Item
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Cautionary
Statement
You
should read the following discussion and analysis in conjunction with the
consolidated financial statements and related notes thereto contained in Part I,
Item 1 of this report. The information contained in this Quarterly Report on
Form 10-Q is not a complete description of our business or the risks associated
with an investment in our common stock. We urge you to carefully review and
consider the various disclosures made by us in this report and in our other
reports filed with the Securities and Exchange Commission, or SEC, including our
Annual Report on Form 10-K for the year ended December 31, 2007, filed with the
SEC on March 14, 2008.
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, results of litigation and other circumstances
affecting anticipated revenues and costs. 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 and in our “Risk Factors” incorporated by reference in Part II, Item
1A of this report.
General
As used
in this Form 10-Q, “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, a Delaware corporation, was originally incorporated in
California in January 1993 and reincorporated in Delaware in December
1999.
The
following discussion is based primarily on our unaudited consolidated balance
sheet as of June 30, 2008, and on our unaudited consolidated statements of
operations for the period from January 1, 2008 to June 30, 2008. The discussion
compares the activities for the three and six months ended June 30, 2008, to the
activities for the three and six months ended June 30, 2007. This information
should be read in conjunction with the accompanying unaudited consolidated
financial statements and notes thereto. This information should also
be read in conjunction with the “Risk Factors” referred to in Part II, Item 1A
of this report.
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 95 patent portfolios, which include U.S. patents and certain
foreign counterparts, covering technologies used in a wide variety of
industries.
Other
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 all historical periods 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.
Overview
Our
operating activities during the three and six months ended June 30, 2008 and
2007, 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 for the three months ended June 30, 2008 totaled $7.1
million, as compared to $5.9 million for the three months ended June 30,
2007. License fee revenues recognized for the six months ended June
30, 2008 totaled $16.2 million, as compared to $31.1 million for the six months
ended June 30, 2007.
License
fee revenues for the three and six months ended June 30, 2008 included license
fees from 16 and 40, respectively, new license agreements covering 11 and 16,
respectively, of the Company’s technology licensing programs. During
the six months ended June 30, 2008, we recorded initial license fee revenues for
7 of our technology licensing programs, including our Authorized Spending
Accounts technology, Picture Archiving & Communications System technology,
Video Editing technology, Electronic Message Advertising technology, Remote
Management of Imaging Devices technology, High Quality Image Processing
technology and Wireless Traffic Information technology. Revenues for
the six months ended June 30, 2008 also included fees from the licensing of our
Audio Communications Fraud Detection technology, Credit Card Fraud Protection
technology, DMT® technology, Electronic Address List Management technology,
Image Resolution Enhancement technology, Pop-up Internet Advertising technology,
Portable Storage Devices with Links technology, Remote Management of Imaging
Devices technology, Rule-Based Monitoring technology and Telematics
technology. License fee revenues for the three and six months ended
June 30, 2007 included fees from 20 and 42, respectively, new licensing
agreements, covering 8 and 12, respectively, of our technology licensing
programs. On a consolidated basis, as of June 30, 2008, 35 of our
licensing programs had begun generating licensing revenues, up from 25 licensing
programs as of June 30, 2007.
Management
measures and assesses the performance and growth of the patent licensing and
enforcement businesses conducted by our individual operating subsidiaries based
on consolidated license fee revenues recognized across all of our subsidiaries’
technology licensing and enforcement programs on a trailing twelve-month
basis. Trailing twelve-month revenues were $37.7 million as of June
30, 2008, $36.5 million as of March 31, 2008, $52.6 million as of December 31,
2007, $47.9 million as of September 30, 2007, $46.8 million as of June 30, 2007,
and $34.8 million at December 31, 2006.
Marketing,
general and administrative expenses increased during the three and six months
ended June 30, 2008, as compared to the three and six months ended June 30,
2007, due primarily to the hiring of additional patent licensing, business
development and engineering personnel since the end of the prior year quarter,
an increase in non-cash stock compensation expense, an increase in business
development and licensing related patent research and consulting costs, and an
increase in corporate, general and administrative costs related to ongoing
operations. The increase in operating expenses is reflective of the
continued growth and expansion of our operating subsidiaries’ technology
licensing and enforcement businesses. Inventor royalties expenses and
contingent legal fee expenses increased during the three months ended June 30,
2008, as compared to the three months ended June 30, 2007, and decreased for the
six months ended June 30, 2008, as compared to the six months ended June 30,
2007, primarily due to the related fluctuations in license fee revenues, as
discussed above.
During
the six months ended June 30, 2008, certain of our operating subsidiaries
continued to execute their business strategy in the area of patent portfolio
acquisitions, including the acquisition of, or the acquisition of the rights to,
ten patent portfolios covering a variety of applications. Patent
rights acquired during the six months ended June 30, 2008 included the
following:
|
·
|
Surgical
Catheter. This patented technology generally relates to
surgical devices, such as percutaneously insertable catheters and
cannulas, that are used to access the circulatory system. These devices
can be used in cardiology and other surgical
procedures.
|
|
·
|
Vehicle Maintenance
Systems. This patented technology generally relates to vehicle
maintenance alerts. This technology may be used to alert a driver
that an oil change or other vehicle maintenance should be
performed.
|
|
·
|
Online Ad
Tracking. This patented technology generally relates to
tracking advertising usage on a network such as the Internet. For example,
this technology can be used to track click through rates of web site
advertising.
|
|
·
|
Videoconferencing. This
patented technology relates to videoconferencing systems and services
based on the Internet.
|
|
·
|
Laparoscopic
Surgery. The patented
technology relates to devices used by surgeons to help repair broken
or damaged blood vessels or gastrointestinal organs. The
devices can be used by cardiologists, gastrointestinal
specialists, and other medical
professionals.
|
|
·
|
Microprocessor. This
patented technology relates to the execution of
instructions by a processor and has applications in personal
computers, servers and embedded
processors.
|
|
·
|
Interactive TV.
This patented technology generally relates to recording interactive
TV responses to specific broadcast material from specific users. This
technology can be used by advertisers to evaluate current advertisement
effectiveness and target buyers with future advertisements. This
technology can also be used by interactive television companies to study
subscriber viewing and interactivity
behavior.
|
|
·
|
Internet Radio Advertisement.
This patented technology generally relates
to advertisement replacement for Internet radio. This technology can
be used by radio stations to replace broadcast advertisements for
distribution over the Internet.
|
|
·
|
Improved Printing. This
patented technology generally relates to patents relating to
improving print quality based on stochastic screening. This
technology renders finer detail and eliminates artifacts found in
traditional halftone patterns. High-volume, commercial printers,
newspapers and publishers can use this technology to improve print quality
while cutting cost.
|
|
·
|
Enterprise Content
Management. This patented technology generally relates to
categorization and sharing of information within an organization and can
be used to organize Internet links, electronic files and hardcopy
documents.
|
Refer to
“Liquidity and Capital Resources” below for information regarding the impact of
patent and patent rights acquisitions on the consolidated financial statements
for the periods presented.
As of
June 30, 2008, certain of our operating subsidiaries had several option
agreements with third-party patent portfolio owners regarding the potential
acquisition of additional patent portfolios. Future patent portfolio
acquisitions will continue to expand and diversify our future revenue generating
opportunities.
Critical
Accounting Estimates
Our
unaudited interim financial statements have been prepared in accordance with
accounting principles generally accepted in the United States of America.
Preparation of these statements requires management to make judgments and
estimates. Some accounting policies have a significant impact on amounts
reported in these financial statements. A summary of significant accounting
policies and a description of accounting policies that are considered critical
may be found in our 2007 Annual Report on Form 10-K, filed with the SEC on March
14, 2008, in the Notes to the Consolidated Financial Statements and the Critical
Accounting Estimates section. In addition, refer to Note 2 to the
consolidated interim financial statements included in Part I, Item 1 of this
report.
Acacia
Research Corporation
Comparison
of the Results of Operations for the Three and Six Months Ended June 30, 2008
and 2007
Net
Loss (In thousands)
|
|
For
the Three Months Ended
|
|
|
For
the Six Months Ended
|
|
|
|
June
30, 2008
|
|
|
June
30, 2007
|
|
|
June
30, 2008
|
|
|
June
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income
(loss) from continuing operations
|
|
$ |
(5,041 |
) |
|
$ |
(3,588 |
) |
|
$ |
(9,530 |
) |
|
$ |
847 |
|
Loss
from discontinued operations - Split-off of CombiMatrix Corporation and
other
|
|
|
- |
|
|
|
(3,667 |
) |
|
|
- |
|
|
|
(5,800 |
) |
Net
income (loss)
|
|
$ |
(5,041 |
) |
|
$ |
(7,255 |
) |
|
$ |
(9,530 |
) |
|
$ |
(4,953 |
) |
The
changes in net Income (loss) were primarily due to operating results and
activities as discussed below.
Revenues
(In thousands)
|
|
For
the Three Months Ended
|
|
|
For
the Six Months Ended
|
|
|
|
June
30, 2008
|
|
|
June
30, 2007
|
|
|
June
30, 2008
|
|
|
June
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
License
fees
|
|
$ |
7,116 |
|
|
$ |
5,865 |
|
|
$ |
16,164 |
|
|
$ |
31,050 |
|
License Fees. Revenues for
the three months ended June 30, 2008 included license fees from 16 new licensing
agreements covering 11 of our technology licensing and enforcement programs, as
compared to 20 new licensing agreements covering 8 of our technology licensing
and enforcement programs in the comparable 2007 period. Revenues for
the six months ended June 30, 2008 included license fees from 40 new licensing
agreements covering 16 of our technology licensing and enforcement programs, as
compared to 42 new licensing agreements covering 12 of our technology licensing
and enforcement programs in the comparable 2007 period. 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.
|
Two licensees individually
accounted for 27% and 21% of license fee revenues recognized during the three
months ended June 30, 2008, and two licensees individually
accounted for 15% and 12% of license fee revenues recognized during the six
months ended June 30, 2008. Three licensees individually
accounted for 21%, 14% and 14% of license fee revenues recognized during the
three months ended June 30, 2007, and two licensees individually
accounted for 31% and 20% of license fee revenues recognized during the six
months ended June 30, 2007.
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)
|
|
For
the Three Months Ended
|
|
|
For
the Six Months Ended
|
|
|
|
June
30, 2008
|
|
|
June
30, 2007
|
|
|
June
30, 2008
|
|
|
June
30, 2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Marketing,
general and administrative expenses (including non-cash stock compensation
expense of
$1,938 and $3,767 for the three and six months ended June 30, 2008 and
$1,144 and $1,907 for the three and six months ended June 30,
2007)
|
|
$ |
5,947 |
|
|
$ |
4,190 |
|
|
$ |
12,573 |
|
|
$ |
8,518 |
|
Inventor
royalties and contingent legal fees expense - patents
|
|
|
4,105 |
|
|
|
3,406 |
|
|
|
8,836 |
|
|
|
17,528 |
|
Legal
expenses - patents
|
|
|
1,073 |
|
|
|
1,069 |
|
|
|
2,089 |
|
|
|
2,436 |
|
Marketing, General and
Administrative Expenses. Marketing, general and administrative
expenses include employee compensation and related personnel costs, including
non-cash stock compensation expenses, office and facilities costs, legal
and accounting professional fees, public relations, marketing, stock
administration and other corporate costs, and patent related development,
commercialization, research, consulting and maintenance costs.
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):
|
|
For
the Three Months
|
|
|
For
the Six Months
|
|
|
|
Ended
June 30,
|
|
|
Ended
June 30,
|
|
|
|
2008
vs. 2007
|
|
|
2008
vs. 2007
|
|
|
|
|
|
|
|
|
Addition
of licensing, business development and engineering personnel
|
|
$ |
374 |
|
|
$ |
1,200 |
|
One
time employee severance charges
|
|
|
231 |
|
|
|
(129 |
) |
Foreign
taxes paid on licensing fees
|
|
|
(6 |
) |
|
|
(151 |
) |
Business
development and licensing related patent research and consulting costs
|
|
|
202 |
|
|
|
1,001 |
|
Corporate,
general and administrative costs
|
|
|
162 |
|
|
|
348 |
|
Non-cash
stock compensation expense
|
|
|
794 |
|
|
|
1,860 |
|
Consulting
expenses paid to former CEO of Global Patent Holdings, LLC
|
|
|
- |
|
|
|
(74 |
) |
The net increase in marketing,
general and administrative expense for the periods presented is reflective of
the continued growth and expansion of our operating subsidiaries’ intellectual
property acquisition, licensing and enforcement businesses and related ongoing
operations.
Non-cash
stock compensation charges increased during the three and six months ended June
30, 2008, as compared to the three and six months ended June 30, 2007, primarily
due to the issuance of additional equity based incentive awards to new and
existing employees since May 2007, in accordance with our ordinary stock based
incentive compensation practices. The fluctuation also reflects an
increase in the average fair value of equity based incentive awards expensed in
each period. The average fair value of equity based incentive awards
expensed was approximately $10.51 and $10.70, for the three and six months ended
June 30, 2008, respectively, as compared to approximately $6.16 and $5.80 for
the three and six months ended June 30, 2007, respectively. The fair
value of restricted stock awards to be expensed over the applicable vesting
period on a straight-line basis is determined by the product of the number
of shares granted and the grant date market price of the underlying common
stock.
Inventor Royalties and Contingent
Legal Fees Expense. For the three and six months ended June
30, 2008, inventor royalties expenses were $2.2 million and $4.3 million, as
compared to $1.6 million and $7.1 million for the three and six months ended
June 30, 2007, respectively. Contingent legal fees expenses incurred
during the three and six months ended June 30, 2008 were $1.9 million and $4.6
million, as compared to $1.8 million and $10.4 million during the three and six
months ended June 30, 2007, 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
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 for the three
months ended June 30, 2008 and 2007 and the decrease in inventor royalties
expense and contingent legal fees expense for the six months ended June 30, 2008
and 2007 primarily reflects the fluctuations in license fee revenues for same
periods, as discussed above.
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 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. We expect
patent-related legal expenses to continue to fluctuate quarter to quarter based
on the factors summarized above, in connection with our current and future
patent commercialization and enforcement programs.
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. 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”). 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 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 statements
of operations and statements of cash flows for all historical periods presented
reflect the results of operations and cash flows for CombiMatrix Corporation as
discontinued operations. 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.”
Refer to
Note 7 to the unaudited consolidated financial statements included elsewhere
herein for information regarding the accounting for the Split-off Transaction
and information regarding the revenues and pretax loss included in discontinued
operations for the historical periods presented.
Inflation
Inflation
has not had a significant impact on Acacia Research Corporation and or its
subsidiaries.
Liquidity
and Capital Resources
Acacia
Research Corporation’s consolidated cash and cash equivalents and investments
totaled $45.7 million at June 30, 2008, compared to $51.4 million at
December 31, 2007. Working capital at June 30, 2008 was $40.9 million,
compared to $48.1 million at December 31, 2007. The change in
working capital primarily reflects the impact of cash flows used in continuing
operating and investing activities, as discussed below. In addition,
the change in working capital also reflects the reclass of $2.8 million (par
value) of auction rate securities collateralized by student loans to noncurrent
assets as of June 30, 2008, as discussed below.
The net
increase (decrease) in cash and cash equivalents related to continuing
operations for the periods presented was comprised of the following (in
thousands):
|
|
For
the Six Months Ended
|
|
|
|
June
30, 2008
|
|
|
June
30, 2007
|
|
Net
cash provided by (used in) continuing operations:
|
|
|
|
|
|
|
Operating
activities
|
|
$ |
(3,882 |
) |
|
$ |
3,590 |
|
Investing
activities
|
|
|
4,330 |
|
|
|
(4,073 |
) |
Financing
activities
|
|
|
142 |
|
|
|
3,159 |
|
Cash Flows from Continuing Operating
Activities. Cash receipts from licensees for the six months
ended June 30, 2008 decreased to $13.1 million, from
$29.0 million in the comparable 2007 period, due to the decrease in license
fee revenues, as discussed above. Cash outflows from operations for
the six months ended June 30, 2008 decreased to $17.0 million, as
compared to $25.1 million in the comparable 2007 period, due to the net
decrease in operating expenses, as discussed above, and the impact of the timing
of payments to inventors, attorneys and other vendors. Accounts
receivable increased to $4.4 million at June 30, 2008, compared to $1.4 million
at December 31, 2007.
Cash Flows from Continuing Investing
Activities. The change in net cash flows used in investing activities was
primarily due to net purchases and sales of available-for-sale investments in
connection with ongoing short-term cash management activities during the periods
presented. Net cash outflows from investing activities for
the six months ended June 30, 2008 also included patent related acquisition
costs totaling $1.7 million, as compared to $1.4 million in the comparable 2007
period.
Cash Flows from Continuing Financing
Activities. Net cash flows provided by financing activities
during the six months ended June 30, 2008 included proceeds from the exercise of
Acacia Research Corporation common stock options totaling $142,000, as compared
to $3.2 million for the comparable 2007 period.
Management
believes that the cash and cash equivalent balances, investments, anticipated
cash flow from operations and other external sources of available credit, will
be sufficient to meet Acacia Research Corporation and its subsidiaries’ cash
requirements through at least July 2009 and for the foreseeable
future. We may however encounter unforeseen difficulties that may
deplete our capital
resources more rapidly than anticipated, including those set forth in Acacia
Research Corporation’s Risk Factors on page 6 of our Annual Report on Form 10-K
for the year ended December 31, 2007, filed with the SEC on March 14,
2008. Any efforts to seek additional funding could be made through
equity, debt or other external financing; however 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 business may suffer.
Auction Rate
Securities. As of June 30, 2008, we held investment grade
auction rate securities with a par value totaling $4.95 million. Our auction
rate securities consist of high credit quality 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 carry credit ratings of
AAA. Auction rate securities are classified as available-for-sale
securities and reflected at fair value in accordance with the requirements of
SFAS No. 157.
Historically,
our auction rate securities were recorded at cost, which approximated their fair
market value due to their variable interest rates, which typically reset every 7
to 35 days, despite the long-term nature of their stated contractual maturities.
The Dutch auction process that resets the applicable interest rate at
predetermined calendar intervals is intended to provide liquidity to the holder
of auction rate securities by matching buyers and sellers within a market
context enabling the holder to gain immediate liquidity by selling such
interests at par or rolling over their investment. If there is an imbalance
between buyers and sellers, the risk of a failed auction exists. Due
to recent liquidity issues in the global credit and capital markets, these
securities experienced several failed auctions since February
2008. In such case of a failure, the auction rate securities continue
to pay interest at the maximum rate in accordance with their terms; however, we
may not be able to access the par value of the invested funds until a future
auction of these investments is successful, the security is called by the
issuer, or a buyer is found outside of the auction process.
As a
result of the recent failed auctions, there are no reliable current observable
market prices available for these securities for purposes of establishing fair
market value as of June 30, 2008. As a result, the fair values of
these securities are estimated utilizing an analysis of certain unobservable
inputs and by reference to a discounted cash flow analysis as of June 30,
2008. These analyses considered, among other items, the underlying
structure of each security, the collateral underlying the security investments,
the creditworthiness of the counterparty, the present value of future principal
and contractual interest payments discounted at rates considered to be
reflective of current market conditions, consideration of the probabilities of
default, continued auction failure, or repurchase or redemption at par for each
period, and estimates of the time period over which liquidity related issues
will be resolved. Observable market data for instruments with similar
characteristics to our auction rate securities was also considered when
possible.
At June
30, 2008, the par value of auction rate securities collateralized by student
loan portfolios totaled $2.8 million. As a result of the liquidity
issues associated with the failed auctions, we estimate that the fair value of
these auction rate securities no longer approximates their par
value. Due to the estimate that the market for these student loan
collateralized instruments may take in excess of twelve months to fully recover,
we have classified these investments as noncurrent in the accompanying June 30,
2008 unaudited Consolidated Balance Sheet. In addition, as a result
of the analysis described above and the estimate that it will take in excess of
twelve months for the market for student loan collateralized instruments to
recover, we recorded an other-than-temporary loss of $263,000 in the
accompanying unaudited statements of operations for the six months ended June
30, 2008, for our student loan collateralized instruments,. The
balance of our auction rate securities, with a par value totaling $2.15 million,
are issued by high credit quality closed-end investment companies, for which the
market has recently had a number of successful auctions and or redemptions at
par value. Management believes that the fair value of our auction
rate securities issued by closed-end investment companies continue to
approximate their par value and are appropriately classified as current
assets in the accompanying consolidated balance sheet as of June 30,
2008.
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. If it is determined that any future valuation adjustments
are other-than-temporary, we would record additional charges to earnings as
appropriate. Any future fluctuation in fair value related to these
instruments that are deemed to be temporary, would be recorded to accumulated
other comprehensive income.
Off-Balance
Sheet Arrangements
We have
not entered into off-balance sheet financing arrangements, other than operating
leases. We have no significant commitments for capital expenditures
in 2008. We have no committed lines of credit or other committed
funding or long-term debt. The following table lists our material
known future cash commitments as of June 30, 2008:
|
|
Payments
Due by Period (in thousands)
|
|
Contractual
Obligations
|
|
|
|
|
Remaining
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013
and
|
|
|
Total
|
|
|
2008
|
|
|
2009
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
Thereafter
|
|
Operating
leases
|
|
|
$3,345
|
|
|
|
$363
|
|
|
|
$903
|
|
|
|
$939
|
|
|
|
$977
|
|
|
|
$163
|
|
|
|
$
-
|
|
Total
contractual cash obligations
|
|
|
$3,345
|
|
|
|
$363
|
|
|
|
$903
|
|
|
|
$939
|
|
|
|
$977
|
|
|
|
$163
|
|
|
|
$
-
|
|
FIN 48
Liability. As of June 30, 2008, the liability for uncertain
tax positions, associated primarily with state income taxes, was $72,000, 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 and Note 8 to the Acacia Research Corporation consolidated financial
statements included in Part I, Item 1 of this report.
Item
3. 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 June 30, 2008, our investments were
comprised of money market funds and auction rate securities. A hypothetical 100
basis point increase in interest rates would not have a material impact on the
fair value of our available-for-sale securities as of June 30,
2008. Refer to Part II. Item 1A. “Risk Factors,” Part I. Item 2.
“Liquidity and Capital Resources,” and Note 8 to the Acacia Research Corporation
consolidated financial statements included in this report for additional
information.
Item
4. CONTROLS AND PROCEDURES
Evaluation
of Disclosure Controls and Procedures
(a) 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 quarterly 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.
Changes
in Internal Controls
(b) There
were no changes in our internal control over financial reporting that occurred
during our last fiscal quarter (the quarter ended June 30, 2008) that have
materially affected, or are reasonably likely to materially affect, our internal
control over financial reporting.
PART
II--OTHER INFORMATION
Item
1. LEGAL PROCEEDINGS
Refer to
Note 6 to the Acacia Research Corporation consolidated financial statements,
contained in Part I, Item 1 of this report, and hereby incorporated by
reference.
Item
1A. RISK FACTORS
Our
annual report on Form 10-K for the year ended December 31, 2007, filed with
the Securities and Exchange Commission on March 14, 2008, contains a full
discussion of our risk factors. There have been no material changes to the risk
factors disclosed in our Form 10-K for the year ended December 31, 2007,
except for the risk factor set forth below.
OUR
INVESTMENTS IN AUCTION RATE SECURITIES ARE SUBJECT TO RISKS, INCLUDING THE
CONTINUED FAILURE OF FUTURE AUCTIONS, WHICH MAY CAUSE US TO INCUR LOSSES OR HAVE
REDUCED LIQUIDITY.
At June
30, 2008, our investments in marketable securities include certain auction rate
securities. Our auction rate securities are investment grade quality and were in
compliance with our investment policy when purchased. Historically,
our auction rate securities were recorded at cost, which approximated their fair
market value due to their variable interest rates, which typically reset every 7
to 35 days, despite the long-term nature of their stated contractual maturities.
The Dutch auction process that resets the applicable interest rate at
predetermined calendar intervals is intended to provide liquidity to the holder
of auction rate securities by matching buyers and sellers within a market
context enabling the holder to gain immediate liquidity by selling such
interests at par or rolling over their investment. If there is an imbalance
between buyers and sellers the risk of a failed auction exists. Due
to recent liquidity issues in the global credit and capital markets, these
securities experienced several failed auctions since February
2008. In such case of a failure, the auction rate securities continue
to pay interest, at the maximum rate, in accordance with their terms, however,
we may not be able to access the par value of the invested funds until a future
auction of these investments is successful, the security is called by the issuer
or a buyer is found outside of the auction process.
At June
30, 2008, the par value of auction rate securities collateralized by student
loan portfolios totaled $2.8 million. As a result of the liquidity
issues associated with the failed auctions, we estimate that the fair value of
these auction rate securities no longer approximates their par
value. Due to the estimate that the market for these student loan
collateralized instruments may take in excess of twelve months to fully recover,
we have classified these investments as noncurrent in the accompanying June 30,
2008 unaudited Consolidated Balance Sheet. In addition, as a result
of our analysis of the estimated fair value of our student loan collateralized
instruments, as described at Note 8 to the consolidated financial statements
included elsewhere herein, and the estimate that it will take in excess of
twelve months for the market for student loan collateralized instruments to
recover, we have recorded an other-than-temporary loss of $263,000 for our
student loan collateralized instruments in the accompanying unaudited
consolidated statements of operations for the six months ended June 30,
2008. The balance of our auction rate securities, with a par value
totaling $2.15 million, are issued by high credit quality closed-end investment
companies, for which the market has recently had a number of successful auctions
and or redemptions at par value. Management believes that the fair
value of our auction rate securities issued by closed-end investment companies
continue to approximate their par value and are appropriately classified as
current assets in the accompanying consolidated balance sheet as of June 30,
2008.
Given the
deteriorating credit markets, and the increased incidence of failure within the
auction market since February 2008, there can be no assurance as to when we
would be able to liquidate a particular issue. Furthermore, if these
market conditions were to persist despite our ability to hold such investments
until maturity, we may be required to record 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. Refer to
Note 8 in our accompanying Consolidated Financial Statements for additional
information about our investments in auction rate securities and the
implementation of SFAS No. 157, Fair Value Measurements.
Item
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
We held
our annual meeting of stockholders on May 20, 2008 in Newport Beach,
California.
(i) At
the annual meeting, the following persons were elected directors for a
three-year term ending in 2011 based on the voting results below:
Name
|
For
|
Withheld
|
Edward
W. Frykman
|
20,340,929
|
1,185,719
|
William
S. Anderson
|
20,932,008
|
594,640
|
The
following persons’ terms as directors continued after the annual meeting and end
in 2009: Paul R. Ryan, and G. Louis Graziadio.
The
following persons' terms as directors continued after the annual meeting and end
in 2010: Robert L. Harris, II and Fred A.
deBoom
(ii) The
stockholders approved the amendment and restatement of the Company’s
Certificate of Incorporation to eliminate references to Acacia
Research-CombiMatrix common stock (“AR-CombiMatrix stock”) and all provisions
relating to the rights and obligations pursuant to the AR-CombiMatrix
stock. As a result, the name of Acacia Research-Acacia Technologies
stock changed to common stock, and it is the only class of common stock of
Acacia Research Corporation outstanding.
For
|
Against
|
Abstain
|
21,228,244
|
288,221
|
10,183
|
(iii )
The stockholders also ratified the appointment of Grant Thornton LLP as our
independent registered public accounting firm for the fiscal year ending
December 31, 2008. The voting results were as follows:
For
|
Against
|
Abstain
|
21,384,700
|
132,630
|
9,318
|
Item
6. EXHIBITS
3.1
|
Amended
and Restated Certificate of Incorporation filed with the California
Secretary of State on June 3, 2008 (1)
|
31.1
|
Certifications
of the Chief Executive Officer provided pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of
1934
|
31.2
|
Certifications
of the Chief Financial Officer provided pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of
1934
|
32.1
|
Certifications
of the Chief Executive Officer provided pursuant to Rule
13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350
|
32.2
|
Certifications
of the Chief Financial Officer provided pursuant to Rule
13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350
|
___________________
|
(1)
|
Incorporated
by reference to Acacia Research Corporation’s Report on Form 8-K filed
with the SEC on June 5, 2008 (SEC File No.
000-026068).
|
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the Registrant has
duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized.
|
ACACIA
RESEARCH CORPORATION
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Paul
R. Ryan |
|
|
|
Paul
R. Ryan
Chief
Executive Officer
(Authorized
Signatory)
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Clayton
J. Haynes |
|
|
|
Clayton
J. Haynes
Chief
Financial Officer /Treasurer
(Principal
Financial Officer)
|
|
Date: July
30, 2008
EXHIBIT
INDEX
EXHIBIT
NUMBER
|
EXHIBIT |
|
|
3.1
|
Amended
and Restated Certificate of Incorporation filed with the California
Secretary of State on June 3, 2008 (1)
|
31.1
|
Certifications
of the Chief Executive Officer provided pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of
1934
|
31.2
|
Certifications
of the Chief Financial Officer provided pursuant to Rule
13a-14(a)/15d-14(a) of the Securities Exchange Act of
1934
|
32.1
|
Certifications
of the Chief Executive Officer provided pursuant to Rule
13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350
|
32.2
|
Certifications
of the Chief Financial Officer provided pursuant to Rule
13a-14(b)/15d-14(b) of the Securities Exchange Act of 1934 and 18 U.S.C.
Section 1350
|
___________________
|
(1)
|
Incorporated
by reference to Acacia Research Corporation’s Report on Form 8-K filed
with the SEC on June 5, 2008 (SEC File No.
000-026068).
|
23