|
|
|
|
2008
|
|
$ |
868 |
|
2009
|
|
|
903 |
|
2010
|
|
|
939 |
|
2011
|
|
|
977 |
|
2012
|
|
|
163 |
|
Total
minimum lease payments
|
|
$ |
3,850 |
|
Rent
expense related to continuing operations for the years ended December 31, 2007,
2006 and 2005 approximated $749,000, $565,000 and $453,000,
respectively. Rental payments are expensed in the statement of
operations in the period to which they relate. Scheduled rent
increases are amortized on a straight-line basis over the lease
term.
Inventor
Royalties and Contingent Legal Expenses
In
connection with the acquisition of certain patents and patent rights, certain
operating subsidiaries of Acacia Research Corporation executed related
agreements which grant to the former owners of the respective patents or patent
rights, the right to receive inventor royalties based on future net license fee
revenues (as defined in the respective agreements) generated as a result of
licensing the respective patents or patent portfolios. Inventor
royalties paid pursuant to the agreements are expensed in the consolidated
statement of operations in the period that the related license fee revenues are
recognized. In certain instances, pursuant to the terms of the
underlying inventor agreements, costs paid by us to acquire patents are
recoverable from future net revenues. Patent acquisition costs that
are recoverable from future net revenues are amortized over the estimated
economic useful life of the related patents, or as the prepaid royalties are
earned by the inventor, as appropriate, and the related expense is included in
amortization expense in the consolidated statement of operations. Any
unamortized patent acquisition costs recovered from net revenues are expensed in
the period recovered, and included in inventor royalties and contingent legal
fees – patents in the consolidated statement of operations.
In
connection with the licensing and enforcement activities of our operating
subsidiaries, they may retain the services of law firms that specialize in
intellectual property licensing and enforcement and patent law. These
law firms may be retained on a contingent fee basis in which the law firms are
paid on a scaled percentage of any negotiated license fees, settlements or
judgments awarded based on how and when the license fees, settlements or
judgments are obtained. In instances where there are no recoveries
from potential infringers (ie. license fees), no contingent legal fees are paid;
however, our operating subsidiaries may be liable for certain out of pocket
legal costs incurred pursuant to the underlying legal services
agreement. Legal fees advanced by contingent law firms that are
required to be paid in the event that no license recoveries are obtained are
expensed as incurred and included in liabilities in the consolidated balance
sheet.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Patent
Enforcement and Other Litigation
Acacia
Research Corporation is subject to claims, counterclaims and legal actions that
arise in the ordinary course of business. Management believes that
the ultimate liability with respect to these claims and legal actions, if any,
will not have a material effect on our consolidated financial position, results
of operations or cash flows. Operating subsidiaries of Acacia
Research Corporation are often required to engage in litigation to enforce their
patents and patent rights.
Guarantees
and Indemnifications
Certain
of our operating subsidiaries have made guarantees and indemnities under which
they may be required to make payments to a guaranteed or indemnified party, in
relation to certain transactions, including revenue transactions in the ordinary
course of business. In connection with certain facility leases Acacia
Research Corporation and certain of its operating subsidiaries have indemnified
lessors for certain claims arising from the facilities or the
leases. Acacia Research Corporation indemnifies its directors and
officers to the maximum extent permitted under the laws of the State of
Delaware. However, Acacia Research Corporation has a directors and
officers insurance policy that may reduce its exposure in certain circumstances
and may enable it to recover a portion of future amounts that may be payable, if
any. The duration of the guarantees and indemnities varies and, in
many cases is indefinite but subject to statute of
limitations. The majority of guarantees and indemnities do not
provide any limitations of the maximum potential future payments that we could
be obligated to make. To date, we have made no payments related to
these guarantees and indemnities. We estimate the fair value of our
indemnification obligations to be insignificant based on this history and have
therefore, not recorded any liability for these guarantees and indemnities in
the accompanying consolidated balance sheets.
13.
RETIREMENT SAVINGS PLAN AND EXECUTIVE SEVERANCE POLICY
Retirement Savings
Plan. Acacia Research Corporation has an employee savings and
retirement plan under section 401(k) of the Internal Revenue Code (the
“Plan”). The Plan is a defined contribution plan in which eligible
employees may elect to have a percentage of their compensation contributed to
the Plan, subject to certain guidelines issued by the Internal Revenue
Service. Acacia Research Corporation may contribute to the Plan at
the discretion of the board of directors. There were no contributions
made by Acacia Research Corporation during the years ended December 31, 2007,
2006 and 2005.
Executive Severance
Policy. Under Acacia Research Corporation’s Executive
Severance Policy, full-time employees with the title of Senior Vice President
and higher (“Officer”) are entitled to receive certain benefits upon termination
of employment. If employment of an Officer is terminated for other than cause or
other than on account of death or disability, Acacia Research Corporation will
(i) promptly pay to the Officer a lump sum amount equal to the aggregate of (a)
accrued obligations ( i.e., the Officer’s annual base salary through the date of
termination to the extent not theretofore paid and any compensation previously
deferred by the Officer (together with any accrued interest or earnings thereon)
and any accrued vacation pay, and reimbursable expenses, in each case to the
extent not theretofore paid) and (b) three (3) months of the Officer’s base
salary for each full year that the Officer was employed by the Company (the
"Severance Period"), up to a maximum of twelve (12) months of the Officer's base
salary and (ii) provide to the Officer, Acacia Research Corporation paid COBRA
coverage for the medical and dental benefits selected by the Officer in the year
in which the termination occurs, for the duration of the Severance
Period.
14.
SUPPLEMENTAL CASH FLOW INFORMATION
Cash paid
by Acacia Research Corporation for income taxes was not material for the periods
presented. Refer to Note 7 for a summary of the non cash investing
activities in connection with the 2005 GPH Acquisition. Refer to Note
6 for impairment charges, and other non-cash reductions in intangibles during
the periods presented. Refer to Notes 10 and 10A for information
regarding the Split-off of CombiMatrix Corporation.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
15. DISCONTINUED
OPERATIONS - OTHER
In 2005,
Acacia Research Corporation accrued an additional $237,000 (net of minority
interests), respectively, in estimated costs to be incurred in connection with
the discontinued operations of Soundbreak.com (originally ceased operations in
February 2001). The additional accruals relate primarily to certain
noncancellable lease obligations, the inability to sublease the related office
space at rates commensurate with our existing obligations and certain lease
termination costs. The related lease obligations, which were guaranteed by
Acacia Research Corporation, expired in August 2005. The assets and
liabilities related to the discontinued operations of Soundbreak.com at December
31, 2007 and 2006 were not material.
16.
QUARTERLY FINANCIAL DATA (unaudited)
The
following table sets forth unaudited consolidated statements of operations data
for the eight quarters in the period ended December 31, 2007. This information
has been derived from our unaudited condensed consolidated financial statements
that have been prepared on the same basis as the audited consolidated financial
statements and, in the opinion of management, include all adjustments,
consisting of normal recurring adjustments, necessary for a fair statement of
the information when read in conjunction with the audited consolidated financial
statements and related notes thereto. Our quarterly results have been in the
past and may in the future be subject to significant fluctuations. As a result,
we believe that results of operations for interim periods should not be relied
upon as any indication of the results to be expected in any future
periods.
As a
result of the Split-off Transaction (refer to Notes 10 and 10A), we have
disposed of our investment in CombiMatrix Corporation, and therefore, in
accordance with guidance set forth in SFAS No. 144, the statement of operations
data for the four quarters in the period ended December 31, 2007, presented
below, reflect the results of operations for CombiMatrix Corporation as
discontinued operations. The unaudited consolidated statement of operations data
for the four quarters in the period ended December 31, 2006, presented below,
have been reclassified to conform to this presentation.
ACACIA
RESEARCH CORPORATION
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Quarter
Ended
|
|
|
|
Mar.
31,
|
|
|
Jun.
30,
|
|
|
Sep.
30,
|
|
|
Dec.
31,
|
|
|
Mar.
31,
|
|
|
Jun.
30,
|
|
|
Sep.
30,
|
|
|
Dec.
31,
|
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2007
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
2006
|
|
|
|
(In
thousands, except share and per share information)
|
|
|
|
(Unaudited)
|
|
License
fees
|
|
$ |
25,185 |
|
|
$ |
5,865 |
|
|
$ |
9,544 |
|
|
$ |
12,003 |
|
|
$ |
4,717 |
|
|
$ |
14,371 |
|
|
$ |
8,424 |
|
|
$ |
7,313 |
|
Operating
expenses
|
|
|
21,133 |
|
|
|
9,979 |
|
|
|
14,836 |
|
|
|
16,160 |
|
|
|
7,487 |
|
|
|
13,537 |
|
|
|
9,859 |
|
|
|
10,789 |
|
Operating
income (loss)
|
|
|
4,052 |
|
|
|
(4,114 |
) |
|
|
(5,292 |
) |
|
|
(4,157 |
) |
|
|
(2,770 |
) |
|
|
834 |
|
|
|
(1,435 |
) |
|
|
(3,476 |
) |
Interest
and investment income
|
|
|
407 |
|
|
|
650 |
|
|
|
647 |
|
|
|
655 |
|
|
|
359 |
|
|
|
394 |
|
|
|
390 |
|
|
|
381 |
|
Income
(loss) from continuing operations before
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
income
taxes and minority interests
|
|
|
4,459 |
|
|
|
(3,464 |
) |
|
|
(4,645 |
) |
|
|
(3,502 |
) |
|
|
(2,411 |
) |
|
|
1,228 |
|
|
|
(1,045 |
) |
|
|
(3,095 |
) |
Benefit
(provision) for income taxes
|
|
|
(24 |
) |
|
|
(124 |
) |
|
|
(29 |
) |
|
|
(30 |
) |
|
|
32 |
|
|
|
(70 |
) |
|
|
(2 |
) |
|
|
- |
|
Income
(loss) from continuing operations
|
|
|
4,435 |
|
|
|
(3,588 |
) |
|
|
(4,674 |
) |
|
|
(3,532 |
) |
|
|
(2,379 |
) |
|
|
1,158 |
|
|
|
(1,047 |
) |
|
|
(3,095 |
) |
Loss
from discontinued operations - Split-off of CombiMatrix
Corporation
|
|
|
(2,133 |
) |
|
|
(3,667 |
) |
|
|
(2,286 |
) |
|
|
- |
|
|
|
(7,719 |
) |
|
|
(3,501 |
) |
|
|
(4,329 |
) |
|
|
(4,544 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$ |
2,302 |
|
|
$ |
(7,255 |
) |
|
$ |
(6,960 |
) |
|
$ |
(3,532 |
) |
|
$ |
(10,098 |
) |
|
$ |
(2,343 |
) |
|
$ |
(5,376 |
) |
|
$ |
(7,639 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) per common share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acacia
Research - Acacia Technologies stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings
(loss) from continuing operations
|
|
$ |
4,435 |
|
|
$ |
(3,588 |
) |
|
$ |
(4,674 |
) |
|
$ |
(3,532 |
) |
|
$ |
(2,379 |
) |
|
$ |
1,158 |
|
|
$ |
(1,047 |
) |
|
$ |
(3,095 |
) |
Basic
earnings (loss) per share
|
|
|
0.16 |
|
|
|
(0.13 |
) |
|
|
(0.16 |
) |
|
|
(0.12 |
) |
|
|
(0.09 |
) |
|
|
0.04 |
|
|
|
(0.04 |
) |
|
|
(0.11 |
) |
Diluted
earnings (loss) per share
|
|
|
0.14 |
|
|
|
(0.13 |
) |
|
|
(0.16 |
) |
|
|
(0.12 |
) |
|
|
(0.09 |
) |
|
|
0.04 |
|
|
|
(0.04 |
) |
|
|
(0.11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acacia
Research - CombiMatrix stock - Discontinued
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operations
- Split-off of CombiMatrix Corporation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$ |
(2,133 |
) |
|
$ |
(3,667 |
) |
|
$ |
(2,286 |
) |
|
$ |
- |
|
|
$ |
(7,719 |
) |
|
$ |
(3,501 |
) |
|
$ |
(4,329 |
) |
|
$ |
(4,544 |
) |
Basic
and diluted loss per share
|
|
|
(0.04 |
) |
|
|
(0.06 |
) |
|
|
(0.04 |
) |
|
|
- |
|
|
|
(0.20 |
) |
|
|
(0.09 |
) |
|
|
(0.11 |
) |
|
|
(0.10 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average shares:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Acacia
Research - Acacia Technologies stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
27,841,286 |
|
|
|
28,298,328 |
|
|
|
28,739,499 |
|
|
|
29,117,523 |
|
|
|
27,400,857 |
|
|
|
27,507,024 |
|
|
|
27,567,848 |
|
|
|
27,708,902 |
|
Diluted
|
|
|
30,969,991 |
|
|
|
28,298,328 |
|
|
|
28,739,499 |
|
|
|
29,117,523 |
|
|
|
27,400,857 |
|
|
|
30,324,732 |
|
|
|
27,567,848 |
|
|
|
27,708,902 |
|
Acacia
Research - CombiMatrix stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
52,516,220 |
|
|
|
57,143,839 |
|
|
|
59,875,769 |
|
|
|
- |
|
|
|
38,992,402 |
|
|
|
39,018,844 |
|
|
|
40,209,640 |
|
|
|
44,120,736 |
|
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
|
Restated
Certificate of Incorporation as amended(3)
|
3.2
|
Amended
and Restated Bylaws
|
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)
|
10.9
|
Settlement
Agreement dated September 30, 2002, by and among Acacia Research
Corporation, CombiMatrix Corporation, Donald D. Montgomery, Ph.D. and
Nanogen, Inc.(10)
|
10.10
|
Form
of Indemnification Agreement (11)
|
10.11
|
Form
of Subscription Agreement between Acacia Research Corporation and certain
investors (12)
|
10.12
|
Third
Amendment to lease dated January 28, 2002 between Acacia Research
Corporation and the Irvine Company (13)
|
10.13
|
Standby
Equity Distribution Agreement dated June 14, 2006 between Acacia Research
Corporation and Cornell Capital Partners, L.P. (14)
|
10.14
|
Amendment
to Standby Equity Distribution Agreement dated June 14, 2006 between
Acacia Research Corporation and Cornell Capital Partners, L.P.
(15)
|
10.15
|
Manufacturing
and Supply Agreement between Acacia Research Corporation and Furuno
Electric Company, Ltd. Effective July 1, 2006 (16)
|
10.16
|
Placement
Agency Agreement between Acacia Research Corporation and Oppenheimer &
Co., dated December 7, 2006 (17)
|
10.17
|
Form
of Subscription Agreement (17)
|
10.18
|
Form
of Investors Warrant (17)
|
10.19*
|
Employment
Agreement, dated January 28, 2005, by and between Acacia Technologies
Services Corporation, and Dooyong Lee, as amended
|
10.20*
|
Employment
Agreement, dated April 12, 2004, by and between Acacia Media Technologies
Corporation and Edward Treska.
|
10.21
|
Fourth
Amendment to lease dated January 28, 2002 between Acacia Research
Corporation and the Irvine Company
|
10.22
|
Fifth
Amendment to Lease dated January 28, 2002 between Acacia Research
Corporation and the Irvine Company
|
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.
|
(1)
|
Incorporated
by reference from Acacia Research Corporation’s 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 Quarterly Report Amendment
No. 1 on Form 10-Q/A for the period ended June 30, 2006, filed on June 5,
2007.
|
(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.
|
(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 as Appendix D 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.
|
(11)
|
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).
|
(12)
|
Incorporated
by reference from Acacia Research Corporation’s Report on Form 8-K filed
on September 19, 2005 (SEC File No.
000-26068).
|
(13)
|
Incorporated
by reference from Acacia Research Corporation’s Quarterly Report on Form
10-Q filed on May 10, 2006 (SEC File No.
000-26068).
|
(14)
|
Incorporated
by reference from Acacia Research Corporation’s Report on Form 8-K filed
on June 15, 2006 (SEC File No.
000-26068).
|
(15)
|
Incorporated
by reference from Acacia Research Corporation’s Report on Form 8-K filed
on June 22, 2006 (SEC File No.
000-26068).
|
(16)
|
Incorporated
by reference from Acacia Research Corporation’s Quarterly Report on Form
10-Q filed on November 9, 2006 (SEC File No.
000-26068).
|
(17)
|
Incorporated
by reference from Acacia Research Corporation’s Report on Form 8-K filed
on December 13, 2006 (SEC File No.
000-26068).
|
III-2