-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, LjjcOVy3R2MXWPslF6b25Vx5UvnRED0Jki3VimAQloECB37MnETiE4Vw4kX1b5kw kBZMENvHWDAmoFYjSIDiow== 0000929624-99-002034.txt : 19991125 0000929624-99-002034.hdr.sgml : 19991125 ACCESSION NUMBER: 0000929624-99-002034 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 11 FILED AS OF DATE: 19991124 FILER: COMPANY DATA: COMPANY CONFORMED NAME: DIGIMARC CORP CENTRAL INDEX KEY: 0001089443 STANDARD INDUSTRIAL CLASSIFICATION: WHOLESALE-PAPER AND PAPER PRODUCTS [5110] IRS NUMBER: 931170830 STATE OF INCORPORATION: OR FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: S-1/A SEC ACT: SEC FILE NUMBER: 333-87501 FILM NUMBER: 99764508 BUSINESS ADDRESS: STREET 1: ONE CENTERPOINE DR STREET 2: STE 500 CITY: LAKE OSWEGO STATE: OR ZIP: 97035 BUSINESS PHONE: 5039682908 MAIL ADDRESS: STREET 1: ONE CENTERPOINTE DR STREET 2: STE 500 CITY: LAKE OSWEGO STATE: OR ZIP: 97035 S-1/A 1 AMENDMENT NO. 3 TO FORM S-1 As filed with the Securities and Exchange Commission on November 24, 1999 Registration No. 333-87501 - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------- AMENDMENT NO. 3 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ---------------- DIGIMARC CORPORATION (Exact Name of Registrant as Specified in Its Charter) Oregon 7370 93-1170830 (State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer Incorporation or Organization) Classification Code Number) Identification Number)
One Centerpointe Drive, Suite 500 Lake Oswego, Oregon 97035-8615 (503) 968-2908 (Address and telephone number of principal executive offices and principal place of business) ---------------- Bruce Davis President and Chief Executive Officer Digimarc Corporation One Centerpointe Drive, Suite 500 Lake Oswego, Oregon 97035-8615 (503) 968-2908 (Name, Address, and Telephone Number of Agent for Service) ---------------- Copies to: Gavin B. Grover, Esq. Alan K. Austin, Esq. James H. Laws, Esq. Brian C. Erb, Esq. S. David Goldenberg, Esq. James C. Creigh, Esq. Charles C. Kim, Esq. David A. King, Esq. Morrison & Foerster LLP Wilson Sonsini Goodrich & Rosati 425 Market Street Professional Corporation San Francisco, California 94105-2482 650 Page Mill Road Palo Alto, California 94304
---------------- Approximate date of commencement of proposed sale to the public: As soon as practicable after this Registration Statement becomes effective. If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933 check the following box. [_] If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. [_] If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. [_] If delivery of the prospectus is expected to be made pursuant to Rule 434, please check the following box. [_] CALCULATION OF REGISTRATION FEE - ------------------------------------------------------------------------------- - -------------------------------------------------------------------------------
Title of Each Class of Proposed Maximum Proposed Maximum Securities Amount to be Offering Price Aggregate Offering Amount of to be Registered Registered Per Share Price(1)(2) Registration Fee(3) - --------------------------------------------------------------------------------------------- Common Stock, $0.001 par value............. 3,450,000 $15.00 51,750,000 $14,386.50
- ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- (1) Includes shares of common stock that the Underwriters have the option to purchase to cover over-allotments, if any. (2) Estimated solely for the purpose of determining the registration fee pursuant to Rule 457(a) promulgated under the Securities Act. (3) $12,468.30 previously paid. ---------------- The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment that specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933 or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine. - ------------------------------------------------------------------------------- - ------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell these securities, and we are not soliciting offers to buy these + +securities, in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED NOVEMBER 24, 1999 3,000,000 Shares Common Stock Digimarc Corporation is offering 3,000,000 shares of its common stock. This is our initial public offering and no public market currently exists for our shares. Our common stock has been approved for quotation on the Nasdaq National Market under the symbol "DMRC." We anticipate that the initial public offering price will be between $13.00 and $15.00 per share. ------------ Investing in our common stock involves risks. See "Risk Factors" beginning on page 4. ------------
Per Share Total ----- ----- Public Offering Price............................................... $ $ Underwriting Discounts and Commissions.............................. $ $ Proceeds to Digimarc................................................ $ $
The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Digimarc has granted the underwriters a 30-day option to purchase up to an additional 450,000 shares of common stock to cover any over-allotments. ------------ Robertson Stephens Hambrecht & Quist U.S. Bancorp Piper Jaffray The date of this Prospectus is , 1999. [THE DIGIMARC CORPORATION LOGO WITH THE TEXT "DIGITAL WATERMARKING."] [OUR MEDIABRIDGE TRADEMARK WITH A SERIES OF PHOTOGRAPHS DEPICTING THE PROCEDURE THROUGH WHICH A USER IS CONNECTED TO AN INTERNET DESTINATION USING OUR MEDIABRIDGE APPLICATION, CONNECTED BY ARROWS AND A PHOTOGRAPH OF AN INDIVIDUAL USING OUR MEDIABRIDGE APPLICATION THAT INCLUDES THE FOLLOWING TEXT: "BRIDGING TRADITIONAL AND ONLINE MEDIA," "PRINTED MATERIALS BECOME PORTALS TO THE INTERNET."] You should rely only on the information contained in this prospectus. We have not authorized anyone to provide you with information different from that contained in this prospectus. We are offering to sell, and seeking offers to buy, shares of common stock only in jurisdictions where offers and sales are permitted. The information contained in this prospectus is accurate only as of the date of this prospectus, regardless of the time of delivery of this prospectus or of any sale of our common stock. Until , 1999, all dealers that buy, sell or trade our common stock, whether or not participating in this offering, may be required to deliver a prospectus. This requirement is in addition to the dealers' obligation to deliver a prospectus when acting as underwriters and with respect to their unsold allotments or subscriptions. ---------------- TABLE OF CONTENTS
Page ---- Summary.................................................................. 1 Risk Factors............................................................. 4 You Should Not Rely on Forward-Looking Statements Because They Are Inherently Uncertain.................................................... 14 Use of Proceeds.......................................................... 15 Dividend Policy.......................................................... 15 Dilution................................................................. 16 Capitalization........................................................... 17 Selected Financial Data.................................................. 18 Management's Discussion and Analysis of Financial Condition and Results of Operations........................................................... 19 Business................................................................. 32 Management............................................................... 48 Related Party Transactions............................................... 58 Principal Stockholders................................................... 60 Description of Capital Stock............................................. 62 Shares Eligible for Future Sale.......................................... 66 Underwriting............................................................. 68 Legal Matters............................................................ 70 Experts.................................................................. 70 Where You Can Find Additional Information................................ 71 Index to Financial Statements............................................ F-1
---------------- "Digimarc" and "MarcSpider" are registered trademarks, and "Paper-as-Portal," "MarcCentre" and "MediaBridge" are trademarks, of Digimarc Corporation. This prospectus also contains other product names, trade names and trademarks of Digimarc Corporation and of other organizations. i SUMMARY You should read the following summary together with the more detailed information in this prospectus, including risk factors, regarding our company and the common stock being sold in this offering. Digimarc Corporation Digimarc is a leading provider of patented digital watermarking technologies that allow imperceptible digital code to be embedded in the printed or digital versions of visual content, such as magazine ads, catalogs and product packages and valuable documents like financial instruments, passports and event tickets. In addition to code which can be embedded within various types of visual content, our technologies include reader software which, as a resident application on PCs, allows PCs to recognize these codes. We believe these technologies have many potential uses. We are developing products and services to address what we believe are our two largest near-term market opportunities: the deterrence of digital counterfeiting or piracy and the enhancement of Internet access and navigation. Recent advances in multimedia, digital imaging and printing technologies have given computer users at every level of sophistication access to highly advanced image manipulation and reproduction capabilities. This access has led to new challenges in the areas of document security, counterfeiting and piracy deterrence by allowing virtually any user to create expert-quality copies of traditional and digital content. At the same time advances in technology have introduced millions of people to the Internet, the growth of the Internet has allowed the Web to become a global distribution channel for unauthorized reproductions of proprietary content. Our reader software can render scanners, digital cameras and PCs ineffective for use in duplicating or distributing proprietary content into which our digital code has been embedded. One area of critical concern in the field of digital counterfeiting is the protection of currency where the cost of failure is extremely high and the standards for imperceptibility and reliability are equally important. Digimarc has been awarded a multi-year contract by a global consortium of leading central banks to develop a system to deter the use of PCs in the counterfeiting of currency. We believe the same core tchnologies can be used to enhance e-commerce. The increasing volume of Internet content and number of Web destinations has made Internet navigation and information retrieval more challenging. Despite the availability of numerous search methods, research indicates that users often experience difficulty when retrieving information on desired products or services, causing a loss of potential e-commerce revenue. To address these issues, we are also using our technologies to develop products we call Paper- as-Portal applications, the first of which, named MediaBridge, is planned for release in the second half of 2000. This application is intended to enable imperceptible digital code to be embedded within magazine advertisements, articles, direct mailers, coupons, catalogs, bank cards and business cards. When recognized by PC cameras enabled by our patented reader software, the code will automatically launch the user to the specific Internet destination chosen by the producer of the printed content. In this way, we believe that MediaBridge will deliver more efficient Internet navigation and access to consumers and more effective means for print advertisers to link readers directly to a targeted e-commerce point-of-sale. We have entered letters of Intent with PC camera vendors such as Logitech and 3Com and agreements with leading magazines and magazine publishers like Wired Magazine and Hearst which we believe will further our MediaBridge initiative. 1 We believe that our applications offer strong advantages over other image commerce and secure documents approaches because our digital watermark codes are imperceptible, persistent and format-independent, allowing them to operate in both analog and digital environments. Our applications are relevant to a wide variety of Internet, computing and communications solutions because virtually any visual content can contain our imperceptible digital watermarking code. We will continue to address both the security and the access problems increasingly arising as the world grows more dependent on multimedia computing and the Internet. Our core goals are to establish our patented technologies as basic components of industry standards for controlling the use of visual content and to establish Paper-as-Portal as a leading means of Internet access and navigation. We intend to achieve these objectives by encouraging widespread adoption of our reader software through marketing and strategic relationships with leading publishers or advertisers and leading manufacturers of PC cameras or other personal computer peripheral devices. To this end, we are working with Logitech and 3Com to bundle our reader software into their PC camera software packages. We also plan to continue to develop new applications that rely upon our technology for other potential applications customers in communications, image processing and electronic commerce. We believe that successful new applications would further increase demand for our reader technology. We intend to maintain our technology leadership in digital watermarking through continued innovation and rigorous intellectual property development and protection. By broadly licensing our technologies for deterring copyright infringement, counterfeiting and piracy, and for linking digital content with the physical world, we intend to build long-term demand for our technologies and promote public awareness of our brand. We derived 51% of our total revenue in 1998 and 92% of our total revenue for the nine months ended September 30, 1999 from an agreement with a consortium of leading central banks, and any change in, or early termination of, our relationship with this customer could seriously harm our business. We anticipate that this agreement will account for most of our revenue until we are able to generate revenue from the introduction of other new products and services that we are currently developing, including MediaBridge. We are not profitable and we expect to continue to incur losses for the foreseeable future. We were incorporated in Oregon on January 3, 1995, and we intend to reincorporate in Delaware prior to the closing of this offering. Our principal executive offices are located at One Centerpointe Drive, Suite 500, Lake Oswego, Oregon 97035-8615, and our telephone number is (503) 968-2908. Our Web site is located at www.digimarc.com. Information contained on our Web site does not constitute part of this prospectus. Unless otherwise indicated, the information in this prospectus assumes our one-for-two reverse stock split to be effected prior to the closing of this offering, the automatic conversion of all outstanding shares of preferred stock into 5,584,786 shares of common stock effective automatically upon the closing of this offering and no exercise by the underwriters of their option to purchase additional shares of common stock. 2 The Offering Common stock offered............................ 3,000,000 shares Common stock to be outstanding after this offering....................................... 10,983,255 shares Use of proceeds................................. For repayment of indebtedness and for general corporate purposes, including working capital, expansion of our sales and marketing efforts, product development, expansion of our customer support organization and capital expenditures. See "Use of Proceeds." Proposed Nasdaq National Market Symbol.......... DMRC
The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of September 30, 1999 and excludes: . 30,000 shares of common stock issued subsequent to September 30, 1999 upon exercise of options; . 2,262,461 shares of common stock issuable upon exercise of options outstanding as of October 31, 1999 at a weighted average exercise price of $1.20 per share; . 2,235,606 shares of common stock reserved for future issuance under our 1995 stock incentive plan, our 1999 stock incentive plan and our 1999 employee stock purchase plan; and . 150,000 shares of common stock issuable upon exercise of warrants outstanding as of October 31, 1999 at an exercise price equal to the initial public offering price. Summary Financial Data The pro forma basic and diluted net loss per share data in the statement of operations data below and the pro forma data in the balance sheet data below reflect the automatic conversion of all outstanding preferred stock into common stock effective upon the closing of this offering. The pro forma as adjusted data reflects adjustments to the pro forma data to show our receipt of the estimated net proceeds of $38.0 million from the sale of 3,000,000 shares of our common stock in this offering at an assumed initial public offering price of $14.00 per share, after deducting estimated underwriting discounts and commissions and estimated offering expenses.
Nine Months Ended Period from September 30, January 3, 1995 Year Ended December 31, (unaudited) (inception) to ------------------------------- -------------------- December 31, 1995 1996 1997 1998 1998 1999 ----------------- --------- --------- --------- --------- --------- (in thousands, except share and per share data) Statement of Operations Data: Total revenue........... $ -- $ 236 $ 186 $ 984 $ 691 $4,185 Gross margin............ -- 229 60 (596) (177) 2,309 Total operating expenses............... 840 1,900 3,999 2,890 2,201 3,142 Operating loss.......... (840) (1,671) (3,939) (3,486) (2,378) (833) Net loss................ $ (874) $(1,578) $(3,979) $(3,442) $(2,321) $ (824) Basic and diluted net loss per share......... $(1.01) $ (0.71) $ (1.88) $ (1.50) $ (1.02) $ (0.35) Weighted average shares used in basic and diluted net loss per share.................. 869,478 2,226,519 2,120,477 2,288,442 2,284,642 2,342,732 Pro forma basic and diluted net loss per share.................. $ (0.53) $ (0.12) Weighted average shares used in pro forma basic and diluted net loss per share.............. 6,447,228 6,793,518
September 30, 1999 (unaudited) ------------------------------ Pro Forma Actual Pro Forma As Adjusted ------- --------- ----------- Balance Sheet Data: Cash and cash equivalents....................... $ 8,039 $ 8,039 $46,031 Working capital................................. 7,219 7,219 45,211 Total assets.................................... 11,274 11,274 -- Long term obligations, net of current portion... 182 182 182 Redeemable convertible preferred stock.......... 17,266 -- -- Total stockholders' equity (deficit)............ (9,753) 7,513 45,505
3 RISK FACTORS An investment in our shares involves risks and uncertainties. You should carefully consider the factors described below before making an investment in our securities. In addition, you should keep in mind that the risks described below are not the only risks that we face. The risks described below are the risks that we currently believe are material risks of our business, the industry in which we compete and this offering. However, risks not presently known to us, or risks that we currently believe are immaterial, may also harm our business. Our business, operating results and financial condition could be adversely affected by any of the following risks. If we are adversely affected by these risks, then the trading price of our common stock could decline and you could lose all or part of your investment. Risks Related to Our Business We have a limited operating history and are subject to the risks encountered by early-stage companies We incorporated in January 1995. Accordingly, we have a limited operating history, and our business and prospects must be considered in light of the risks and uncertainties to which early-stage companies in new and rapidly evolving markets, such as digital watermarking, are exposed. These risks include the following: . our developing revenue models and anticipated products and services may fail to attract or retain customers; . the intense competition and rapid technological change in our industry could adversely affect the market's acceptance of our products and services; . we may be unable to build and maintain our brand; . we may be unable to develop and maintain the strategic relationships upon which we currently rely for our revenue; and . our quarterly operating results may fluctuate significantly. We cannot assure you that our business strategy will be successful or that we will successfully address these risks and the risks described below. We have a history of losses, expect future losses and cannot assure you that we will achieve profitability We have incurred significant net losses since inception. We incurred net losses of $874,000 in 1995, $1.6 million in 1996, $4.0 million in 1997, $3.4 million in 1998 and $824,000 in the nine months ended September 30, 1999. We have not been profitable and cannot assure you that we will realize sufficient revenue to achieve profitability. Our accumulated deficit as of September 30, 1999 was approximately $10.8 million. We anticipate that we will increase our research and development, sales and marketing, product development and general and administrative expenses in the remainder of 1999 and for the foreseeable future. In order to achieve profitability, we will need to generate significantly higher revenue than we have in prior years. Even if we ultimately do achieve profitability, we may not be able to sustain or increase our profitability. If our revenue grows more slowly than we anticipate, or if our operating expenses exceed our expectations, our operating results will be harmed. 4 Most of our significant revenue models are under development, and the corresponding anticipated products and services may fail to attract or retain customers Our business involves embedding digital watermarks in traditional and digital media, including secure documents, images on the Internet and video merchandise. Our current applications include image commerce and counterfeiting and piracy deterrence. To date, our revenue stream has been based primarily on a combination of development, consulting, subscription and license fees from copyright communication, and in recent periods, from secure document applications. In the future, we anticipate that an increasing share of our revenue will be from sales of our Paper-as-Portal applications, such as MediaBridge, and sales of other applications of our digital watermarking technologies. We have not fully developed a revenue model for our Paper-as- Portal products, including MediaBridge, or for our other future applications. In addition, because we have not yet sold these products in the marketplace and because these products will be sold in new and undeveloped markets, we cannot be certain that the pricing structure and product marketing that we are currently developing for these new products will be accepted. We must complete the development of MediaBridge and obtain revenue from its commercial launch in order to meet our revenue objectives. If we do not successfully develop, market and support MediaBridge, it is likely that our future revenue would fall below our targeted objectives. Any shortfall in revenue from MediaBridge or our other future applications could reduce the trading price of our common stock. We believe that it is too early to determine whether revenue from these initiatives will meet our objectives, and whether the revenue models that we are currently developing and may develop in the future will be successful or require changes after adoption. We cannot assure you that our anticipated products and services will be able to compete effectively against other alternative technologies in our target markets or that we will be able to compete effectively against current or future digital watermark companies in terms of price, performance, applications or other features of their technologies. In addition, as we develop models for generating revenue, they may not be sustainable over time, and as a result, our operating results and financial condition may be harmed. Because we currently receive 92% of our revenue from a single customer, the loss of this customer would seriously harm our business, operating results and financial condition We have derived a substantial portion of our revenue from a consortium of leading central banks with whom we have a development and license agreement related to banknote counterfeit deterrence. Revenue from products and services provided to this significant customer accounted for 51% of our total revenue in 1998 and 92% of our total revenue for the first nine months of 1999. We anticipate that this relationship will account for most of our revenue until we are able to generate revenue from the introduction of other new products and services that we are developing, including MediaBridge. The customer has a discretionary right of early termination with respect to the agreement. Unless the customer exercises this right, the Company expects revenues under the agreement to continue at or above current levels for the next two years. Under the terms of our agreement with this customer, we are obliged to keep the identity of the participating banks, design of the system and timetable for deployment confidential. Any change in our relationship with this customer, including any actual or alleged breach of the contract by either party or the early termination of, or any other material change in, the agreement would seriously harm our business, operating results and financial condition. 5 Our future growth will depend on the successful implementation of our solutions by third-party providers We are currently developing MediaBridge and our other Paper-as-Portal technologies and applications. These technologies and other applications and services which we plan on providing in the future will rely on the successful implementation of our product solutions, including our reader technology, by third party software developers and original equipment manufacturers. We anticipate maintaining and entering into new agreements with major third-party vendors to create and promote products that incorporate, embed, integrate or bundle our technologies. If we fail to obtain partners that will incorporate, embed, integrate or bundle our technologies or these partners are unsuccessful in these efforts, our business, operating results and financial condition could be seriously harmed. In addition, if our technologies do not perform according to market expectations, our business will be seriously harmed. Our future quarterly operating results may not meet analysts' expectations and may fluctuate significantly in the future, which could adversely affect our stock price We expect that our quarterly operating results will fluctuate significantly in the future. Accordingly, you should not rely on quarter-to-quarter comparisons of our historical results as an indication of future performance. If our quarterly operating results do not meet the expectations of analysts or investors, the market price of our common stock will likely decline. Our quarterly results may fluctuate in the future as a result of many factors, some of which are outside our control, including: . the timing, introduction and successful commercialization of our new products and services, including MediaBridge; . the timing and success of our brand-building and marketing campaigns; . the loss of or reduction in revenue from the customer that currently accounts for 92% of our total revenue or any other significant customer; . the market's acceptance of our products and services, including MediaBridge; . our ability to establish and maintain strategic relationships; . the potential costs of litigation and intellectual property protection; . the operating costs and capital expenditures related to the expansion of our business operations and infrastructure, domestically and internationally, including the hiring of key personnel and new employees; . the introduction of similar or substitute technologies by our competitors; . the timing of future licensing revenue; and . the marketing arrangements that we enter into during early market development. In addition, because the markets for our products and services are new and rapidly evolving, it is difficult for us to predict our future financial results. Our research and development, sales and marketing efforts and business expenditures are based in part on our expectations regarding developments in counterfeiting and piracy, and our estimates as to the use of digital watermarking as a solution to those problems. To the extent that these predictions prove inaccurate, our revenue and operating results will fluctuate from our anticipated results. 6 The markets for digital watermark applications are new and developing Digital watermarking is a new and developing technology. Our success depends on the acceptance of this technology and the adoption of applications in areas such as digital image commerce, counterfeiting and piracy deterrence and self- authentication of documents. The markets for products and services using digital watermarks are rapidly evolving and are characterized by an increasing number of market entrants who have introduced or developed products and services using digital watermarking or alternative technologies. As is typical in a new and rapidly evolving industry, demand and market acceptance of recently introduced products and services are subject to a high level of uncertainty. Our products and services are currently used by only a limited number of customers. It is difficult to predict the future growth rate, if any, and ultimate size of these markets or our anticipated future markets. We cannot assure you that markets for our products and services will develop. We may not be able to adequately protect our intellectual property, and we may be subject to infringement claims Our success depends on our proprietary technologies. We rely on a combination of patent, copyright, trademark and trade secret rights, confidentiality procedures and licensing arrangements to establish and protect our proprietary rights. As a result, we face risks associated with our patent position, including the potential need to engage in significant legal proceedings to enforce our patents, the possibility that the validity or enforceability of our patents may be denied, the possibility that third parties will be able to compete against us without infringing our patents and the possibility that our products may infringe patent rights of third parties. If we fail to protect our intellectual property rights and proprietary technologies adequately, if there are changes in applicable laws that are adverse to our interests, or if we become involved in litigation relating to our intellectual property rights and proprietary technologies or relating to the intellectual property rights of others, our business could be harmed. As part of our confidentiality procedures, we generally enter into non- disclosure agreements with our employees, consultants and corporate partners and attempt to control access to and distribution of our technologies, documentation and other proprietary information. Despite these procedures, third parties could copy or otherwise obtain and make unauthorized use of our technologies or independently develop similar technologies. The steps we have taken may not prevent misappropriation of our solutions or technologies, particularly in foreign countries where laws or law enforcement practices may not protect our proprietary rights as fully as in the United States. Effective protection of intellectual property rights may be unavailable or limited, both in the United States and in foreign countries. Patent protection throughout the world is generally established on a country-by-country basis. We have applied for patent protection both inside the United States and in various countries outside the United States. However, we cannot assure you that pending patents will issue or that issued patents will be valid or enforceable. We cannot assure you that the protection of our proprietary rights will be adequate or that our competitors will not independently develop similar technologies, duplicate our services or design around any patents or other intellectual property rights we hold. We license some rights management technology from a third party, and may need the assistance of this third party to enforce our rights to this technology. Although we do not currently rely on this 7 technology for our core products, we may in the future. The cooperation of any third party in enforcement of patent rights we may license cannot be assured. We have registered "Digimarc" as a trademark in the United States and other countries, and are pursuing registration in additional countries. However, our tradename or trademark may be registered by third parties in other countries, impairing our ability to enter and compete in these markets. In the United States, the trademark "Digimark" and the domain name "Digimark.com" have been registered by an unrelated company. While we have successfully co-existed for several years with this other company, we cannot assure you that this state of affairs will continue. If we were forced to change our name, we would lose a significant amount of our brand equity. As more companies enter the digital watermark marketplace and develop intellectual property rights, it is increasingly likely that claims may arise which assert that some of our products or services infringe upon other parties' intellectual property rights. These claims could subject us to costly litigation, divert management resources and result in the invalidation of our intellectual property rights. These claims may require us to pay significant damages, cease production of infringing products, terminate our use of infringing technologies or develop non-infringing technologies. In these circumstances, continued use of our technologies may require that we acquire licenses to the intellectual property that is the subject of the alleged infringement, and we might not be able to obtain these licenses on commercially reasonable terms or at all. Our use of protected technologies may result in liability that threatens our continuing operation. The security systems that we use in our proprietary technologies may be circumvented by third parties, which could damage our reputation and disrupt our business Our products and services involve the embedding of imperceptible digital data in visual content that is imperceptible in normal use but that can be read by digitally-enabled devices. The success of our products and services depends on the security of our image commerce, anti-counterfeiting and piracy systems and self-authentication solutions. Security breaches of these systems and solutions could damage our reputation and expose us to a risk of loss or litigation and possible liability. The security measures that we use in our products and services may not prevent security breaches, and failure to prevent these security breaches may disrupt our business. A party who is able to circumvent our security measures could misappropriate proprietary information or cause interruptions or otherwise damage our products and services and the properties of our customers. If unintended parties obtain sensitive data and information, or create bugs or viruses in an attempt to sabotage the functionality of our products and services, we may receive negative publicity, incur liability to our customers or lose the confidence of our customers, any of which may cause the termination or modification of our contracts. We may be required to expend significant capital and other resources to protect ourselves against the threat of security breaches or to alleviate problems caused by these breaches. However, protection may not be available at a reasonable price or at all. Our products could have unknown defects Products as complex as those we offer or develop frequently contain undetected defects or errors. Despite testing, defects or errors may occur in existing or new products, which could result in loss of revenue or market share, failure to achieve market acceptance, diversion of development resources, injury to our reputation, increased insurance costs and increased service and warranty 8 costs, any of which could materially harm our business. Furthermore, we often provide implementation, customization, consulting and other technical services in connection with the implementation and ongoing maintenance of our products. The performance of these products typically involves working with sophisticated software, computing and communications systems. Our failure to meet customer expectations or project milestones in a timely manner could also result in a loss of, or delay in, revenue, loss of market share, failure to achieve market acceptance, injury to our reputation and increased costs. Because customers rely on our products for critical security applications, defects or errors in our products might discourage customers from purchasing our products. These defects or errors could also result in product liability or warranty claims. Although we attempt to reduce the risk of losses resulting from these claims through warranty disclaimers and liability limitation clauses in our sales agreements, these contractual provisions may not be enforceable in every instance. Furthermore, although we maintain errors and omissions insurance, this insurance coverage may not adequately cover these claims. If a court refused to enforce the liability-limiting provisions of our contracts for any reason, or if liabilities arose that were not contractually limited or adequately covered by insurance, our business could be materially harmed. We may encounter difficulties managing our planned growth and expansion that may harm our business As of October 21, 1999 we had 57 employees. In addition, we expect that we need to hire approximately 60 additional employees in all areas in the rest of 1999 and 2000. We also expect to continue to expand our business and develop current and new products using our Paper-as-Portal technologies. To manage the future growth we currently expect to experience, our management must continue to improve our operational and financial systems and expand, train, retain and manage our growing employee base. In addition, any additional growth of our product lines or business will place an even more significant strain on our managerial and financial resources. If we cannot manage our growth effectively, we may not be able to coordinate the activities of our technical, accounting and marketing staffs, and our business could be harmed. We depend on our key employees for our future success Our success depends to a significant extent on the performance and continued service of our senior management. None of our senior management has an employment agreement. Although our employees have executed agreements containing non-competition clauses, there is no assurance that a court would enforce all of the terms of these clauses or the clauses generally. If these clauses were not fully enforced, our employees would be freely able to join our competitors. In addition, we currently have key person life insurance only on Bruce Davis, our president and chief executive officer, and Geoffrey Rhoads, our chief technology officer and secretary. The loss of the services of any of our senior management or any of our other key employees could harm our business. If we are not able to hire, integrate or retain qualified personnel, our business may be harmed The recent growth in our business has resulted in an increase in the responsibilities for both existing and new management personnel. Many of our personnel are presently serving in more than one capacity. In addition, we expect that we will need to hire approximately 60 additional employees in all areas in the rest of 1999 and in 2000, including general managers for new operations in key market segments. Competition for experienced personnel in our market segments is intense. We may 9 not be able to retain our current key employees or attract, integrate or retain other qualified personnel in the future. If we do not succeed in attracting new personnel or in integrating, retaining and motivating our current personnel, our business could be harmed. In addition, because our business is based on our patented technology, which is unique and not generally known, new employees will require substantial training, which will require substantial resources and management attention. Our promotion of the Digimarc brand must be successful in order for us to attract users as well as advertisers and other strategic partners We believe that establishing and maintaining our brand is critical to our success and that the importance of brand recognition will increase due to the growing number of technologies that compete with our watermarking technologies and the increasing number of competitors offering technologies similar to ours. We intend to increase our marketing and branding expenditures in our effort to increase awareness of our brand. If our brand-building strategy is unsuccessful, these expenses may never be recovered, we may be unable to increase our future revenue and our business could be materially harmed. We may need to raise additional funds, which may not be available We believe that our current cash resources, combined with the net proceeds from this offering, will be sufficient to meet our presently anticipated working capital and capital expenditure requirements for at least the next 12 months following the date of this prospectus. We may need to raise additional funds, however, to do the following: . research and develop new applications for digital watermarking, and new products and services; . respond to competitive pressures; and . acquire complementary businesses or technologies. Our future liquidity and capital requirements will depend on numerous factors, including the success of our existing and future products and services and potentially competing technological and market developments. We may be required to raise additional funds through public or private financing, strategic relationships or other arrangements. Raising additional equity capital would have a dilutive effect on existing stockholders. We cannot assure you that additional funding, if needed, will be available on terms acceptable to us or at all. If adequate funds are not available on acceptable terms, our ability to develop or enhance our products and services, take advantage of future opportunities or respond to competitive pressures would be significantly limited. Any of these limitations could harm our business, operating results and financial condition. Risks Related to Our Industry If we are unable to respond to regulatory or industry standards effectively, our operating results could be harmed Our future success will depend in part on our ability to enhance and improve the responsiveness, functionality and features of our products and services in accordance with newly-imposed regulatory or industry standards. Our ability to remain competitive will depend in part on our ability to influence and respond to emerging industry standards, including any standards that may be adopted for the protection of digital photography or video on DVD, in a timely and cost- effective manner. For instance, our video copy prevention solution is competing with another solution to become the 10 industry standard for DVD copy protection. In addition, our MediaBridge application competes against companies that provide Internet portals, and other Internet companies that provide search and directory services. If we are unable to influence or respond to these standards effectively, our operating results could be harmed. If we are unable to integrate new technologies effectively, our business could be harmed Our target markets are characterized by new and evolving technologies. The success of our business will depend on our ability to address the increasingly sophisticated technological needs of our customers in a timely and cost- effective manner. Our ability to remain competitive will depend, in part, on our ability to: . enhance and improve the responsiveness, functionality and other features of the products and services we offer or plan to offer; . continue to develop our technical expertise; and . develop and introduce new services, applications and technologies to meet changing customer needs and preferences and to integrate new technologies. We cannot assure you that we will be successful in responding to these technological and industry challenges in a timely and cost-effective manner. If we are unable to integrate new technologies effectively or respond to these changing needs, our business could be harmed. Our markets are highly competitive The markets for digital watermarking applications are new, intensely competitive and rapidly evolving. We expect competition to continue to increase from both existing competitors and new market entrants. We face competition from other companies using digital watermarking technologies and from alternative technologies. As we expand the applications for our digital watermarking technologies, we will experience more competition from products and services that are substitutes for our digital watermarking products. Because our business model is new and emerging, we may face competition from unexpected sources. Alternative technologies that may directly or indirectly compete with certain applications of our watermarking technologies include: . encryption--securing data during distribution using a secret code so it cannot be accessed except by authorized users; . containers--inserting a media object in a "wrapper," which prevents the media object from being duplicated; . dataglyphs--a visible modification of the characteristics of an image that is machine-readable; . scrambled indicia--optical refraction-based data-hiding technique that is inserted into an image and can be read with a glass; . traditional anti-counterfeiting technologies--a number of solutions used currently by many governments that compete for budgetary outlays designed to deter counterfeiting, including optically sensitive ink, magnetic "threads" and other materials used in the printing of currencies; . radio frequency tags--embedding a chip that emits a signal when in close proximity with a receiver, which is being used in photo identification, labels and tags; 11 . Internet technologies--numerous existing and potential Internet access and search methods will be potentially competitive with MediaBridge and other Paper-as-Portal applications; and . bar codes--visible data-carrying code. In addition, as we apply our technologies to the Internet through the anticipated introduction of MediaBridge and other Paper-as-Portal applications, we may begin to compete with a wide range of other companies. Many of the companies that currently compete with us, as well as other companies with whom we may compete in the future, are national or international in scope and may have greater resources than we do. These resources could enable these companies to initiate severe price cuts or take other measures in an effort to gain market share in our target markets. We cannot assure you that digital watermarking technologies, and our products and services using these technologies, will gain widespread market acceptance. We cannot assure you that we will be able to compete successfully against current or future participants in our markets or against alternative technologies, nor can we assure you that the competitive pressures we face will not harm our business, operating results and financial condition. Our business may be negatively affected by Year 2000 issues Many currently installed computer systems and software products are coded to accept only two-digit entries in the date code field. These date code fields will need to accept four-digit entries to distinguish 21st century dates from 20th century dates. As a result, many companies' software and computer systems may need to be upgraded or replaced in order to comply with Year 2000 requirements. We utilize third-party equipment and software that may not be Year 2000 compliant. Failure of this third-party equipment or software to be Year 2000 compliant could require us to incur unanticipated expenses to remedy any problems, which could harm our business, operating results and financial condition. Furthermore, the purchasing patterns of customers or potential customers may be affected by Year 2000 issues as companies expend significant resources to correct their current systems for Year 2000 compliance. These expenditures may result in reduced funds being available to purchase products and services we offer, which could harm our business, operating results and financial condition. Risks Related to This Offering Our stock price may be volatile The market price of our common stock is likely to be highly volatile and fluctuate significantly in response to a number of factors, most of which are beyond our control, including: . fluctuations in quarterly operating results; . changes in our relationship with the consortium of central banks, which is our primary customer; . announcements of significant contracts, strategic relationships, acquisitions or capital commitments; . technological developments in digital watermarking and other forms of document security, and technological shifts in accessing the Internet; . the rapidly evolving nature of our business and the digital watermarking industry; . the timing and manner of announcement of new products by us or our competitors; 12 . changes in the marketing methods used by advertisers; . the launch of significant new products and lines of business, which as of yet are unreleased and untested in the marketplace; . changes in financial estimates by securities analysts; . changes in our intellectual property position or the adoption of industry standards applicable to our technology; . failure to obtain patents or defend them successfully; . failure to complete significant license transactions; . additions or departures of key personnel; . trading characteristics that develop in the market for our common stock, which may include low trading volume and other factors that affect the liquidity of trading; and . stock market price and volume fluctuations, which are particularly common among highly volatile securities of high-technology and software companies. In the past, securities class action litigation has often been instituted against a company following periods of volatility in the company's stock price. This type of litigation could result in substantial costs and could divert our management's attention and resources. 73% of our common stock is held by existing stockholders and may be sold into the public market in the future, which may cause our stock price to decline Sales of a substantial number of shares of common stock after this offering could adversely affect the market price of our common stock and could impair our ability to raise capital through the sale of additional equity securities. After the closing of this offering, we will have outstanding 10,983,255 shares of common stock, assuming no exercise of outstanding options or warrants after September 30, 1999 and no exercise of the underwriters' over-allotment option. The 3,000,000 shares of common stock sold in this offering, which would be 3,450,000 shares if the underwriters' over-allotment option to purchase additional shares is exercised in full, will be freely tradeable without restriction or further registration under the federal securities laws unless purchased by persons who are considered affiliates under the federal securities laws. The remaining 7,983,255 shares of common stock outstanding upon the closing of this offering will be considered restricted securities under the federal securities laws. Many of our stockholders, option holders and warrant holders are subject to agreements that limit their ability to sell their shares of common stock. Subject to limited exceptions, these securityholders cannot sell or otherwise dispose of any shares of common stock for a period of at least 180 days after the date of this prospectus without the prior written approval of BancBoston Robertson Stephens. When these agreements expire, these shares and the shares underlying the options will become eligible for sale, in some cases only in accordance with the volume, manner of sale and notice requirements of the federal securities laws. See "Shares Eligible for Future Sale" and "Underwriting." Our management will retain broad discretion in the use of proceeds from this offering and may use the proceeds in ways with which you do not agree We intend to use the net proceeds from this offering for the repayment of indebtedness, working capital and general corporate purposes, including market expansion, acquisitions and product and 13 technology development. Accordingly, our management will have significant flexibility in applying the net proceeds from this offering and may use the net proceeds in ways with which you do not agree. Until the net proceeds are needed, we plan to invest them in investment-grade, interest-bearing securities. We cannot assure you that investment of the net proceeds will yield a favorable or any return. The inability of our management to apply these funds effectively could harm our business. Anti-takeover provisions in our charter documents could prevent or delay transactions that could be profitable for our stockholders from occurring The anti-takeover provisions of Delaware law and our certificate of incorporation and bylaws may make a change of control of us more difficult, even if a change of control would be beneficial to our stockholders. These provisions may allow our board of directors to prevent changes in management and control of us. Under Delaware law, our board may adopt additional anti- takeover measures in the future. We have adopted the following anti-takeover provisions, each to take effect upon the closing of this offering: . our board of directors will be divided into three classes of directors, with a separate class of directors being elected at each successive annual meeting for a term of three years; . special meetings of the stockholders may be called only by our president, our secretary or at the discretion of our board of directors; . vacancies on our board of directors may be filled by a majority of directors in office, and not by the stockholders; and . our board of directors may issue preferred stock and determine the price, rights, preferences and privileges of those shares without any vote or further action by the stockholders. These provisions could have the effect of discouraging a third party from making a tender offer or otherwise attempting to gain control of us. In addition, these provisions could limit the price that investors might be willing to pay in the future for shares of our common stock. YOU SHOULD NOT RELY ON FORWARD-LOOKING STATEMENTS BECAUSE THEY ARE INHERENTLY UNCERTAIN This prospectus contains forward-looking statements that involve risks and uncertainties. We use words such as "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and similar expressions to identify forward- looking statements. This prospectus also contains forward-looking statements attributed to third parties relating to their estimates regarding the prevalence and growth of the number of incidences of copyright infringement, counterfeiting and piracy. Readers are cautioned not to place undue reliance on any of these forward-looking statements, which reflect our management's views as of the date of this prospectus. Our actual results could differ materially from those anticipated in these forward-looking statements for many reasons, including the risks faced by us and described in "Risk Factors" and elsewhere in this prospectus. 14 USE OF PROCEEDS We estimate that we will receive net proceeds of $38.0 million from the sale of the 3,000,000 shares of common stock in this offering, assuming an initial public offering price of $14.00 per share and after deducting the estimated underwriting discounts and commissions, and estimated offering expenses. If the underwriters' over-allotment option is exercised in full, our net proceeds will be approximately $43.9 million. We intend to use a portion of the net proceeds to repay in full the principal of and interest, which has been accruing at 7% per annum, on unsecured notes payable to some of our founding common stockholders, incurred several years ago as part of our early efforts to finance our business development. The principal and interest balance on the notes was $386,000 at September 30, 1999. As of the date of this prospectus, we have not made any specific allocations with respect to the remainder of the net proceeds. Therefore, we cannot specify with certainty the particular uses for the net proceeds to be received upon consummation of this offering. Accordingly, our management will have significant flexibility in applying the net proceeds. We expect to use the net proceeds of this offering for: . additional working capital; . creating a public market for our common stock; and . facilitating future access by Digimarc to public equity markets. Pending our use of these funds, the net proceeds from this offering will be invested in short-term, interest-bearing, investment grade, instruments. DIVIDEND POLICY We have never declared or paid any cash dividends on shares of our common stock. We currently intend to retain future earnings, if any, to support the development of our business and do not anticipate paying any cash dividends in the foreseeable future. Our board of directors will have discretion as to whether future dividends will be paid, after taking into account factors such as our financial condition, operating results and current and anticipated cash needs. 15 DILUTION As of September 30, 1999, our pro forma net tangible book value was approximately $7.5 million or $0.93 per share of common stock. Pro forma net tangible book value per share represents the amount of our total tangible assets less total liabilities, divided by the pro forma number of shares of common stock outstanding. After giving effect to the sale of the 3,000,000 shares of common stock we are offering at an assumed initial public offering price of $14.00, our pro forma net tangible book value as of September 30, 1999 would have been $45.5 million or $4.14 per share of common stock. This represents an immediate increase in net tangible book value of $3.21 per share to existing stockholders and an immediate dilution of $9.86 per share to new investors. The following table illustrates this per share dilution: Assumed initial public offering price per share................... $14.00 Pro forma net tangible book value per share as of September 30, 1999............................................................ $0.93 Increase per share attributable to new investors................. 3.21 ----- Pro forma net tangible book value per share after this offering... 4.14 ------ Dilution per share to new investors............................... $ 9.86 ======
The following table summarizes, on a pro forma basis as of September 30, 1999, the number of shares of common stock purchased, the total consideration paid and the average price per share paid by the existing stockholders and the new investors purchasing shares of common stock in this offering. The information presented is based upon an assumed initial public offering price of $14.00 per share, before deducting estimated underwriting discounts and commissions, and estimated offering expenses of this offering:
Shares Purchased Total Consideration ------------------ ------------------- Average Price Number Percent Amount Percent Per Share ---------- ------- ----------- ------- ------------- Existing stockholders...... 7,983,255 72.7% $18,370,000 30.4% $ 2.30 New investors.............. 3,000,000 27.3 42,000,000 69.6 14.00 ---------- ----- ----------- ----- Total.................... 10,983,255 100.0% $60,370,000 100.0% 5.50 ========== ===== =========== =====
The information presented with respect to existing stockholders includes 4,520,286 shares of preferred stock, which will be automatically converted into 5,584,786 shares of common stock upon the closing of this offering. The above information is as of September 30, 1999 and excludes: . 30,000 shares of common stock issued subsequent to September 30, 1999 upon exercise of options; . 2,262,461 shares of common stock issuable upon exercise of options outstanding as of October 31, 1999 at a weighted average exercise price of $1.20 per share; . 2,235,606 shares of common stock reserved for future issuance under our 1995 stock incentive plan, our 1999 stock incentive plan and our 1999 employee stock purchase plan; and . 150,000 shares of common stock issuable upon exercise of warrants outstanding as of October 31, 1999 at an exercise price equal to the initial public offering price. Giving effect to the full vesting of all options and warrants outstanding as of October 31, 1999 and the stock issued subsequent to September 30, 1999, the pro forma net tangible book value per share after this offering as of September 30, 1999 would be $3.74, the dilution per share to the new investors would be $10.26, and the consideration paid by the existing shareholders and the new investors would represent 35.6% and 64.4%, respectively. If holders of outstanding options exercise these options, or if we grant additional options with low exercise prices in the future, there will be further dilution to new investors. 16 CAPITALIZATION The following table sets forth our capitalization as of September 30, 1999 on an actual basis, on a pro forma basis to give effect to the conversion of all outstanding shares of preferred stock into common stock and on a pro forma as adjusted basis to give effect to the conversion of all outstanding shares of our preferred stock into common stock and the receipt of the estimated net proceeds from the sale of 3,000,000 shares of common stock offered in this offering at an assumed initial public offering price of $14.00 per share and after deducting estimated underwriting discounts and commissions, and estimated offering expenses. The actual, pro forma and pro forma as adjusted information below is unaudited and should be read in conjunction with our financial statements and the notes to those financial statements appearing at the end of this prospectus.
September 30, 1999 (unaudited) -------------------------------- Pro Forma Actual Pro Forma As Adjusted -------- --------- ----------- (dollars in thousands) Mandatorily redeemable preferred stock, $0.001 par value, 10,874,000 shares authorized, 4,357,786 shares issued and outstanding, actual; no shares authorized, issued or outstanding, pro forma and pro forma as adjusted...................................... $ 17,266 $ -- $ -- Stockholders' equity (deficit): Convertible preferred stock, $0.001 par value; 325,000 shares authorized, 162,500 shares issued and outstanding, actual; no shares issued and outstanding, pro forma and pro forma as adjusted....................... -- -- -- Common stock, $0.001 par value; 12,500,000 shares authorized; 2,398,469 shares issued and outstanding, actual; 7,983,255 shares issued and outstanding, pro forma; and 10,983,255 shares issued and outstanding, pro forma as adjusted....................... 3 8 11 Additional paid in capital................... 4,509 21,770 59,759 Deferred compensation........................ (3,466) (3,466) (3,466) Accumulated deficit.......................... (10,799) (10,799) (10,799) -------- -------- -------- Total stockholders' equity (deficit)....... (9,753) 7,513 45,505 -------- -------- -------- Total capitalization..................... $ 7,513 $ 7,513 $ 45,505 ======== ======== ========
The number of shares of common stock to be outstanding after this offering is based on the number of shares outstanding as of September 30, 1999 and excludes: . 30,000 shares of common stock issued subsequent to September 30, 1999 upon exercise of options; . 2,262,461 shares of common stock issuable upon exercise of options outstanding as of October 31, 1999 at a weighted average exercise price of $1.20 per share; . 2,235,606 shares of common stock reserved for future issuance under our 1995 stock incentive plan, our 1999 stock incentive plan and our 1999 employee stock purchase plan; and . 150,000 shares of common stock issuable upon exercise of warrants outstanding as of October 31, 1999 at an exercise price equal to the initial public offering price. 17 SELECTED FINANCIAL DATA The following selected financial data should be read in conjunction with our financial statements and related notes and "Management's Discussion and Analysis of Financial Condition and Results of Operations" included in this prospectus. The statement of operations data for the years ended December 31, 1996, 1997 and 1998, and the balance sheet data at December 31, 1997 and 1998, are derived from our financial statements that KPMG LLP, independent certified public accountants, have audited and are included in this prospectus. The statement of operations data for the period from January 3, 1995 (inception) through December 31, 1995 and the balance sheet data at December 31, 1995 and 1996 are derived from our audited financial statements not included in this prospectus. The statement of operations data for the nine-month periods ended September 30, 1998 and 1999, and the balance sheet data at September 30, 1999, are derived from unaudited interim financial statements included in this prospectus. The unaudited financial statements have been prepared on substantially the same basis as the audited financial statements and, in the opinion of management, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the results of operations for these periods. Historical results are not necessarily indicative of the results to be expected in the future, and results of interim periods are not necessarily indicative of results for the entire year.
Period from January 3, 1995 Nine Months Ended (inception) September 30, through Year Ended December 31, (unaudited) December 31, ------------------------------- -------------------- 1995 1996 1997 1998 1998 1999 --------------- --------- --------- --------- --------- --------- (in thousands, except share and per share data) Statement of Operations Data: Revenue: License and subscription......... $ -- $ 186 $ 161 $ 484 $ 379 $ 175 Service............... -- 50 25 500 312 4,010 ------- --------- --------- --------- --------- --------- Total revenue........ -- 236 186 984 691 4,185 Cost of revenue: License and subscription......... -- 7 126 114 93 62 Service............... -- -- -- 1,466 775 1,814 ------- --------- --------- --------- --------- --------- Total cost of revenue............. -- 7 126 1,580 868 1,876 ------- --------- --------- --------- --------- --------- Gross margin.......... -- 229 60 (596) (177) 2.309 Operating expenses: Sales and marketing... 36 376 1,330 825 742 731 Research and development.......... 327 690 934 658 546 450 Impairment charge..... -- -- 453 -- -- -- General and administrative....... 477 834 1,282 1,407 913 1,961 ------- --------- --------- --------- --------- --------- Total operating expenses............ 840 1,900 3,999 2,890 2,201 3,142 ------- --------- --------- --------- --------- --------- Operating loss.......... (840) (1,671) (3,939) (3,486) (2,378) (833) Other income (expense).. (34) 93 (40) 44 57 9 ------- --------- --------- --------- --------- --------- Loss before income taxes.................. (874) (1,578) (3,979) (3,442) (2,321) (824) Provision for income taxes.................. -- -- -- -- -- -- ------- --------- --------- --------- --------- --------- Net loss.............. $ (874) $ (1,578) $ (3,979) $ (3,442) $ (2,321) $ (824) ======= ========= ========= ========= ========= ========= Basic and diluted net loss per share......... $ (1.01) $ (0.71) $ (1.88) $ (1.50) $ (1.02) $ (0.35) ======= ========= ========= ========= ========= ========= Weighted average shares outstanding used in basic and diluted net loss per share calculation............ 869,478 2,226,519 2,120,477 2,288,442 2,284,642 2,342,732
September 30, December 31, (unaudited) -------------------------------- ------------- 1995 1996 1997 1998 1999 ----- ------- ------- ------- ------------- (in thousands) Balance Sheet Data: Cash and cash equivalents..... $ 46 $ 3,113 $ 5,638 $ 2,137 $ 8,039 Working capital............... (244) 2,782 4,631 1,196 7,219 Total assets.................. 63 3,376 6,168 2,978 11,274 Long-term obligations, net of current portion.............. 438 396 395 469 182 Redeemable convertible preferred stock.............. -- 4,441 10,185 10,185 17,266 Total stockholders' deficit... (690) (1,885) (5,680) (9,095) (9,753)
18 MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The following discussion should be read in conjunction with the financial statements and related notes included in this prospectus. 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 factors described within this prospectus. We refer you also to the section "You Should Not Rely on Forward-Looking Statements Because They Are Inherently Uncertain." Overview Digimarc is a leading provider of patented digital watermarking technologies that allow imperceptible digital code to be embedded in traditional and digital content, including movies, photographic or artistic images and valuable documents such as financial instruments, passports and event tickets. Our technologies protect copyrights and deter counterfeiting or piracy by enabling information related to copyright ownership to be communicated easily. In addition, our MediaBridge product will offer advertisers, for the first time, a direct link between physical content and the Internet. This link will be accomplished by a PC recognizing the embedded digital code within a MediaBridge-enabled image and, as a result, automatically executing an instruction to take the user directly to a particular Internet destination without any mouse clicks or keyboard strokes. From our inception in January 1995 through late 1996, we devoted substantially all of our efforts to product development, raising capital and recruiting personnel. We first generated licensing revenue in the third quarter of 1996 through the licensing of our software plug-ins to Adobe Systems. In the fourth quarter of 1996, we introduced a subscription-based service for communicating copyrights of digital images across the Internet. This product offering was followed by the introduction in mid-1997 of MarcSpider, our service that searches the Internet for images containing Digimarc watermarks and produces reports on the locations of these images. In late 1997, we began expanding the use of our digital watermarking technologies to counterfeiting and piracy deterrence. In 1998, we began working with a consortium of leading central banks to develop a system to deter the use of personal computer systems in the counterfeiting of currency. Providing services relating to the development of this anti-counterfeiting system accounted for 51% of our total revenue in 1998 and 92% of our total revenue for the first nine months of 1999. This increase in the share of total revenue resulted from our securing a contractual relationship with the consortium. We anticipate that this development project will account for most of our revenue until we are able to generate substantial revenue from the introduction of new products that we are developing relating to document security and our Paper-as-Portal applications. In early 1999, we began to place increasing emphasis on developing MediaBridge, the first of our Paper-as-Portal applications. Our efforts to develop and introduce MediaBridge and related Paper-as-Portal applications will require significant continuing investment. To date, we have not derived any revenue from MediaBridge or any other Paper-as-Portal application. We expect to begin marketing MediaBridge in the second half of 2000. We currently expect to develop new products and services, which we anticipate selling to customers through a variety of pricing plans, including annual license fees and license fees per document from issuers of valuable documents other than banknotes and from magazine advertisers and publishers. Successful introduction and marketing of these new products and services, including MediaBridge and other Paper-as- Portal applications, if achieved, would significantly change the mix and the concentration of our future revenue. 19 To date, we have derived our revenue from licensing software products, delivering subscription-based services and providing development and consulting services to the consortium of central banks. We license our software products to owners of digital images. Revenue is recognized on delivery of software, assuming no significant obligations or customer acceptance rights exist. We provide subscription services to users for tracking of their watermarked images across the Internet. Subscriptions are paid in advance, and revenue is recognized ratably over the term of the subscription. We also provide development and consulting services related to the customization, integration and installation of our technologies. This revenue is recognized as services are performed, unless completion is subject to customer acceptance. Revenue from our international sales has primarily been denominated in U.S. dollars. Therefore, fluctuations in foreign currency exchange rates have not had a material effect on our business. We intend to increase our revenue through the marketing of new digital watermarking applications and the licensing of MediaBridge and other Paper-as- Portal applications. We expect to target, among other sources of revenue, publishers, advertisers and other producers of printed materials. Our aim is to license our technologies to those content producers so that they may embed our digital watermarks in their print media, such as magazine ads or articles, direct mail coupons or catalogs and credit or business cards. Our current and anticipated products are intended to enable them to control reproduction and alteration of their content, as well as to enable their print materials to provide a link to relevant Web destinations. Revenue from our new applications may include one-time licenses, time-based or usage-based fees, royalties and revenue-sharing. We anticipate that the calculation of fees and royalties will be based at least in part on the size of the installed base of PCs, cameras, scanners, digital image capture and output devices, and software carrying our patented reader technology as well as the nature of the use, and the nature and amount of licensed content carrying our MediaBridge digital watermarks. We believe that development of our business will require increasing levels of expenditures in future periods, including a significant increase in our sales and marketing efforts for the launch of new products, including MediaBridge and other applications of our Paper-as-Portal technology. Accordingly, we anticipate that we will continue to invest significantly in sales and marketing for the foreseeable future and that the dollar amount of sales and marketing expenses is likely to increase in the future. We believe that a significant increase in our research and development investment will be necessary for the development of additional applications of our technologies. We anticipate that we will continue to invest significantly in product research and development for the foreseeable future and that research and development expenses are likely to increase in the future. Due to the short development period between achievement of technological feasibility and the general availability of our software to customers, software development costs qualifying for capitalization have been insignificant, and as a result, are expensed as they are incurred. We also believe that our general and administrative expenses will continue to increase as a result of the continued expansion of our administrative staff and the expenses associated with becoming a public company, including annual and other public-reporting costs, directors' and officers' liability insurance, investor-relations programs and professional-service fees. Since inception, we have invested in attracting top senior management, in developing products and in building our sales and marketing organizations. We have a limited operating history upon which investors may evaluate our business and prospects. We have incurred significant losses to date, and as of September 30, 1999, we had an accumulated deficit of approximately $10.8 million. We intend to continue to expend significant financial and management resources on developing additional 20 products and services, increasing sales and marketing activities, improving our technologies and expanding our operations. As a result, we expect to continue to incur additional losses and negative cash flow through 2001 and possibly beyond. Our revenue may not increase or even continue at its current levels and we may not achieve or maintain profitability or generate cash from operations in future periods. Our prospects must be considered in light of the risks, expenses and difficulties frequently encountered by companies in their early stages of development, particularly companies deploying new technologies and applications, such as our efforts to develop our Paper-as-Portal technology as a new means of using the Internet. Results of Operations The following table presents our statement of operations data for the periods indicated as a percentage of total revenue.
Nine Months Ended September 30, Year Ended December 31, (unaudited) ----------------------------- -------------- 1996 1997 1998 1998 1999 ------- --------- ------- ------ ----- Revenue: License and subscription.... 79% 87% 49% 55% 4% Service..................... 21 13 51 45 96 ------- --------- ------- ------ ----- Total revenue............. 100 100 100 100 100 ------- --------- ------- ------ ----- Cost of revenue: License and subscription.... 3 68 12 14 2 Service..................... -- -- 149 112 43 ------- --------- ------- ------ ----- Total cost of revenue..... 3 68 161 126 45 ------- --------- ------- ------ ----- Gross margin.............. 97 32 (61) (26) 55 Operating expenses: Sales and marketing......... 159 715 84 107 17 Research and development.... 292 502 67 79 11 Impairment charge........... -- 244 -- -- -- General and administrative.. 353 689 143 132 47 ------- --------- ------- ------ ----- Total operating expenses.. 804 2150 294 318 75 ------- --------- ------- ------ ----- Operating loss.............. (707) (2,118) (355) (344) (20) Other Income (Expense)...... 39 (21) 5 8 -- ------- --------- ------- ------ ----- Loss before income taxes.... (668) (2,139) (350) (336) (20) Provision for income taxes.. -- -- -- -- -- ------- --------- ------- ------ ----- Net loss.................. (668)% (2,139)% (350)% (336)% (20)% ======= ========= ======= ====== =====
Nine Months Ended September 30, 1998 and 1999 Revenue Total revenue was $691,000 and $4.2 million for the nine months ended September 30, 1998 and 1999, respectively, representing an increase of $3.5 million. This increase was primarily the result of increased service revenue which we earned through securing a relationship with a consortium of leading central banks. One customer (the consortium of banks) accounted for approximately 45% and 92% of our total revenue for the nine months ended September 30, 1998 21 and 1999, respectively. The customer has a discretionary right of early termination with respect to the agreement. Unless the customer exercises this right, the Company expects revenues under the agreement to continue at or above current levels for the next two years. The Company intends to pursue further business with this customer and may be able to achieve other sources of revenue in future periods by providing additional products and services to them and related institutions. We currently expect to develop new products and services, which we anticipate selling to customers through a variety of pricing plans, including license fees and license fees per document from issuers of valuable documents other than banknotes and from magazine advertisers and publishers. Successful introduction and implementation of these new products and services, including self-authenticating documents, MediaBridge and other Paper-as-Portal applications, if achieved, would significantly change the mix and concentration of our future revenue. License and subscription. License and subscription revenue was $379,000 and $175,000 for the nine months ended September 30, 1998 and 1999, respectively, representing a decrease of $204,000. This decrease was the result of an increased use of our sales, marketing and research and development personnel to provide education, outreach and product definition services to our anti- counterfeiting system customer. Service. Service revenue was $312,000 and $4.1 million for the nine months ended September 30, 1998 and 1999, respectively, representing an increase of $3.7 million. This increase was the direct result of our securing a relationship with a consortium of leading central banks under which we are developing a system to deter the use of personal computer systems in the counterfeiting of currency. Cost of Revenue License and subscription. Cost of license and subscription revenue includes compensation for operations personnel, cost of outsourced customer support, Internet service provider connectivity charges and image search data fees to support our services. Cost of license and subscription revenue was $93,000 and $62,000 for the nine months ended September 30, 1998 and 1999, respectively. Service. Cost of service revenue primarily includes compensation for software developers, quality assurance personnel, product managers and business development personnel, outside contractors and travel costs directly attributable to certain service and development contracts. Cost of service revenue was $775,000 and $1.8 million for the nine months ended September 30, 1998 and 1999, respectively, representing an increase of $1.0 million. This increase was the result of an increased use of our research and development and sales and marketing personnel to provide services to our anti-counterfeiting system customer under the development contract. Cost of service revenue as a percentage of service revenue decreased from 248% in the nine months ended September 30, 1998 to 45% in the nine months ended September 30, 1999. Operating Expenses Sales and marketing. Sales and marketing expenses consist primarily of compensation, benefits and related costs of sales and marketing personnel, product managers and sales engineers, as well as recruiting, travel, market research and costs associated with marketing programs, such as trade shows, public relations and new product launches. Sales and marketing expenses were $742,000 and $731,000 for the nine months ended September 30, 1998 and 1999, respectively, representing a decrease of $11,000. This decrease resulted from increased costs of $711,000 from salaries, other 22 related employee costs and travel, offset by a decrease in advertising, promotional activities and other marketing costs of $132,000 and an increased allocation of $590,000 to cost of service revenue associated with sales and marketing personnel who provide education, outreach and product definition services to our anti-counterfeiting system customer. Sales and marketing employees totaled seven and 15 as of September 30, 1998 and 1999, respectively. We believe that a significant increase in our sales and marketing effort is essential for the introduction of new products, including additional secure document applications, and MediaBridge and other Paper-as-Portal applications. Accordingly, we anticipate that we will continue to invest significantly in sales and marketing for the foreseeable future, and that sales and marketing expenses are likely to increase in the future. Research and development. Research and development expenses consist primarily of compensation, benefits and related costs of software developers and quality assurance personnel and payments to outside contractors. Research and development expenses were $546,000 and $450,000 for the nine months ended September 30, 1998 and 1999, respectively, representing a decrease of $96,000. Increased use of research and development personnel to provide services to our anti-counterfeiting system customer resulted in an additional $710,000 of these expenses being allocated to cost of service revenue, while salaries and other employee related costs increased $626,000. Research and development personnel totaled 14 and 28 as of September 30, 1998 and 1999, respectively. We believe that a significant increase in our research and development investment is essential for us to maintain our market position, to continue to expand our product lines and to enhance our technologies and intellectual property rights. Accordingly, we anticipate that we will continue to invest significantly in product research and development for the foreseeable future, and that research and development expenses are likely to increase in the future. General and administrative. General and administrative expenses consist primarily of compensation, benefits and related costs of executive, finance and administrative personnel, facilities costs, legal and other professional fees and depreciation expense. General and administrative expenses were $913,000 and $2.0 million for the nine months ended September 30, 1998 and 1999, respectively, representing an increase of $1.0 million. $810,000 of this increase was the result of increased executive compensation and travel expenses, as well as executive recruiting fees and professional fees related to our recent growth. General and administrative employees totaled four and nine as of September 30, 1998 and 1999, respectively. We believe that our general and administrative expenses will continue to increase as a result of the continued expansion of our administrative staff and expenses associated with being a public company, including annual and other public-reporting costs, directors' and officers' liability insurance, investor-relations programs and professional-services fees. Stock Compensation Expense. Compensation expense includes costs relating to stock-based employee compensation arrangements. Stock compensation expense is based on the difference between the fair market value of our common stock and the exercise price of options to purchase that stock on the date of the grant, and is being recognized over the vesting periods of the related options, usually four years. Stock compensation expense of $121,000 was recorded for the nine months ended September 30, 1999. The total unearned compensation recorded by us from inception to September 30, 1999 was $3.6 million. The fair value per share used to determine unearned compensation was derived by reference to the preferred stock values reduced by a discount factor. We expect to record at least an additional $3.1 million of total unearned compensation for the fourth quarter ended December 31, 1999 related to stock grants. The actual amount will depend on the number of options granted and their exercise price. At current estimates, additional deferred compensation amortization related to these stock option grants, as well as grants made since 23 inception will be approximately $326,000 for the fourth quarter of 1999 and approximately $1.7 million for each of 2000 and 2001. Years Ended December 31, 1997 and 1998 Revenue Total revenue was $186,000 and $984,000 in 1997 and 1998, respectively, representing an increase of $798,000. This increase was caused by increased service revenue in 1998. We had two customers (Micrographx and the consortium of central banks) that accounted for more than 10% of our revenue, representing in aggregate approximately 30% of our total revenue for the year ended December 31, 1997; and one customer (the consortium of central banks) that accounted for more than 10% of our revenue, representing approximately 51% of our total revenue for the year ended December 31, 1998. License and subscription. License and subscription revenue was $161,000 and $484,000 in 1997 and 1998, respectively, representing an increase of $323,000. $241,000 of this increase was the result of our introduction and the market's acceptance of our subscription-based services designed to address the needs of customers that distribute and promote their image collections on the Internet. Service. Service revenue was $25,000 and $500,000 in 1997 and 1998, respectively, representing an increase of $475,000. This increase was a result of our completion of an anti-counterfeiting feasibility study in 1998. This has since led to the award of a contract to develop a system to deter the use of personal computers in the counterfeiting of currency. Cost of Revenue License and subscription. Cost of license and subscription revenue was $126,000 and $114,000 in 1997 and 1998, respectively, representing a decrease of $12,000. $7,000 of this decrease was the result of cost savings associated with providing customer technical support in-house, which had previously been provided by a third party. Service. We recorded cost of service revenue of $1.5 million in 1998 as a result of the use of our product managers, sales, marketing and research and development personnel in our performance of a feasibility study for a consortium of leading central banks which led to a contract to develop a system to deter the use of personal computer systems in the counterfeiting of currency. Cost of service revenue was 293% of service revenue for the year ended 1998. Operating Expenses Sales and marketing. Sales and marketing expenses were $1.3 million and $825,000 in 1997 and 1998, respectively, representing a decrease of $505,000. This decrease was the result of devoting sales and marketing personnel to provide education, outreach and product definition services to our anti- counterfeiting system customer at a cost of $498,000. Sales and marketing employees totaled ten and eight at December 31, 1997 and 1998, respectively. We believe that a significant increase in our sales and marketing efforts is essential for the introduction of new products, including self-authenticating documents, MediaBridge and other Paper-as-Portal applications. Research and development. Research and development expenses were $934,000 and $658,000 in 1997 and 1998, respectively, representing a decrease of $276,000. Increased use of our research and development personnel to provide services to our anti-counterfeiting system customer resulted in $968,000 of these expenses being allocated to cost of service revenue, while salaries and other employee related costs increased $594,000. Research and development personnel totaled ten and 24 fourteen for 1997 and 1998, respectively. We believe that a significant increase in our research and development investment is essential for us to maintain our market position, to continue to expand our product line and to enhance our technologies and associated intellectual property. Accordingly, we anticipate that we will continue to invest significantly in product research and development for the foreseeable future, and research and development expenses are likely to increase in the future. In the development of our new products such as self-authenticating documents, MediaBridge and other Paper-as- Portal applications and enhancements of existing products, the technological feasibility of the software is not established until substantially all product development is complete. General and administrative. General and administrative expenses were $1.3 million and $1.4 million in 1997 and 1998, respectively, representing an increase of $125,000. $64,000 of this increase was the result of more frequent domestic and international travel and $81,000 was the result of increased depreciation expense as our fixed asset base grows. General and administrative employees totaled three and four at December 31, 1997 and 1998, respectively. Asset Impairment. Asset impairment expense relates to certain assets we acquired in July 1997 from NetRights, LLC. The assets acquired included certain office equipment, trademarks and tradenames, and all engineering drawings, designs and documentation, including patent applications. We originally intended to use the technology to expand and potentially enhance the delivery of information to our customers in connection with a reevaluation of our business strategy. Prior to consummating the acquisition, we realized that NetRights' technology did not have the features and functionality previously believed, and that results could be achieved in a more simple way. Despite proceeding with the legally binding terms that had been agreed by the parties, a decision was made prior to consummating the transaction not to use the purchased technology. As a result, the purchased technology totaling $453,000 was considered impaired and written off during the year ended December 31, 1997. The fixed assets, the pending patent and tradenames were retained as acquired assets. Years Ended December 31, 1996 and 1997 Revenue Total revenue was $236,000 and $186,000 in 1996 and 1997, respectively, representing a decrease of $50,000. The decrease in revenue was caused by higher licensing fees, most of which were received from Adobe Systems and Corel Corporation, in 1996. We had three customers (Adobe Systems, Corel Corporation and Motorola, Inc.) that each accounted for more than 10% of our revenue, representing in aggregate approximately 100% of our total revenue, for the year ended December 31, 1996; and two customers (Micrographx and the consortium of central banks) that accounted for more than 10% of our revenue, representing in aggregate approximately 30% of our total revenue for the year ended December 31, 1997. License and subscription. License and subscription revenue was $186,000 and $161,000 in 1996 and 1997, respectively, representing a decrease of $25,000. This decrease was the result of lower one-time licensing fees in 1997 ($155,000), offset by increased subscription sales of $93,000. Service. We recorded service revenue of $50,000 and $25,000 in 1996 and 1997, respectively, representing a decrease of $25,000. In both years, service revenue was derived from one-time consulting projects. 25 Cost of Revenue License and subscription. Cost of license and subscription revenue was $7,000 and $126,000 in 1996 and 1997, respectively, representing an increase of $119,000. All of this increase was caused by the growth of our service department and related costs to support our software product and service introductions made in the fourth quarter of 1996. Operating Expenses Sales and marketing. Sales and marketing expenses were $376,000 and $1.3 million in 1996 and 1997, respectively, representing an increase of $954,000. $553,000 of this increase resulted from the hiring of sales management and sales and marketing personnel, and $324,000 for increased travel and enhanced promotional programs. Sales and marketing employees totaled five and ten at December 31, 1996 and 1997, respectively. Research and development. Research and development expenses were $690,000 and $934,000 in 1996 and 1997, representing an increase of $244,000. Increased salaries and other employee related costs of software development and quality- assurance personnel resulted in an increase of $302,000 offset in part by a decrease of $96,000 in outside contractors. Research and development personnel totaled eight and ten for the years ended December 31, 1996 and 1997, respectively. General and administrative. General and administrative expenses were $834,000 and $1.3 million in 1996 and 1997, respectively, representing an increase of $448,000. $377,000 of this increase was the result of increased salary expense and related payroll taxes and benefits from hiring new personnel. General and administrative employees totaled four and three at December 31, 1996 and 1997, respectively. Asset Impairment. Asset impairment expense relates to certain assets we acquired in July 1997 from NetRights, LLC. As discussed above, some of the purchased technology assets, totaling $453,000, were considered impaired and written off during the year ended December 31, 1997. Provision for Income Taxes We have recognized operating losses since inception and as such have not incurred income tax expense. As of December 31, 1998, we had operating loss carryovers for federal and state income tax reporting purposes of approximately $8.6 million and research and development tax credit carryforwards of $113,000, the last of which will expire through 2018 if not utilized. Under the Tax Reform Act of 1986, the amounts of and benefits from net operating loss carryforwards may be impaired or limited in certain circumstances, including a change of more than 50% in ownership. Such a change in ownership occurred with the sale of preferred stock in June 1996 and again in July 1996. Accordingly, we estimate that the approximately $915,000 of net operating loss carryforwards generated from inception through July of 1996 will be limited. 26 Quarterly Results of Operations The following table presents unaudited statement of operations data for the seven quarters ended September 30, 1999 in dollars. In our management's opinion, this unaudited information has been prepared on the same basis as the audited annual financial statements and includes all adjustments, consisting only of normal recurring adjustments, necessary for fair presentation of the unaudited information for the quarters presented. You should read this information in conjunction with the financial statements and the related notes included elsewhere in this prospectus. The results of operations for any quarter are not necessarily indicative of results that we might achieve for any subsequent periods.
Quarter Ended (unaudited) ---------------------------------------------------------------- Dec. Mar. 31, June 30, Sept. 30, 31, Mar. 31, June 30, Sept. 30, 1998 1998 1998 1998 1999 1999 1999 -------- -------- --------- ------- -------- -------- --------- (in thousands) Statement of Operations Revenue: License and subscription......... $ 161 $ 121 $ 97 $ 105 $ 74 $ 42 $ 59 Service............... -- 125 187 188 985 954 2,071 ----- ----- ----- ------- ----- ----- ------ Total revenue....... 161 246 284 293 1,059 996 2,130 ----- ----- ----- ------- ----- ----- ------ Cost of revenue: License and subscription......... 31 31 31 21 21 22 19 Service............... 128 339 308 691 459 433 922 ----- ----- ----- ------- ----- ----- ------ Total cost of revenue............ 159 370 339 712 480 455 941 ----- ----- ----- ------- ----- ----- ------ Gross margin........ 2 (124) (55) (419) 579 541 1,189 Operating expenses: Sales and marketing... 294 204 244 83 131 263 337 Research and development.......... 236 179 131 112 107 140 203 General and administrative....... 275 331 307 494 459 569 933 ----- ----- ----- ------- ----- ----- ------ Total operating expense............ 805 714 682 689 697 972 1,473 ----- ----- ----- ------- ----- ----- ------ Operating loss...... (803) (838) (737) (1,108) (118) (431) (284) Other income (expense).. 16 16 25 (13) (11) (17) 37 ----- ----- ----- ------- ----- ----- ------ Loss before provision for income taxes..... (787) (822) (712) (1,121) (129) (448) (247) Provision for income taxes.................. -- -- -- -- -- -- -- ----- ----- ----- ------- ----- ----- ------ Net loss............ $(787) $(822) $(712) $(1,121) $(129) $(448) $ (247) ===== ===== ===== ======= ===== ===== ======
We expect operating results to fluctuate significantly in the future as a result of a variety of factors, many of which are outside of our control. See "Risk Factors--Our future quarterly operating results may not meet analysts' expectations and may fluctuate significantly in the future, which could adversely affect our stock price" for more information on quarterly fluctuations and how they affect our business. We believe that comparisons of our historical quarterly operating results will not necessarily be meaningful, and you should not rely on them as an indication of future performance. It is possible that in some future periods our operating results may fail to meet the expectations of analysts and investors. In such event, the trading price of our common stock may decline. 27 Liquidity and Capital Resources Since inception, we have financed our operations primarily through the private placement of our preferred stock, equipment financings, lines of credit and long-term loans from shareholders. As of September 30, 1999, we had raised approximately $17.9 million through the sale of our preferred stock. As of September 30, 1999, we had cash and cash equivalents of $8.0 million, representing an increase of $5.9 million from $2.1 million at December 31, 1998. Our working capital at September 30, 1999 was $7.2 million, compared to working capital of $1.2 million at December 31, 1998. This increase in working capital is attributable primarily to a $6.3 million and $800,000 sale of our preferred stock in June 1999 and August 1999, respectively, and an increase in our trade accounts receivable due to increased revenue from a single customer. Our operating activities resulted in net cash outflows of $2.3 million and $644,000 for the nine months ended September 30, 1998 and 1999, respectively. This $1.6 million decrease in operating cash outflows from the nine months ended September 30, 1998 to the nine months ended September 30, 1999 was due primarily to improved operating results in the nine months ended September 30, 1999. Operating activities resulted in net cash outflows of $1.5 million in 1996, $3.1 million in 1997, and $3.2 million in 1998. The $1.6 million increase in operating cash outflows from 1996 to 1997 was attributable primarily to an increase in operating losses, offset by an increase in deferred revenue. The $68,000 increase in operating cash outflows from 1997 to 1998 resulted from further growth of deferred revenue and accrued payroll and related costs, offset by lower operating losses. Investing activities used cash of $60,000 and $209,000 for the nine months ended September 30, 1998 and 1999, respectively. This $149,000 increase in cash used in investing activities related to the acquisition of property and equipment. In addition, investing activities used cash of $165,000 in 1996, $440,000 in 1997 and $58,000 in 1998. Net cash used in investing activities in 1996 was related primarily to the acquisition of property and equipment. Net cash used in investing activities in 1997 was related primarily to the acquisition of selected assets, including technology, patent applications and some fixed assets of NetRights LLC. Net cash used in investing activities in 1998 was related primarily to the purchase of patents. We anticipate that we will experience an increase in our capital expenditures consistent with our anticipated growth in operations, infrastructure and personnel. Financing activities used net cash of $67,000 and provided cash of $6.8 million for the nine months ended September 30, 1998 and 1999, respectively. Financing activities provided cash of $4.8 million in 1996 and $6.1 million in 1997 and used cash of $233,000 in 1998. Net cash provided by, or used in, financing activities in each of these periods was related primarily to the sales of shares of our preferred stock in 1996, 1997 and the first nine months of 1999 and proceeds from borrowing in 1997, offset by principal payments on our bank line of credit and equipment lease obligations in 1998 and the first half of 1999. We have a $400,000 bank revolving line of credit that matures on November 20, 1999. This facility requires that we maintain certain financial covenants. As of September 30, 1999, we had no outstanding borrowings under the revolving line of credit. Any advances would bear interest at the bank's prime interest rate plus 1% and would be secured by substantially all of our assets, excluding intellectual property. We have computers and office equipment financed under long-term capital leases that expire over the next 36 months. As of September 30, 1999, we had an outstanding balance 28 of $301,000 of capital lease obligations. We had unsecured notes payable to common stockholders totaling $308,000 at September 30, 1999 which bear interest at 7% per annum. We intend to repay these notes in full from the net proceeds of this offering. Other significant commitments consist of obligations under non-cancelable operating leases, which totaled $2.0 million as of September 30, 1999, and are payable in monthly installments through 2004. We currently anticipate that we will continue to experience significant growth in our operating expenses for the foreseeable future. These operating expenses will consume a material amount of our cash resources, including a portion of the net proceeds from this offering. We believe that the net proceeds from this offering, together with our existing cash and cash equivalents and available bank borrowings, will be sufficient to meet our anticipated capital needs for at least the next 12 months, although we may seek to raise additional capital during that period. If additional funds are raised through the issuance of equity securities, stockholders may experience additional dilution, and such equity securities may have rights, preferences or privileges senior to those of the holders of our common stock. There can be no assurance that additional financing will be available on acceptable terms or at all. If adequate funds are not available or are not available on acceptable terms, we may be unable to develop or enhance our products, take advantage of future opportunities or respond to competitive pressures or unanticipated requirements, which could harm our business, operating results and financial condition. Interest Rate Risk Our exposure to market risk for changes in interest rates relates primarily to the increase or decrease in the amount of interest income we can earn on our investment portfolio and on the increase or decrease in the amount of any interest expense we must pay with respect to outstanding debt instruments. The risk associated with fluctuating interest expense is limited, however, to the exposure related to those debt instruments and credit facilities which are tied to market rates. We do not plan to use derivative financial instruments in our investment portfolio. We plan to ensure the safety and preservation of its invested principal funds by limiting default risks, market risk and investment risk. We plan to mitigate default risk by investing in low-risk securities. At December 31, 1998, we had an investment portfolio of money market funds, commercial securities and U.S. Government securities, including those classified as short-term investments, of $2.1 million. We had loans outstanding of $548,000 at December 31, 1998. If market interest rates were to increase immediately and uniformly by 10% from levels as of December 31, 1998, the decline of the fair market value of the fixed income portfolio and loans outstanding would not be material. New Accounting Pronouncements In June 1998, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standard No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 133 establishes methods for derivative financial instruments and hedging activities related to those instruments, as well as other hedging activities. Because we do not currently hold any derivative instruments and do not currently engage in hedging activities, we expect that the adoption of SFAS No. 133 will not have a material impact on our financial position or results of operations. In June 1999, the FASB issued Statement No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral of the Effective Date of FASB Statement No. 133, an Amendment of FASB Statement No. 133." Statement No. 137 defers the effective date of Statement No. 133 for one year. Statement No. 133, as amended, is now effective for all fiscal quarters of all fiscal years beginning after June 15, 2000. 29 In December 1998, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position 98-9, "Modification of SOP 97-2, Software Revenue Recognition, with Respect to Certain Transactions." SOP 98-9 amends SOP 97-2 and SOP 98-4, extending the deferral of the application of certain provisions of SOP 97-2 amended by SOP 98-4 through fiscal years beginning on or before March 15, 1999. All other provisions of SOP 98-9 are effective for transactions entered into in fiscal years beginning after March 15, 1999. Before 1998, we recognized software license revenue in accordance with the AICPA SOP 91-1, "Software Revenue Recognition." Beginning in 1998, we have recognized software license revenue in accordance with AICPA SOP 97-2, "Software Revenue Recognition," and related amendments and interpretations contained in the AICPA's SOP 98-4, "Deferral of the Effective Date of a Provision of SOP 97-2." Although these pronouncements apply to our subscription and license revenue and service revenue, we do not expect the adoption of SOP 98-9 to have a material effect on our results of operations or financial condition or to materially impact our revenue recognition practices. Year 2000 Readiness Many currently installed computer systems and software products worldwide are coded to accept only two-digit entries to identify a year in the date code field. Consequently, on January 1, 2000, these systems could fail or malfunction because they are not able to distinguish between the year 1900 and the year 2000. Accordingly, many companies, including ourselves and our customers, potential customers, vendors and strategic partners, may need to upgrade their systems to comply with applicable Year 2000 requirements. Risks of Year 2000 Issues Because we and our customers depend to a very substantial degree upon proper functioning of computer systems, a failure of these systems to correctly recognize dates beyond January 1, 2000 could disrupt operations. Any disruptions could harm our business. Additionally, our failure to provide Year 2000 compliant solutions to our customers could result in financial loss, harm of reputation and legal liability to us. We believe that our products and services are Year 2000 compliant; however, our products and services are often integrated with other systems that may not be compliant. Our State of Readiness We have reviewed our internal management information and other critical business systems to identify any Year 2000 problems. Our review consisted of: . quality assurance testing of our applications; . assessing repair or replacement requirements; . implementing repair or replacement as necessary; and . creating contingency plans in the event of Year 2000 failures. We have tested our software products and have determined that the currently shipping versions of all of our software products are Year 2000 compliant. We have also investigated the Year 2000 readiness of external vendors that supply us with material software and information. In the course of these investigations, we have not encountered any material Year 2000 problems with these third-party products. We continue to monitor these third parties for updates to their products as part of our 30 ongoing Year 2000 effort. We have not made a full assessment of the extent to which our customers might be vulnerable to Year 2000 issues. Likewise, we have not made a full assessment of the extent to which other third parties with which we transact business have determined their vulnerability to Year 2000 issues. We believe that the Year 2000 risk will not present significant operational problems for us. However, there can be no assurance that our Year 2000 program will prevent any harm to our business. Contingency Plan Although we have regular data back-up procedures that would assist us in the recovery of lost business information, we have not yet developed a contingency plan for handling Year 2000 problems that are not detected and corrected prior to their occurrence. Any failure to address any unforeseen Year 2000 issue could harm our business. Costs to Address Year 2000 Issues We expect that costs directly related to Year 2000 issues will not exceed approximately $50,000 for both costs incurred to date and future costs, including cases where non-compliant third-party products have been or need to be replaced. We would have incurred the replacement cost of non-compliant third-party products regardless of the Year 2000 issue due to technology obsolescence and/or our growth. We have expensed and continue to expense all costs arising from Year 2000 issues as incurred, funding them from working capital. If our Year 2000 program is inadequate and our business operations are materially impacted, we could incur additional costs to recover any lost information and replace affected systems. We believe that these systems could be replaced without significant difficulties, as replacement systems are generally available on commercially reasonable terms. 31 BUSINESS Overview Digimarc is a leading provider of patented digital watermarking technologies that allow imperceptible digital code to be embedded in the printed or digital versions of visual content, such as magazine ads, catalogs and product packages and valuable documents like financial instruments, passports and event tickets. In addition to code which can be embedded within various types of visual content, our technologies include reader software which, as a resident application on PCs, allows PCs to recognize these codes. We believe these technologies have many potential uses. We are developing products and services to address what we believe are our two largest near-term market opportunities: the deterrence of digital counterfeiting or piracy and the enhancement of Internet access and navigation. Since the introduction of our first product in 1996, we have built a broad technology platform that we believe has a range of applications. Our initial products allowed copyright owners to deter the use of advanced digital imaging tools in producing unauthorized high-quality copies of their images. We later developed image commerce applications that allowed customers to persistently identify their protected properties and locate these properties across the Internet, which further discourages their unauthorized distribution and use. Today, our business focuses on providing image commerce solutions, including copyright protection, and counterfeiting and piracy deterrence. We are currently developing additional applications to address other forms of visual media such as DVD and video, and other distribution channels such as the Internet. We are also using our technologies to develop products we call Paper- as-Portal applications, the first of which, named MediaBridge, is being developed and is planned for release as a resident application in PC camera software in the second half of 2000. MediaBridge is intended to enable imperceptible digital code to be embedded within print media, such as magazine advertisements or articles, direct mail coupons or catalogs and bank cards or business cards. When recognized by PC cameras enabled by our patented reader technology, that code will automatically launch the user directly to the specific Internet destination chosen by the producer of the print media. In this way, we believe that MediaBridge will deliver more efficient Internet navigation and access to consumers and more effective means for print advertisers to link readers directly to targeted e-commerce points-of-sale. Industry Background The Proliferation of Advanced Computing and the Internet Computing systems widely available today are more powerful than ever before, incorporating high-resolution scanning, streaming media and data compression as well as significant increases in processing power, bandwidth and memory. Advances in multimedia, digital imaging and printing technologies have given users of every level of sophistication access to highly advanced image manipulation and printing capabilities. Higher scanner and printer resolution, now typically at 600 dots per inch or higher, have enabled users to digitally capture and subsequently print images more quickly and precisely. Very high- resolution digital camera technology, with over one million pixels per image, has become standard in consumer digital camera products, giving users the ability to capture images that approach photo quality. International Data Corporation, or IDC, estimates that worldwide scanner shipments will increase at 23.3% per year to 39.5 million units by 2003 and worldwide PC camera shipments will grow from approximately 600,000 in 1997 to more than 9.2 million units by 2002. 32 These advances in computing performance, coupled with computer system price decreases, are also enabling millions of people to participate in the growth of activity on the Internet. IDC estimates that the number of Internet users worldwide will grow from 104 million in 1998 to 320 million by 2002. The Internet represents a fundamental change in the way people conduct business and access or distribute information and contributes to an increase in the conversion of traditional media and other forms of content to electronic digital format. NEC estimates that the number of Web pages will increase from 320 million in 1997 to 9.1 billion in 2002 and IDC estimates that the number of users who will make purchases on the Web will increase from 18 million in 1997 to over 128 million in 2002. The rapid growth in the Internet, Internet-based business activities and the growing use of the digital format for media content are all contributing to the growing obsolescence of analog media content control systems, creating new technological challenges in media content protection. Web Interface, Internet Navigation and e-Commerce As advances in technology are transforming the Internet into a ubiquitous platform for commerce, traditional "bricks and mortar" businesses are being challenged to bridge their existing methods for marketing and selling with new on-line marketing models. According to Forrester Research, U.S. per capita advertising spending, including print, TV, radio and the Internet, will be over $700 this year, and the U.S. per capita online advertising portion will grow from $40 in 1999 to $195 in 2004. A MarketFacts survey indicates that in 1998 approximately 62% of current Internet users visited a Web site after seeing it mentioned in a magazine or newspaper and approximately 53% visited a site because of a product's packaging. Currently these users must use search engines, which only provide an uncategorized listing of Internet addresses, or at best look for an advertiser's Internet address within the fine print at the bottom of the page, to find their intended Web destination. The current forms of print advertising such as magazine ads, couponing, packaging and direct mail does not fully tap the communications capabilities of the Internet, because these approaches do not provide a direct link driving potential customers to the e-commerce point-of-sale. The growth of the Internet has created a large amount of unstructured information which, according to eMarketer, consists of hundreds of millions of Web sites and hundreds of millions of Web pages, with 1.5 million Web pages being added per day. Many corporate Web sites now have thousands of pages, which often makes finding relevant information within a particular site frustrating and time-consuming. As a result, Internet users using conventional search and directory services often experience difficulty in retrieving information relevant to specific products and services, potentially causing e-commerce vendors to lose sales opportunities. According to a study conducted by the Georgia Institute of Technology, approximately 70% of online shoppers abandon a Web site because they have problems locating specific products or services. Search engines currently available are generally inefficient. According to data gathered by NEC, the most comprehensive search engine indexes less than 16% of the Web, a decrease from previous periods. NEC also estimates that the top 11 search engines combined currently index only 42% of the Web. Counterfeiting and Piracy in the Digital Age The access to advanced technology that allows users to easily create high- quality digital content has lowered the barriers to entry for professional counterfeiters, counterfeiters engaged in crimes of opportunity and unknowing copyright infringers. This has exacerbated the difficulties of tracking and managing proprietary content such as movies and photographic or artistic images. The International Intellectual Property Alliance estimates that U.S. copyright industries lost at least $12.4 billion worldwide due to copyright piracy in 1998. Traditional commercial merchandise or services, financial 33 instruments and government-issued documents are also affected. The European Commission estimates that more than 5% of world trade is lost to counterfeiting. The expediency and reach of the Internet fuels the rate at which this harm is being done. The first visual content providers to utilize our digital watermarking for protection of their copyrights were photographers. Shortly thereafter, the movie industry formed an anti-piracy initiative focused on digital watermarking technologies. The lack of an effective DVD security method led major motion picture studios, including Universal Studios, Warner Brothers, The Walt Disney Company, Paramount Pictures, Columbia TriStar, 20th Century Fox, Metro-Goldwyn- Mayer and United Artists, as well as the Motion Picture Association of America, to engage in their own multi-year digital watermarking specifications program that is still underway. To our knowledge no contracts have yet been awarded under this program. Although current Internet speeds are not fast enough to support the practical transmission of video, future broadband technology improvements may allow for this transmission. Currently, the Motion Picture Association of America estimates that American motion picture companies lose approximately $2.5 billion per year to video piracy, and the potential loss after Internet distribution of movies becomes widely available could be much greater. Financial instruments and government-issued documents are frequent targets of illegal counterfeiting enabled by digital technology. In recent Congressional testimony, the U.S. Treasury Department attributed the alarming increases in counterfeiting activity primarily to high-quality graphic devices such as color scanners and printers. The U.S. Treasury Department reported that the advanced technology of today's PCs and peripheral devices was responsible for 43% of all counterfeit banknotes passed and seized in 1998, up from 0.5% in 1995. The U.S. Treasury Department also reported that the amount of U.S. counterfeit banknotes produced increased over 30% during the twelve months ended September 1998. Currency counterfeiting has wide-ranging implications that may involve, among other issues, undermining the confidence in a currency's stability, causing losses far greater than the aggregate face amount of the currency counterfeited. We believe that digital imaging has contributed to a portion of the $615 million lost by U.S. banks each year due to fraudulent and counterfeit checks but are unable to quantify the portion of the loss attributable to digital imaging. We believe that the rise of digital counterfeiting and forgery of passports, driver's licenses and other photo identification is also responsible for substantial losses related to increases in identity theft and falsification of other valuable documents. Easy access to duplication technology has also put other high-value documents such as stocks, bonds, government obligations, traveler's checks, commercial checks, credit and debit cards and food stamps at risk for counterfeiting and substantial losses. Many other forms of printed materials are also at risk. Counterfeiters have targeted traditional commercial merchandise and services by using high-quality scanners and laser printers to reproduce packaging, stamps, gift certificates and event tickets. These copies can be distributed over the Internet or on hard copy, CDs or disks. Event tickets in particular can be successfully duplicated and sold. Concerned over counterfeit tickets, organizers of the World Cup and Super Bowl recently adopted currency and check security techniques that required costly design and printing alterations. Product counterfeiting of branded clothing, perfumes, luxury items and other items is widespread, causing label and tag manufacturers to explore and implement similar security printing methods. For instance, manufacturers of expensive retail items, such as computer software and branded clothing, have redesigned their packaging and identification tags to incorporate security techniques such as holograms and microtext to deter counterfeiting and enhance authentication of genuine articles. So far, none of these vendors have used our solutions. 34 Existing solutions to combat counterfeiting and piracy have had limited success against advanced digital technology. Traditional analog security solutions for printed documents, such as special printing techniques, embedded holograms and microthreads, and the use of optically-variable inks, generally do not provide sufficient protection from digital counterfeiting. Network security measures, such as encryption, digital signatures, conditional access and digital containers, control access to digital content during electronic transmission but are ineffective for situations in which encryption or format conversion are involved. These measures also fail to communicate information regarding content copyright and are unable to operate outside of the digital environment. Digital certificates, which are specially prepared software files that act as verifiable electronic credentials, provide authentication and privacy capabilities for consumers and businesses conducting commerce over the Internet, but also do not convert to a non-digital format and do not identify copyright ownership. Without effective solutions that combat counterfeiting and piracy by communicating copyright ownership within the digital landscape, there can be no foundation for the management and efficient licensing of proprietary content across the Internet. Solutions We are developing a fundamentally new way to access and use the Internet by embedding imperceptible digital code in traditional and digital media, including printed materials such as magazine advertisements, articles, covers and subscription cards; direct mailers; packaging; debit and credit cards; greeting cards; coupons; catalogues; tickets; business cards; and digital content such as video, images and other creative properties in digital form. This embedded code creates a bridge between those materials and the Internet that permits users to link directly to relevant Web destinations without any typing or mouse clicks. Thus, our patented technologies will give digital capabilities to physical media and allow new forms of interaction with the digital world, enhancing publishing, advertising and e-commerce. We first used our patented digital watermarking technologies in a variety of applications that protect copyrights, promote image commerce and deter counterfeiting, piracy and other unauthorized uses of all forms of traditional and digital visual content. We believe that ours have become the most widely employed digital watermarking technologies in the image commerce and secure documents markets. We believe our applications offer strong advantages over other approaches because our digital watermarks are imperceptible, format independent and survive format changes such as scanning, printing and some types of copying, allowing them to operate in both analog and digital environments. Paper-as-Portal: Bridging the Physical and Digital Worlds and Enhancing the Use of the Internet Our technologies allow owners of visual content, such as printed materials and movies, to embed imperceptible digital code into the content itself. We have designed our reader technology to detect and read this code by cameras, scanners and other image capture devices connected to personal computers and other digital devices. When the code is read, our software is designed to initiate the display of Web destinations or launch Web-based applications specified by the creators of the visual content. We believe these Paper-as- Portal applications will benefit users by providing "no click" direct access to Internet-based information and e-commerce opportunities. For example, a magazine advertisement that has been embedded with our digital code will enable a user to hold the magazine page up to a digital camera enabled with our proprietary reader technology and be taken directly to the Web destination specified by the advertiser. As online business models evolve and the amount of business transacted on the Internet increases, enterprises are seeking new Internet solutions that will enable them to develop, maintain 35 and leverage relationships with consumers, users and affiliates. We believe our Paper-as-Portal applications will bridge the two separate commerce systems in place right now: traditional commerce and e-commerce. We believe Digimarc- enabled images will facilitate cost-effective integrated marketing by linking traditional marketing materials to the Internet, allowing print materials to become direct portals to the Internet and other digital processing environments. Through our technologies, advertisers will be able to address both online and offline audiences through one marketing effort, and easily link readers of traditional print material to an advertiser's Internet or e-commerce presence. We believe our ability to embed imperceptible digital code in traditional and digital visual content will benefit consumers, businesses and institutions in the following areas: . Benefits to Businesses. We believe our solutions will enable marketers to improve the return on their investment in conventional and Internet advertising. Because our embedded codes will direct users to a specified Web destination, we believe advertisers can expect a higher percentage of their intended audience to respond to an advertisement, and ultimately, to become purchasers. In addition, our solutions are intended to improve customer satisfaction and retention as customers will be less frustrated with searches and complicated Web sites. We intend to provide advertisers the flexibility to alter the Web destination linked by the embedded code in a particular advertisement, allowing them to remotely redirect a marketing campaign without having to update their print advertisements. We believe businesses can lessen the need for, and therefore lower the internal costs of, call and e-mail centers by establishing self-service Web pages on proper use and maintenance that are linked to embedded content. Moreover, imperceptible digital code can be embedded without any visible design changes or additional material costs. . Benefits to Consumers. We believe consumers will benefit from our solutions through improved convenience and assured success in reaching the relevant Web destination. We intend to offer a direct path from a consumer's interest in an advertisement, editorial, package or label to an online research and buying opportunity, thus avoiding misdirected or overly broad searches on traditional search engines or portals. Protecting Visual Content and Valuable Documents We also provide solutions to deter the counterfeiting, piracy and unauthorized alteration of media content. Major industries have endorsed digital watermarking generally as an important technology in controlling visual content and valuable documents, including commercial photography, movies, video, music, traditional merchandise and services, financial instruments and other high-value documents. Our digital watermarking solutions are compatible with a variety of Internet, computing and communications solutions because virtually any piece of visual content can contain our imperceptible digital watermarking code. We are able to digitally mark a diverse set of sensitive, high-value materials, including identity documents such as passports and drivers' licenses, commercial and traveler's checks, credit and debit cards, video or print images, currencies, stock certificates, stamps, personal checks, event tickets and clothing brand labels. Our solutions also provide the means to link an embedded code to human- and machine-readable information about a document to establish its authenticity, control its use and link it to the rightful owner. Our digital watermarking technologies can be applied to various types of applications for protecting content, including: . Counterfeiting Deterrence. One customer (the consortium of banks) has accounted for nearly all of our revenue to date in the area of counterfeiting deterrence. We intend to pursue further development of our relationship with this customer and develop other sources of revenue by 36 proposing additional products and services over time. We also intend to use our digital watermarking technologies to provide other issuers of high-value documents with the ability both to deter illegal or prohibited reproduction, subject to approval by the consortium, and to verify authenticity of photo identification documents. We are forming partnerships with computer, software and peripheral vendors with the aim of having these entities embed or bundle our reader technology into their products. Once incorporated into their products, our reader technology will detect each of our digital watermarks embedded in images or documents the user attempts to process. Detection of the watermark can deter attempts to counterfeit high-value documents by preventing the computer processing of those documents. . Piracy Prevention. Our digital watermarking technologies provide the ability to prevent unauthorized reproduction of copyrighted or otherwise proprietary content. Our digital watermarks can be embedded in almost any form of visual content and can survive file and format changes to provide persistent identification of the content. By enabling applications with our embedding and reader technologies, the imperceptible identity created by a digital watermark facilitates the communication of copyright and ownership information. Ultimately, these anti-piracy applications help owners of visual content to retain attribution and compensation for their proprietary content. . Document Integrity. We are developing applications using our digital watermarking technologies to deter unauthorized alteration of confidential or proprietary content and to ensure document integrity. Our self-authenticating technology will allow an access control device enabled with our reader technology to check for digital watermarking consistency in documents like passports to determine if a document has been altered. For instance, this capability could allow a plane ticket or travel document to be checked for authenticity. By checking to see if the code in the digital watermark matches information such as a ticket number, an access control device can determine if a document is authentic. . Image Commerce. Any form of visual intellectual property that can be put into a digital format can be marked with our digital watermarking technologies. Our digital watermarks represent a new feature in visual content because they can enhance any type of content, both as a form of protection that allows an owner of intellectual property to discourage its unauthorized distribution and as a method for owners to locate their property on the Internet. In this manner, we provide a fundamental component of image commerce systems and facilitate e-commerce. Strategy Our strategy focuses on establishing our technologies as the industry standard for all forms of visual content, contributing to systems designed to control its consumption and use, and enabling numerous new communications functions to enhance its value for producers and consumers. The key elements of our strategy are as follows: Become the De Facto Standard for Digital Watermarking We believe that our proprietary technologies will emerge as standard digital watermarking technologies for anti-counterfeiting and for linking digital visual content with the physical world because of the advantages they offer over existing security and communications-enabling technologies. We intend to leverage our expertise, our customer and OEM relationships and our strong intellectual property position derived from our first-to-market position and robust portfolio of 37 digital watermarking patents to extend our leadership position into other areas of opportunity for digital watermarking, including movies and video, traditional merchandise and services and high-value documents. We plan to leverage our relationship with a consortium of leading central banks to encourage manufacturers and developers to install our reader software in multiple personal computer system components including in computers, digital cameras, scanners and software. Digimarc has the right to use these readers to protect documents other than banknotes, subject to prior approval by our customer (the consortium of central banks). We also actively participate in a number of initiatives for establishing industry standards, including the Copy Protection Technical Working Group for video copy protection and the Digital Imaging Group for promotion of digital imaging solutions in general. Through our participation in these groups, we hope to promote the role that digital watermarking technologies play in each of these industries. We believe the following characteristics provide a competitive advantage for establishing our technologies as standards: . Imperceptibility. The imperceptible nature of our digital watermark distinguishes it from most other security technologies because it does not require a visible or audible change in content, preserving the aesthetic value of the object. . Persistence and Format Independence. Our digital watermark survives file and format changes, including printing and scanning, to provide persistent identity. In addition, the embedded image is not restricted to specific channels or media. Achieve Market Penetration Through an Integrated Focus on Infrastructure and Applications We are attempting to build long-term demand for our technologies by fostering broad proliferation of our reader technology software as a resident application on personal computers and in software applications and image processing peripherals, like digital cameras, printers and scanners. We plan to leverage our relationship with a consortium of leading central banks to encourage manufacturers and developers to install our reader software in multiple personal computer system components, adding to our infrastructure development. Simultaneously, we are aggressively pursuing the development of applications that utilize our digital watermarking technologies. Our success in driving the proliferation of infrastructure enabled by our digital watermarking reader technology will reinforce our technology's applicability to, and is expected to generate demand for, related applications. In a complementary fashion, the successful implementation of applications should drive the availability and demand for our reader technology. We plan to focus efforts in each of these key areas as follows: . Drive Proliferation of Our Reader Technology. We are working with major infrastructure companies, including Adobe, Be Incorporated, 3Com, Logitech and Hewlett-Packard, to broaden and extend the penetration of our reader technology into scanners, digital cameras, graphics editing and photo-processing software, printers, Web browsers and other areas of the digital infrastructure. Our reader technology is currently bundled with image-editing applications from leading vendors. To drive adoption, we will continue working with these and other leading infrastructure companies through joint research and development efforts and assistance in product development to influence the establishment of technical standards. . Develop New Applications. We intend to continue developing applications for our digital watermarking technologies through strategic relationships and consulting efforts with leading consumer and business brands and governmental agencies. Through our efforts with consumer brand leaders, we hope to incorporate our watermarking technologies into applications that span all forms of content, including still images and video. 38 Establish Paper-as-Portal as a Leading Internet Access and Navigation Technology We believe our MediaBridge solution will serve as a fundamental new interface to digital devices and the Internet, while also enhancing e-commerce. Our Paper-as-Portal technology is intended to bridge the analog and digital formats by embedding imperceptible digital code in printed materials, making those materials Web-enabled. To promote our Paper-as-Portal applications, we intend to establish strategic relationships with leading consumer brands and publishers of printed media as well as infrastructure partners. We believe that our applications offer distinct advantages over existing Internet-based alternatives for facilitating e-commerce, including ease of use, disintermediation of directories and search engines and enhanced market research. We also intend to facilitate e-commerce through our Paper-as-Portal applications by: enabling licensing and distribution of content; promoting e- commerce through digital and printed imagery; protecting the financial instruments used to pay for Internet goods and services; and establishing greater confidence in personal identity systems. Continue Intellectual Property Leadership We were an early developer of the core technologies that we believe will become the standard in both digital image commerce and other e-commerce enabling applications. Since our patent filings commenced in 1993, we believe that we have established one of the world's most extensive patent portfolios in the field of digital watermarking. We hold 15 U.S. issued patents, and have an additional 59 U.S. patent applications pending of which 2 have received a notice of allowance, indicating that the allowed applications are entitled to issue as patents subject to completion of all formalities, and at least 17 foreign patent applications pending, including Patent Cooperation Treaty applications. We intend to maintain our technology leadership by creating new products and services, concentrating heavily on research and development, and emphasizing intellectual property protection in all of our activities. We believe our dedication to innovation will also enable us to respond to the challenges presented by the ever-increasing access to sophisticated technology in the areas of piracy and counterfeiting, as well as address the opportunities emerging from the growth of e-commerce. Promote Our Brand To enhance industry and public awareness of our solutions, we are pursuing an aggressive brand development strategy through mass market and targeted advertising, promotions and public relations. Our industry branding strategy promotes the broad utility of our technologies across numerous content types, distribution channels and applications. We believe that building our brand will foster continued adoption of our solutions by leading companies in relevant markets and, as appropriate, educate consumers about the new features in media content that we enable. We also believe that a strong brand will increase licensing opportunities with corporate customers, contributing to revenue growth and diversification. Products We offer patented digital watermarking solutions, including software, tools and services that allow users to embed, and subsequently read, imperceptible digital code in visual content. This embedded data is imperceptible during normal use but detectable by our software or hardware. We believe that this embedded code can be used to identify, authenticate, track, manage and enhance content, as well as facilitate traditional and e-commerce. 39 Our initial products addressed the growing concerns of photographers, illustrators and graphic designers who began to use the Web and CD-ROM as central marketing and distribution tools for their portfolios, but who had become increasingly concerned by the use of digital imaging tools to produce high fidelity copies of their images. Our initial products addressed the copyright concerns of these image owners, and ultimately fostered commercial relations between them, by communicating ownership information and helping an image owner to retain attribution and compensation for a copyrighted work. The Advertising Photographers of America expressed concern to Adobe and other major vendors that tools like Photoshop were providing greater availability of new forms of copyright infringement. In response, vendors began to bundle our digital watermarking applications in Photoshop and other leading imaging applications. In addition, by working with the Picture Agency Council of America, and leading agencies such as MasterFile, we developed products to address the needs of stock photo agencies, which use CD-ROM technology for image distribution and the Web for marketing their image collections, but which often do not directly hold image copyrights. We have worked closely with our customers to develop applications for our digital watermarking technologies with other media forms, distribution channels and applications like DVD and the Internet. For instance, our initial customers sought to track uses of copyrighted images. This market demand led us to develop MarcSpider, our service to track images on the Internet. Other industries, including media companies such as Time Inc. and National Geographic Television, began to use digital means to distribute and promote large image collections, and as a result, they also sought to develop a system of image asset management. For instance, Time used our watermarking technologies to mark images that were published in the online version of Teen People. Our image asset management applications allow customers to use our digital watermarks as a de facto digital asset tag, discouraging an image's unauthorized distribution and ultimately generating revenue and extending brand recognition by increasing the likelihood of the licensing of marked images. The dual goals of copyright protection and revenue and brand enhancement inspired two system improvements: the addition of transactional watermarking and the construction of an image commerce platform. Working with large stock photo collections, notably Corbis and Getty Images, we developed and licensed systems to dynamically embed digital watermarks in images as they are downloaded to customers. Corbis marked more than a million images, many of which became available through AltaVista's search engine. Getty added our digital watermarks to the Tony Stone Web site, the online source for their premium images. National Geographic Television began using our digital watermarks for advertising images used with partners. In addition, we are continuing to develop the image commerce system in cooperation with our customers and business partners, reaching further into the image publishing work flow. By using our digital watermarks to link an image to a server, distributors can offer licensing and image search functions within products like Photoshop. Virtual content bundling being contemplated will further extend the reach for distributors while adding substantial value to an image user. Our products continue to adapt to the technological needs of our customers. Applications like MediaBridge are intended to allow our customers to link virtually any physical content with the online world of computing, multimedia and the Internet. We believe that this new method for Web-enabling printed materials will have many potential product applications in direct marketing, merchandising and promotion, packaging, service and support, community building, brand enhancement, news, entertainment and education. Together with the evolution of our product offerings, we believe that our fundamental embedding and reader technologies will continue to find increased applicability. For example, counterfeiting 40 constitutes a growing threat to the security of the world's currencies. The proliferation of high-resolution color copiers, scanners and printers, and increasingly powerful computers and image-processing software has made it possible for relatively unsophisticated users to produce counterfeit banknotes that pass as authentic in many environments. These developments have made casual counterfeiting a more attractive crime of opportunity, leading to a substantially increased burden on law agencies. In response to these threats, a number of leading central banks have decided to add new anti-counterfeiting features to their currencies using our digital watermarking technologies. Our current and planned products are grouped along three lines of business: secure documents, copyright protection and image commerce, and Paper-as-Portal. Each product line consists of embedders to place our digital watermarks into content, and reader technology to detect, read and respond to the embedded code. Secure Documents Our planned document security products will use digital watermarking to authenticate original documents, detect fraudulent documents and deter unauthorized duplication or alteration of high-value documents such as passports, tax stamps, tickets and financial instruments like securities, traveler's checks and currencies. We have relationships with a number of financial institutions that are involved in the creation or protection of high- value documents. These relationships include a development and license agreement with a consortium of leading central banks related to anti- counterfeiting of currencies that has accounted for more than half of our revenue in 1998 and is expected to account for substantially all of our revenue until we develop new sources of revenue from new products like MediaBridge. We also intend to pursue further development of our relationship with the consortium of central banks to develop other sources of revenue by proposing additional products and services to this customer over time and by offering the benefits of the anti-counterfeiting system to, and developing new product applications for, the issuers of other high value documents. Copyright Protection and Image Commerce Our copyright protection and image commerce products provide a range of solutions, including copyright communication, asset management and business-to- business image commerce solutions. Our solutions are enabled by digital watermarking tools provided to content owners, and software modules provided to manufacturers and software vendors for reading the embedded code and facilitating the appropriate responses to them. Our products and services include those listed below. . Still Images. Copyright protection solution customers can benefit from our solutions by using a number of applications. Image creators can use Digimarc plug-ins that are bundled with a number of leading image editing applications from companies such as Adobe Systems, Corel, Micrografx and JASC Software. The Digimarc batch embedder is a stand-alone tool that processes the embedding of digital watermarks in large collections of digital images. The Digimarc digital watermarking software development kit (SDK) provides a programmatic interface to digital watermark embedding, detection and reading, designed for integration into client and server products. Our SDK application includes real-time server-based watermarking, where digital watermarks carrying transactional data are added to images as they are delivered to customers. Our MarcCentre service is a central repository of registered ownership information that is accessible by a Web user who views Digimarc-enhanced proprietary content with our patented reader technology. This service allows any user to view the information that 41 the content owner wishes to register in MarcCentre. Our MarcSpider service searches the public Web for images containing our digital watermarks and produces reports on where and when such images are found. This service allows Web content developers, photographers, stock photography agencies and publishers of entertainment, sports and news images to track their works on the Web. . Video. Using a unique approach to digital watermarking, Digimarc, Macrovision and Philips engineers have developed prototypes of technology that can protect program material on videocassettes, DVDs, cable or satellite transmissions from unauthorized copying to recordable DVDs, DVHS and multimedia personal computers. The resulting system would complement Macrovision's widely-adopted existing video copy protection technology. Detectors can be cost effectively deployed in hardware or software to meet real-time play and record control requirements in a wide range of DVD platforms. Paper-as-Portal We anticipate that our Paper-as-Portal products will provide the ability for printed documents to be identified by personal computers and similar devices through digital images in the documents enhanced with our watermarks that are generally imperceptible to users which will link the computer to a targeted Web destination. We believe that these enhanced images and associated reader technology will enable a variety of potential applications, the first of which is MediaBridge. . MediaBridge is an application we are developing based on our patented core technology. MediaBridge will create new communications capabilities for visual content that promote and enhance e-commerce. MediaBridge will be a fundamentally new way to access and use the Internet by embedding imperceptible digital code in printed materials, including, among other things, magazine advertisements, articles, covers and subscription cards, direct mailers, packaging, debit and credit cards, greeting cards, coupons, catalogues, tickets and business cards that can be read by digital devices enabled by our patented reader technology. We expect to begin marketing MediaBridge in the second half of 2000. The same technology can be used to permit video, images and other creative properties in digital form to interact with the digital world. Technology and Intellectual Property Digimarc's watermarking technologies embed digital code in images and video that is imperceptible during normal use but readable by computers and software. The science of creating these imperceptible codes is known as digital watermarking. We are a leading owner of intellectual property relating to digital watermarks and pioneer in the commercial application of digital watermarking. Our technologies are supported by a broad patent portfolio covering a wide range of methods and applications for digital watermarking. Our core technology incorporates a method for embedding code within visual images in digital formats, such as computer files, and physical representations, such as print or film. Our primary system embeds a message in an image by making subtle changes to the brightness of the pixels, creating a message that can be detected and decoded by hardware that has been enabled with our patented reader technology. Our embedding process adjusts to the unique characteristics of the content, placing a stronger watermark signal in areas with rich detail and a weaker watermark signal in areas with little detail. Because the message is carried by the image's pixels, it is file- format 42 independent. The message can survive most normal image edits, rotation, scaling, file-format transformations, copying, scanning and printing. The structure of the information in our digital watermark is modeled along the lines of a network protocol. The watermark protocol consists of protocol structure information, such as the type of message and protocol version, the actual message data and error correction data. The protocol can be upgraded to readily accommodate new message types in the future, and is designed so that later versions of our reader software will be able to read previously created watermarks. The message in our watermarked content can carry identifying information, attributes and instructions. This message is typically short in length so that it can be replicated throughout the image content many times. The information in the message can uniquely identify the content, link to Web destinations or databases, communicate information about the content, enable tracking of the content or convey instructions for software or devices. Our technologies allow messages in our watermarked images to survive through a variety of changes to the underlying image, including scaling and rotation of the image. The ability to be rotation independent is particularly important for images that are acquired through digital scanners or cameras because the input image is rarely at the exact same orientation as the original image. We achieve rotation independence through a patented process that incorporates orientation information into our digital watermarks, which allows our watermarks to be read regardless of their orientation relative to the scanner or camera. Using this orientation information, our patented reader technology can recover an image's embedded message after scale changes of as much as .6x to 2x the original image size. We believe these features will be important for communicating the embedded messages through changes from digital to physical form and back again. We believe these features will be especially critical for applications that include printing and scanning, or recording a digital video to VHS and back to DVD. To protect our significant efforts in creating these technologies, we have implemented an extensive intellectual property protection program that relies upon a combination of patent, copyright, trademark and trade secret laws, nondisclosure agreements and other contractual provisions. We have adopted an aggressive patent strategy. We believe that we have established one of the world's most extensive patent portfolios in the field of digital watermarking, holding 15 U.S. issued patents, with at least 59 U.S. patent applications currently on file, of which 2 have received a notice of allowance, and at least 17 foreign patent applications pending, including Patent Cooperation Treaty applications. We also believe, based on published patents, that we hold some of the earliest invention dates on issued patents in the field of digital watermarking and that some of these early patents may be of significant value to our competitive position. We also own registered trademarks in both the U.S. and other countries and have applied for other trademarks and have licensed rights to other technologies. We seek to protect new product applications through both existing patents and filings for new patents. We are not currently involved in any proceedings and are not currently aware of any claims regarding our intellectual property rights. Although we devote significant resources to developing and protecting our technologies, and periodically evaluate potential competitors of our technologies for infringement of our intellectual property rights, these infringements may nonetheless go undetected or may arise in the future. We expect that infringement claims may increase as companies become more concerned with protecting their content from electronic copying. 43 Customers and Strategic Relationships Since the introduction of our first product in 1996, we have built a broad technology platform that we believe has a range of applications. Our initial customers were copyright owners concerned with the use of digital imaging tools in producing unauthorized high-quality copies of their images. We have helped corporate users to generate revenue and extend their brands through image commerce initiatives. We later developed image commerce applications allowing customers to persistently identify their protected properties or locate those properties on the Internet and, ultimately, discourage the unauthorized distribution or use of those properties. Our strategic partners use our image commerce applications to offer licensing and image search functions within image-editing products. While our applications continue to develop to address changing technological trends, our fundamental embedding and reader technologies continue to find increased applicability. Customers Digimarc has been awarded a multi-year contract to develop a system to deter the use of personal computer systems in the counterfeiting of currency. The contract is funded by a consortium of leading central banks. The identities of the participating banks, design of the system and timetable for deployment are confidential. The central banks have acquired an exclusive license to Digimarc's technologies for deterring the counterfeiting of currency. Digimarc has retained the exclusive right to use the technologies developed for the system in other applications, subject to approval by the banks. Digimarc's current customers also include leaders in the sports, entertainment, news and publishing fields, as well as leading image creators, such as National Geographic Television, Corbis, Getty Communications, Time, Inc. and Fox Broadcasting. Our target markets include photographers, Web designers and OEMs, such as Adobe, Corel and Micrografx. Our stock photo agency customers account for 75% of all stock photo collections, which include more than 60 million high-quality photographs. The following case studies provide illustrations of how selected customers have used our products and services to address their copyright concerns: . NASA's Lunar and Planetary Institute (LPI). LPI was looking for a way to announce its copyrights on the unique images in its 3-D Tour of the Solar System CD-ROM. LPI also wanted to remind viewers that these images could not be copied without permission. After much study, LPI took a dual approach by adding a "do not copy" warning to the packaging and Digimarc- enhancing all of the images. LPI used the Digimarc Plug-ins bundled with Adobe Photoshop to mark the images on the CD-ROM, as well as the images on the LPI Web site. To date, LPI has discovered no misuse of the images, and it has indicated to us that it plans to use Digimarc-enhanced images on future projects to communicate image copyrights. . National Geographic Television. National Geographic Television uses Digimarc software to add "digital asset tags" to assist with tracking and management of the computer-generated original content it uses in its television programming. National Geographic Television's graphic designers Digimarc-enhance digital art used in their productions prior to sharing the work with outside production facilities or other groups within the National Geographic Society. Strategic Relationships . Macrovision and Philips. In 1997, we entered a joint marketing and development agreement with Macrovision, our largest shareholder, aimed at addressing the absense of an effective DVD security method. Under this arrangement, we have agreed to develop with Macrovision 44 a system to control the copying and unauthorized playing of video content in all forms of distribution, with an initial focus on DVD video. In 1998, Philips NV joined the partnership. Macrovision and Philips have been developing the video copy prevention and play control solution, with Digimarc contributing intellectual property and technical assistance. In addition, Macrovision has exclusive marketing rights for the video copy prevention and playback control solution for a number of years, subject to payment of minimum royalties. Between December 1997 and June 1999, Macrovision purchased shares of our preferred stock that upon the closing of this offering will be converted into 924,475 shares of our common stock. . Hearst. In October 1999, we entered into a binding letter agreement with Hearst Communications, Inc. Under this agreement, Hearst and Digimarc will jointly promote and market MediaBridge by enhancing the editorial content of participating Hearst magazines and by enabling advertisements in Hearst magazines to be compatible with MediaBridge. In connection with these marketing efforts, we have agreed to provide a non-exclusive license to Hearst to enable its editorial content to be compatible with MediaBridge and to sublicense MediaBridge to its advertisers. We will also provide Hearst with all reasonable and necessary development tools and related training to enable it to create and publish Digimarc-enabled content for its magazines. Under the letter agreement, we have granted Hearst a warrant to purchase up to 150,000 shares of our common stock at an exercise price equal to our initial public offering price, 87,500 of which are subject to vesting based upon events as set forth in the letter agreement. In addition to marketing MediaBridge to publishers of its magazines and their advertisers, Hearst has agreed to promote MediaBridge to readers of its publications and to remit to Digimarc a portion of revenues it receives from MediaBridge-enabled advertising. . Wired. In October 1999, we entered into a binding letter agreement with Wired magazine. Under this agreement, Digimarc and Wired have each agreed to encourage advertisers to use MediaBridge for their advertisements in issues of Wired magazine beginning in the summer of 2000. In addition, Wired has agreed to jointly promote and market in Wired magazine and to remit to us a portion of the revenue it receives for MediaBridge-enabled advertising. Under this agreement, we have agreed to provide a non- exclusive license to Wired to enable its editorial content to be compatible with MediaBridge, as well as to provide Wired with all reasonable and necessary development tools, training, software and cameras for it to comply with its obligations under the agreement. We have also agreed to refrain from granting a license to distribute a MediaBridge-enabled publication to any other publisher until at least 30 days after the first issue of Wired is published under this agreement. . Logitech. In September 1999, we entered into a non-binding letter of intent to establish a strategic partnership with Logitech, Inc. In this letter of intent, Logitech expressed its intention to enter into an agreement with Digimarc to include MediaBridge with Logitech's tethered PC camera software and to prominently mark each package with the Digimarc logo beginning no later than six months after the first commercial availability of MediaBridge. . 3Com. In September 1999, we entered a non-binding letter of intent to establish a strategic partnership with 3Com Corporation. In this letter of intent, 3Com expressed its intention to enter a bundling agreement with Digimarc that will provide for the bundling of MediaBridge with 3Com's tethered PC cameras and to prominently mark each package with the Digimarc logo beginning no later than six months after Digimarc's first commercial shipment of MediaBridge. 45 . Be Incorporated. In August 1999, we entered a non-binding letter of intent to establish a strategic partner relationship with Be Incorporated for use of our MediaBridge software as a standard feature of their operating system. In exchange, Digimarc will grant a royalty free, non- exclusive license to Be Incorporated to offer MediaBridge to licensees of its operating system. . Adobe. In 1996, Digimarc granted a ten-year license to Adobe to use Digimarc's watermarking technologies in its Photoshop application, a leading professional image editing application. Simultaneously, Adobe granted Digimarc a ten-year license which allows us to use their software code to develop new applications that are compatible with Adobe's technology. In the same year, Adobe incorporated Digimarc's technology into Adobe's ImageReady application, an image processing application designed specifically for the needs of Web publishers. Between July 1996 and June 1999, Adobe Ventures L.P. purchased shares of our preferred stock that upon consummation of this offering will be converted into 846,692 shares of our common stock. . Hewlett-Packard. In June 1999, Hewlett-Packard made an investment in Digimarc by purchasing $1.5 million of our preferred stock to help us foster new advancements in our digital watermarking technologies and image commerce applications. Upon the closing of this offering, Hewlett- Packard's preferred stock will be converted into 300,000 shares of our common stock. . Corbis. In 1998, Digimarc granted a three-year enterprise-wide license to Corbis for the use of Digimarc image commerce solutions across Corbis' image collections. Since that time, Corbis and Digimarc have cooperated in defining market requirements and advancing standards that promote the industry-wide use of Digimarc watermarking. In addition, in 1998, Digimarc purchased certain intellectual property relating to digital watermarking from Corbis. Competition The markets in which we compete are emerging, highly competitive, fragmented and characterized by rapidly changing technology and evolving standards. We face competition in the overall digital watermarking market as well as in each of the market segments where our products and services compete. We believe that the principal competitive factors in the markets for our products are functionality, interoperability with major hardware and software platforms, and the costs, time to implementation and support services associated with the installation of new products and services. We have experienced and expect to continue to experience increased competition from enterprises in high- technology industries that are developing watermarking capabilities of their own, many of whom have significantly greater financial, technical and marketing resources than we have. Digimarc's major competition comes from the internal development efforts at high-technology companies. Internal technology departments have staffed projects to build their own watermarking systems utilizing a variety of tools. In some cases, these internal-development projects have been successful in satisfying the needs of an organization. The competitive factors in this area require that we generate a product that conforms to the customer's technology standards, scales to meet the needs of large enterprises, operates globally and costs less than the results of an internal development effort. Our video copy prevention and play control solution for DVD faces intense competition. Our consortium, comprised of Digimarc, Macrovision and Philips, directly competes with a larger consortium comprised of IBM, NEC, Sony, Hitachi and Pioneer. 46 Most competition in the secure documents market comes from traditional security features, such as holograms, security threads, special inks, and laminates which compete for the portion of the production budget reserved for security features, and machine-readable features, such as Scrambled Indicia, two dimensional barcodes, Glyphs from Xerox and data-carrying magnetic stripes. Our Internet-based technology faces competition from companies that provide Internet portals, and search and directory services. For example, we compete with search engines, including Excite@Home, Inktomi and AltaVista, for the traffic generated by Internet users seeking links to third-party content to address their online information needs. We also compete with directory services, such as Yahoo! and LookSmart, because they provide alternative ways for users to obtain the desired information. Our current and potential competitors, irrespective of the technology they use or intend to use, may have well-established relationships with current and potential customers of ours, extensive knowledge of the markets targeted by us, better name recognition than us and more extensive financial, development, sales and marketing resources than us. Therefore, our competitors' products may achieve greater market acceptance than those offered by us. The development and marketing of competing software may reduce the marketability of our products and therefore may harm our business, operating results and financial condition. Our business is characterized by extensive research efforts and rapid technological progress. To remain competitive, we will be required to expand and enhance the functionality of our watermarking software and reader technologies. New developments are expected to continue, and there can be no assurance that discoveries by others, including current and potential competitors and internal development efforts, will not render our services and products noncompetitive. Because of rapid technological change, we may be required to expend greater amounts in the development of each new product than currently anticipated, which in turn will require greater revenue to recoup such expenditures. Employees As of October 21, 1999, we had 57 full-time employees, including 14 in sales and marketing, 30 in research and development and 13 in finance, administration and corporate communications. Our future success will depend, in part, on our ability to continue to attract, retain and motivate highly qualified technical and management personnel, for whom competition is intense. Our employees are not covered by any collective bargaining agreement, and we have never experienced a work stoppage. We believe that our relations with our employees are good. Facilities Our principal administrative, sales, marketing, support and research and development facility is currently located in Lake Oswego, Oregon. This facility occupies a total of approximately 6,000 square feet under a sub-lease that expires in October 2000. We have signed a five-year lease on approximately 16,500 square feet of space in Tualatin, Oregon, and intend to locate our principal facility there in November 1999. We believe our current facilities are adequate to meet our needs for the foreseeable future. Legal Proceedings We may from time to time become a party to various legal proceedings arising in the ordinary course of our business. However, we are not currently subject to any material legal proceedings. 47 MANAGEMENT Officers and Directors The following table sets forth certain information regarding our executive officers, corporate officers and directors as of October 21, 1999:
Name Age Position - ---- --- -------- Executive Officers Bruce Davis............. 47 President, Chief Executive Officer and Director Geoffrey Rhoads......... 37 Chief Technology Officer and Director E. K. Ranjit............ 49 Chief Financial Officer and Secretary J. Scott Carr........... 37 Vice President and General Manager, Secure Documents Corporate Officers Burt W. Perry........... 45 Vice President of Engineering Kathy S. Brogdon........ 46 Vice President of Finance and Operations William Y. Conwell...... 40 Vice President of Intellectual Property Directors Philip J. Monego, Sr.... 52 Chairman of the Board Brian J. Grossi......... 49 Director John Taysom............. 45 Director
Executive Officers Bruce Davis has served as our president, chief executive officer and director since December 1997. Prior to joining us, Mr. Davis served as president of Titan Broadband Communications, a provider of information technology and satellite communications systems and services, from April 1997 to December 1997. Prior to that, Mr. Davis served as president of Prevue Networks, Inc., a supplier of electronic program guides and program promotion services for the cable and satellite television markets, from July 1996 to February 1997. Prior to that, Mr. Davis founded and served as president of TV Guide On Screen, a joint venture of News Corporation and TCI which supplied electronic program guides and navigational software for the cable television market, from January 1993 to July 1996. Mr. Davis received a B.S. in accounting and psychology and an M.A. in criminal justice from the State University of New York at Albany, and a J.D. from Columbia University. Geoffrey Rhoads founded Digimarc in 1995 and now serves as chief technology officer, secretary and director. Previously, Mr. Rhoads served as our interim president from September to November 1995, and as chairman of the board of directors from January 1995 to March 1996. Prior to that, Mr. Rhoads was the founder and president of Pinecone Imaging Corporation, a company which develops imaging systems for telescopes, since 1992. Mr. Rhoads received his B.A. in physics from the University of Oregon. E. K. Ranjit has served as our chief financial officer since August 1999. Prior to that, he served as vice president of finance and treasurer of TriQuint Semiconductor, Inc., a supplier of integrated circuits for the wireless communications, telecommunications, data communications and aerospace markets from July 1996 to August 1999, and as its corporate controller from May 1991 to June 1996. Mr. Ranjit received a B.S. from the University of Texas at Dallas and an M.B.A. from Pepperdine University. 48 J. Scott Carr has served as our vice president and general manager of secure documents since June 1999. Prior to that, he served as our vice president of marketing and business development from January 1998 to May 1999, and director of business development from May 1996 to December 1997. Prior to joining us, Mr. Carr served as vice president of marketing at nCUBE Corporation, a manufacturer of video servers, from July 1995 to May 1996. Prior to that, Mr. Carr worked as a staff architect at Sequent Computer Systems, Inc., a computer equipment manufacturer, from August 1992 to July 1995. Mr. Carr received his B.S. in computer science from Oregon State University. Corporate Officers Burt W. Perry has served as our vice president of engineering since July 1996 and served as interim co-president from August through December 1997. Prior to that, Mr. Perry worked as an engineering manager at Intel, designing and managing technology and software development, from June 1993 to July 1996. Mr. Perry received a B.S. in computer science from the University of Delaware. Kathy S. Brogdon has served as our vice president of finance and operations since October 1996 and served as interim co-president from August through December 1997. Prior to joining us, Ms. Brogdon served as vice president of finance and operations at Active Arts, Inc., a multimedia company, from December 1995 to October 1996. Ms. Brogdon worked as the controller and a partner at Nova Northwest, Inc., a lending, leasing and financial advisory company, from September 1990 to December 1995. Ms. Brogdon received a B.A. in accounting and quantitative methods from the University of Oregon and became a Certified Public Accountant in Oregon in 1978. William Y. Conwell has served as our vice president of intellectual property since July 1999. Prior to joining us, Mr. Conwell was a patent attorney at Klarquist Sparkman Campbell Leigh & Whinston, LLP since 1984, and became a partner in January 1990. Mr. Conwell received a bachelor's degree in Electrical Engineering from Georgia Institute of Technology and a J.D. from Emory University School of Law. Directors Philip J. Monego, Sr. has been chairman of our board of directors since 1996. Mr. Monego has served as chief executive officer and chairman of the board of directors of Voquette, Inc., an Internet media portal company, since May 1999. Prior to that, Mr. Monego was co-founder, president and chief executive officer of NetChannel, Inc., an Internet information delivery service, from May 1996 to June 1998. Prior to that, Mr. Monego was interim president and chief executive officer of Yahoo! Corporation from April 1995 to September 1995. He is an early investor in several new media startups and also currently a venture partner in the Media Technology Venture fund. Mr. Monego received a B.A. in management from LaSalle University. Brian J. Grossi has served as one of our directors since July 1996. Mr. Grossi co-founded AVI Capital, a venture capital firm specializing in high- technology companies, in 1994. Prior to that, Mr. Grossi was a general partner with Alpha Partners, a venture capital firm, from 1982 to 1992. Prior to that, he worked at the Stanford Research Institute as a research engineer and project leader from 1976 to 1982. Currently, Mr. Grossi serves as a director of Apptitude, Inc., Aptia, Inc., Intraspect Software, Inc., InVisio, Inc., nCommand, Inc., Vivant! Corporation and Pointbase, Inc. Mr. Grossi received a B.S. and an M.S. in mechanical engineering from Stanford University. 49 John Taysom has served as one of our directors since December 1997. Mr. Taysom has been employed by Reuters, a worldwide television and news agency, since 1982 and is currently the Managing Director of the Reuters Greenhouse Fund. Mr. Taysom also serves on the board of directors of TIBCO Software Inc. and Fantastic Corporation, a Swiss company. Mr. Taysom received a B.Sc. in economics from Bath University. Upon consummation of this offering, our board of directors will be divided into three classes. One class of directors will be elected each year for a three-year term and until their successors are selected and qualified or until their earlier resignation or removal. Mr. Taysom will serve until our 2000 annual meeting of shareholders; Messrs. Monego and Rhoads will serve until our 2001 annual meeting of shareholders; and Messrs. Davis and Grossi will serve until our 2002 annual meeting of shareholders. Executive officers are elected by and serve at the discretion of the board of directors. Board Committees The board of directors has established a compensation committee and an audit committee. The compensation committee, consisting of Messrs. Monego and Grossi, exercises the authority of the board of directors on all compensation matters, including both cash and equity incentive compensation, and administers our employee benefit plans. The audit committee, consisting of Messrs. Monego and Grossi, recommends the selection of independent public accountants to the board of directors, reviews the scope and results of the audit and other services provided by our independent accountants and reviews our accounting practices and systems of internal accounting controls. Director Compensation Directors who are also employees of Digimarc receive no additional compensation for their services as directors. Directors who are not employees of Digimarc do not receive a fee for attendance in person at meetings of the board of directors or committees of the board of directors, but they are reimbursed for travel expenses and other out-of-pocket costs incurred in connection with their attendance of meetings. Non-employee directors have also been granted stock options in the past. After the closing of this offering, we will adopt an option program for our non-employee directors. See "Management-- Employee Benefit Plans--1999 Non-Employee Director Option Program." Compensation Committee Interlocks and Insider Participation No member of our compensation committee was at any time during the fiscal year ended December 31, 1998 an officer or employee of Digimarc. No member of our compensation committee serves as a member of the board of directors or compensation committee of any entity that has any executive officer serving as a member of our board of directors or compensation committee. Summary Compensation Table The following table contains information in summary form concerning the compensation paid to our chief executive officer and each of our most highly compensated executive officers, which we refer to in this prospectus as the named executive officers, whose total salary, bonus and other compensation exceeded $100,000 during the years ended December 31, 1996, 1997 and 1998. 50 The salary information shown for Messrs. Davis and Carr reflects compensation paid to each in his principal position commencing on December 1997 and May 1996, respectively.
Long-Term Annual Compensation Compensation -------------------- ------------ Securities Name and Principal Underlying All Other Position Year Salary ($) Bonus ($) Options (#) Compensation ($) - ------------------ ---- ---------- --------- ------------ ---------------- Bruce Davis(1) ........ 1998 208,124 75,000 -- 65,529 President and Chief Executive Officer 1997 2,596 -- 400,000 -- 1996 -- -- -- -- Geoffrey Rhoads(2) .... 1998 123,542 75,000 -- -- Chief Technology Officer 1997 90,101 -- -- -- 1996 78,700 -- -- 302,505 J. Scott Carr ......... 1998 109,167 45,000 -- -- Vice President and General Manager-- 1997 90,000 -- 50,000 -- Secure Documents 1996 55,625 -- 60,000 --
- -------- (1) The $65,529 of other compensation represents reimbursement for relocation expenses. (2) In July 1996, Geoffrey Rhoads and his spouse granted us, for a one-time cash payment of $217,505.30, an option to purchase a maximum of 701,630 shares of our common stock owned by them at an exercise price of $0.01 per share. The number of shares subject to the option lapsed on a monthly basis, and the option could only be exercised by us upon Mr. Rhoads' voluntary departure or his termination for cause. As of July 30, 1999, our rights under this option lapsed. In July 1996, we repurchased 170,000 shares of our common stock from Mr. Rhoads for an aggregate purchase price of $85,000. Aggregate Option Exercises in Last Fiscal Year and Fiscal Year-End Values The following table provides summary information, as to the named executive officers, concerning stock options exercised during 1998 and the number of shares subject to both exercisable and unexercisable stock options as of December 31, 1998. The value of unexercised options at year-end is based on an assumed fair market value of our common stock at December 31, 1998 of $0.50 per share less the exercise price.
Number of Securities Value of Unexercised Underlying Options at In-the-Money Options at Shares Fiscal Year-End (#) Fiscal Year-End ($)(1) Acquired on Value ------------------------- ------------------------- Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable - ---- ----------- ------------ ----------- ------------- ----------- ------------- Bruce Davis............. -- -- 100,000 300,000 0 0 Geoffrey Rhoads......... -- -- -- -- -- -- J. Scott Carr........... -- -- 66,664 43,336 17,500 3,500
- -------- (1) Fair market value as of December 31, 1998 was determined by the board of directors, and is based upon its assessment of our overall business, business prospects and financial condition at that time. The board considered, among other things, the illiquid nature of Digimarc's common stock, the price paid for shares of preferred stock in arm's-length transactions and Digimarc's financial performance and operating results at that time. Employment Arrangements In July 1999, we adopted a policy regarding the vesting of stock options for all our officers, including prior grants. All shares subject to their options that have not vested will immediately vest if the following two conditions are met: . we merge with another company and there is a change of control of our company or we sell substantially all of our assets to another company; and . any officer's employment is terminated, or constructively terminated, within twelve months thereafter. 51 Employee Benefit Plans 1995 Stock Incentive Plan The 1995 plan was approved by our board of directors in October 1995 and by our shareholders in March 1996. Initially, a total of 500,000 shares of common stock were reserved for issuance under the 1995 plan. This reserve was amended several times to reserve a total of 2,800,000 shares of common stock for issuance under the plan. As of October 21, 1999, options to purchase 426,932 shares of common stock granted had been exercised, options to purchase 2,262,461 shares of common stock were outstanding, and options to purchase 110,607 shares of common stock remained available for grant. The outstanding options were exercisable at a weighted average exercise price of $1.20 per share. Outstanding options to purchase an aggregate of 627,461 shares were held by employees and consultants who are not officers or directors of our company. After the closing of this offering, all options granted under the 1995 plan that expire without having been exercised or are cancelled will become available for grant under the 1999 plan. The 1995 plan will terminate in 2005, unless terminated earlier by our board of directors. Awards under the 1995 plan may consist of restricted stock, incentive stock options, which are stock options that qualify under Section 422 of the Internal Revenue Code, or non- qualified stock options, which are stock options that do not qualify under that provision. The board may grant incentive stock options to employees, including officers and directors who are employees. Non-qualified stock options and restricted stock may be granted to employees, including officers and directors who are employees, or consultants. The compensation committee may set the terms of such grants, subject to the restrictions in the 1995 plan. During an optionee's lifetime, only the optionee can exercise an option. The optionee cannot transfer their options other than by will or the laws of descent and distribution. If an optionee's status as an employee or consultant terminates for any reason other than death or disability, the optionee may exercise their exercisable options within the three-month period following the termination. In the event the optionee becomes disabled or dies while the optionee is an employee or consultant of our company, the options vested as of the date of disability or death may be exercised prior to the earlier of their expiration date or 12 months from the date of the optionee's disability or death. In November 1997, we amended the plan to adjust certain exercise periods, which affects all grants made after that time. Under this amendment, the time to exercise after termination was reduced from three months to one month and the time to exercise after death or disability was reduced from 12 months to four months. In the event of a proposed sale of all or substantially all of our assets or a merger by us with or into another company, every option outstanding under the 1995 plan may be assumed or substituted with an equivalent option by the successor company, or its parent or subsidiary. However, our board of directors may determine, in lieu of assumption or substitution, that an optionee is entitled to exercise their options, including options which would not otherwise be exercisable within thirty days of this determination by the board. Our officers' stock option grant agreements provide for accelerated vesting of their options in the event of a change of control. If we liquidate or dissolve, the options will terminate immediately prior to the completion of the dissolution or liquidation. However, our board may in its sole discretion declare that any option terminates on a date fixed by the board and give the optionees the right to exercise their options, including options which would not otherwise be exercisable. 52 The 1995 plan will terminate automatically in 2005 unless terminated earlier by our board of directors. The board of directors has the authority to amend or terminate the 1995 plan, subject to stockholder approval of certain amendments. However, no action may be taken which will affect any shares of common stock previously issued and sold or any option previously granted under the 1995 plan, without the optionee's consent. We do not anticipate granting options under this plan after closing of this offering. 1999 Stock Incentive Plan Our 1999 Stock Incentive Plan was approved by our board of directors on October 6, 1999. We will be submitting it for approval by our stockholders prior to the closing of this offering. After the completion of this offering, we anticipate all further option grants will be made solely under the 1999 Stock Incentive Plan. Initially, we reserved 1,500,000 shares of our common stock for issuance under the 1999 Stock Incentive Plan. The number of shares initially reserved will be increased by the number of shares reserved under our 1995 Stock Incentive Plan and available for grant as of the date of the closing of this offering, and represented by awards under the 1995 Stock Incentive Plan that are forfeited, expire or are cancelled following the adoption of the 1999 Stock Incentive Plan. Commencing on the first day of our fiscal year beginning in 2001, the number of shares of stock reserved for issuance under the 1999 Stock Incentive Plan will be increased annually by a number equal to the lesser of 3% of the fully-diluted number of shares outstanding as of that date or a lesser number of shares determined by the board. However, the maximum number of shares available for issuance as incentive stock options shall be increased by the lesser of 625,000 shares, 3% of the number of fully-diluted shares outstanding as of that date or a lesser number of shares determined by the board. No options to purchase shares of our common stock under the 1999 Stock Incentive Plan have been exercised, no options to purchase shares of common stock are outstanding, and options to purchase 1,500,000 shares of common stock remained available for grant prior to this offering. The purpose of the 1999 Stock Incentive Plan is to attract and retain the best available personnel, to provide additional incentive to our employees, directors and consultants and our related entities and to promote the success of our business. The 1999 Stock Incentive Plan provides for the granting to employees of incentive stock options, and the granting to our employees, directors and consultants and our related entities of non-statutory stock options, stock appreciation rights, dividend equivalent rights, restricted stock, performance units, performance shares and other equity-based rights. Under the 1999 Stock Incentive Plan, our board of directors, or a committee designated by the board made up of two or more non-employee directors, administers the granting of stock and options to directors and officers in a way that allows these grants of stock to be exempt from Section 16(b) of the Securities Exchange Act and determines the provisions, terms and conditions of each award. When stock or options are granted to other participants in the 1999 Stock Incentive Plan, our board, or a committee designated by our board administers these awards and determines the provisions, terms and conditions of each award. During their lifetime, those who hold the incentive stock options granted under this plan cannot transfer these options. The options may be distributed by a will or the laws of descent upon the death of the option holder. No one is allowed to exercise the incentive stock options except the person to whom the options were first issued while that person is alive. Stock or options other than incentive 53 stock options which are issued under the 1999 Stock Incentive Plan can be transferred to the extent agreed upon at the time of the award. The term of 1999 Stock Incentive Plan awards will be determined by the board. The exercise price or purchase price, if any, of 1999 Stock Incentive Plan awards that are not incentive stock options will be determined by the board, but will not be less than 50% of the fair market value of the stock. The form of payment for the shares of common stock when options are exercised or stock is purchased under a 1999 Stock Incentive Plan award will be determined by the board and may include cash, check, shares of common stock or the assignment of part of the proceeds from the sale of shares acquired upon exercise or purchase of the award. Where the award agreement permits the exercise or purchase of an award for a period of time following the recipient's termination of service with us, disability or death, that award will terminate to the extent not exercised or purchased on the last day of the specified period or the last day of the original term of the award, whichever occurs first. If a third party acquires us through the purchase of all or substantially all of our assets, a merger or other business combination, all unexercised options will terminate unless assumed by the successor corporation. Unless terminated sooner, the 1999 Stock Incentive Plan will terminate automatically in 2009. The board has the authority to amend, suspend or terminate the 1999 Stock Incentive Plan, subject to stockholder approval of certain amendments. However, no action may be taken which will affect awards previously granted under the 1999 Stock Incentive Plan unless agreed to by the affected grantees. 1999 Non-Employee Director Option Program Our 1999 Non-Employee Director Option Program was adopted as part of to the 1999 Stock Incentive Plan and is subject to the terms and conditions of the 1999 Stock Incentive Plan. Our 1999 Non-Employee Director Stock Option Program was approved by our board of directors on October 6, 1999. The 1999 Non- Employee Director Stock Option Program is effective as of the effective date of this prospectus, and no awards will be made under this program until that time. The purpose of the 1999 Non-Employee Director Stock Option Program is to enhance our ability to attract and retain the best available non-employee directors, to provide them additional incentives and, therefore, to promote the success of our business. The 1999 Non-Employee Director Stock Option Program establishes an automatic option grant program for the grant of awards to non-employee directors. Under this program, each then-existing non-employee director upon the effective date of this prospectus and each non-employee director first elected to our board of directors following the closing of this offering will automatically be granted an option to acquire 10,000 shares of our common stock at an exercise price per share equal to the fair market value of our common stock at the date of grant. These options will vest and become exercisable in four equal installments on each anniversary of the grant date. Upon the date of each annual stockholders' meeting, each non-employee director who has been a member of our board of directors for at least six months prior to the date of the stockholders' meeting will receive an automatic grant of options to acquire 2,500 shares of our common stock at an exercise price equal to the fair market value of our common stock at the date of grant. These options will vest and become fully exercisable on the first anniversary of the grant date. 54 The term of each automatic option grant and the extent to which it will be transferable will be provided in the agreement evidencing the option. The consideration for the option may consist of cash, check, shares of our common stock, the assignment of part of the proceeds from the sale of shares acquired upon exercise of the option or any combination. The 1999 Non-Employee Director Stock Option Program is administered by the board or a committee designated by the board made up of two or more non- employee directors so that such awards would be exempt from Section 16(b) of the Exchange Act. The program administrator shall determine the terms and conditions of awards, and construe and interpret the terms of the program and awards granted under the program. Non-employee directors may also be granted additional incentives, subject to the discretion of the board or the committee. Unless terminated sooner, the 1999 Non-Employee Director Stock Option Program will terminate automatically in 2009 when the 1999 Stock Incentive Plan terminates. Our board of directors has the authority to amend, suspend or terminate the 1999 Non-Employee Director Stock Option Program provided that no such action may affect awards to non-employee directors previously granted under the program unless agreed to by the affected non-employee directors. 1999 Employee Stock Purchase Plan Our 1999 Employee Stock Purchase Plan was approved on October 6, 1999. We will be submitting it for approval by our stockholders prior to the closing of this offering. The 1999 Employee Stock Purchase Plan is intended to qualify as an "employee stock purchase plan" under Section 423 of the Internal Revenue Code in order to provide our employees with an opportunity to purchase common stock through payroll deductions. The 1999 Employee Stock Purchase Plan will be administered by our board of directors or a committee designated by our board, which will have the authority to terminate or amend the 1999 Employee Stock Purchase Plan, subject to specified restrictions, and otherwise to administer the 1999 Employee Stock Purchase Plan and to resolve all questions relating to its administration. Initially, we reserved 625,000 shares of our common stock for issuance and made them available for purchase under the 1999 Employee Stock Purchase Plan, subject to adjustment in the event of a stock split, stock dividend or other similar change in our common stock or our capital structure. Commencing on the first day of our fiscal year beginning in 2001, the number of shares of stock reserved for issuance under this plan will be increased annually by a number equal to the lesser of 1% of the fully-diluted number of shares outstanding as of that date, 250,000 shares or a lesser number of shares determined by the board. All employees of our company and of our subsidiaries whose customary employment is for more than five months in any calendar year and 20 hours or more per week are eligible to participate in our 1999 Employee Stock Purchase Plan. Employees hired after the closing of this offering are eligible to participate in our 1999 Employee Stock Purchase Plan, subject to a ten-day waiting period after hiring. Non-employee directors, consultants and employees subject to the rules or laws of a foreign jurisdiction that prohibit or make impractical their participation in the 1999 Employee Stock Purchase Plan are not eligible to participate in our 1999 Employee Stock Purchase Plan. The 1999 Employee Stock Purchase Plan designates the periods when the stock is offered, when it can be purchased, and the exercise dates for options. Offer periods are generally overlapping periods of 24 months. The initial offer period begins on the effective date of this prospectus, and 55 ends on January 31, 2002. Additional offer periods will commence each December 1 and June 1. Purchase periods are generally six-month periods, with the initial purchase period commencing on the effective date of this prospectus and ending on May 31, 2000. After the effective date of this prospectus, purchase periods will commence each December 1 and June 1. Exercise dates are the last day of each purchase period. If we merge with or into another corporation, sell all or substantially all of our assets or enter into other transactions in which our shareholders before the transaction own less than 50% of the total combined voting power of our outstanding securities following the transaction, the board may elect to shorten the offer period then in progress. On the first day of each offer period, a participating employee is granted a purchase right. A purchase right is a form of option to be exercised automatically on the forthcoming exercise dates within the offer period. During the offer period, authorized deductions from the pay of participants are credited to their accounts under the 1999 Employee Stock Purchase Plan. When the purchase right is exercised, the participant's withheld salary is used to purchase shares of common stock. The price per share at which shares of common stock are to be purchased under the 1999 Employee Stock Purchase Plan during any purchase period is the lesser of 85% of the fair market value of the common stock on the date of the grant of the option, which is the beginning of the offer period, or 85% of the fair market value of the common stock on the exercise date. The participant's purchase right is exercised in this manner on each exercise date arising in the offer period unless, on the first day of any purchase period, the fair market value of the common stock is lower than the fair market value of the common stock on the first day of the offer period. If it is, the participant's participation in the original offer period is terminated, and the participant is automatically enrolled in the new offer period effective the same date with an exercise price equal to the fair market value of the stock on the first day of the new offer period. Payroll deductions may range from 1% to 15% in whole percentage increments of a participant's regular base pay, including cash payments for commissions, overtime, bonuses, annual awards and other cash incentive payments. Participants may not make direct cash payments to their accounts. The maximum number of shares of common stock that any employee may purchase under the 1999 Employee Stock Purchase Plan during a purchase period is 750 shares. The Internal Revenue Code imposes additional limitations on the amount of common stock that may be purchased during any calendar year. 401(k) Plan In 1997, we implemented a 401(k) Plan covering certain of our employees who are at least 21 years old and have been employed at least four months. Pursuant to the 401(k) Plan, eligible employees may elect to reduce their current compensation by up to the lesser of 15% of their compensation or the prescribed annual limit ($10,000 in 1999) and contribute these amounts to the 401(k) Plan. We may make contributions to the 401(k) Plan on behalf of eligible employees. Employees become 25% vested in these contributions after one year of service, and increase their vested percentages by an additional 25% for each year of additional service. The 401(k) Plan is intended to qualify under Section 401 of the Internal Revenue Code so that contributions by employees or by us to the 401(k) Plan, and income earned on the 401(k) Plan contributions, are not taxable to employees until withdrawn from the 401(k) Plan, and so that contributions by us, if any, will be deductible by us when made. The trustee under the 401(k) Plan, at the direction of each participant, invests the 401(k) Plan employee salary deferrals in selected investment options. We made no contributions to the 401(k) Plan in 1995, 1996, 1997 or 1998. We do not presently expect to make any contributions to the 401(k) Plan during fiscal 1999. 56 Limitation of Liability and Indemnification Matters We intend to reincorporate in the State of Delaware immediately prior to this offering. Our certificate of incorporation and bylaws will provide that we will indemnify all directors and officers of Digimarc to the fullest extent permitted by Delaware law. Our certificate of incorporation and bylaws also will authorize us to indemnify our employees and other agents, at our option, to the fullest extent permitted by Delaware law. We intend to enter into agreements to indemnify our directors and officers, in addition to indemnification provided for in our charter documents. These agreements, among other things, will provide for the indemnification of our directors and officers for certain expenses (including attorneys' fees), judgments, fines and settlement amounts incurred by any such person in any action or proceeding, including any action by or in the right of Digimarc, arising out of such person's services as a director or officer of Digimarc or any other company or enterprise to which such person provides services at the request of Digimarc to the fullest extent permitted by applicable law. We believe that these provisions and agreements will assist us in attracting and retaining qualified persons to serve as directors and officers. Delaware law permits a corporation to provide in its certificate of incorporation that a director of the corporation shall not be personally liable to the corporation or its stockholders for monetary damages for breach of fiduciary duty as a director, except for liability for any breach of the director's duty of loyalty to the corporation or its stockholders, for acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law for liability arising under Section 174 of the General Corporation Law of the State of Delaware, or for any transaction from which the director derived an improper personal benefit. Our certificate of incorporation provides for the elimination of personal liability of a director for breach of fiduciary duty, as permitted by Delaware law. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of Digimarc in accordance with the provisions contained in our charter documents, Delaware law or otherwise, we have been advised that in the opinion of the Securities and Exchange Commission this indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. If a claim for indemnification against such liabilities (other than the payment by Digimarc of expenses incurred or paid by a director, officer or controlling person of Digimarc in the successful defense of any action, suit, or proceeding) is asserted by such director, officer or controlling person, we will, unless in the opinion of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by us is against public policy as expressed in the Securities Act and we will follow the court's determination. We intend to purchase and maintain insurance on behalf of the officers and directors, insuring them against liabilities that they may incur in such capacities or arising out of such status. 57 RELATED PARTY TRANSACTIONS Reincorporation Prior to the closing of this offering, we will reincorporate in Delaware and our existing stockholders will receive shares of common stock and preferred stock of the Delaware corporation in exchange for their shares of common stock and preferred stock of the Oregon corporation. In connection with the closing of this offering, each share of Series A and Series B preferred stock will automatically convert into two shares of common stock of the Delaware corporation and each share of Series C, Series D and Series D-X preferred stock will automatically convert into one share of common stock of the Delaware corporation. Private Placement Transactions Since our inception, we have issued in private placement transactions shares of preferred stock as follows: . an aggregate of 151,411 shares of Series A-1 preferred stock at $2.50 per share in June 1996 to eight investors; . an aggregate of 11,089 shares of Series A-1 preferred stock at $4.50 per share in June 1996 to two investors; . an aggregate of 902,000 shares of Series B-1 preferred stock at $5.00 per share in July 1996 to seven investors, including Adobe Ventures L.P., AVI Capital L.P. and affiliates whose general partner, Brian Grossi, is a member of our board of directors, Justsystem, Inc. and Softbank Ventures, Inc.; . an aggregate of 2,029,786 shares of Series C-1 preferred stock at $2.86 per share in December 1997 to 16 investors, including Philip Monego, Sr., chairman of our board of directors, Adobe Ventures L.P., AVI Capital L.P. and affiliates, Macrovision Corporation, Reuters, Ltd., a general manager of which is John Taysom, a member of our board of directors, and Justsystem, Inc.; . an aggregate of 1,266,000 shares of Series D preferred stock at $5.00 per share in June 1999 to 14 investors, including Philip Monego, Sr., Adobe Ventures L.P., AVI Capital L.P. and affiliates, Macrovision Corporation and Reuters Holdings Switzerland, S.A.; and . an aggregate of 160,000 shares of Series D-X preferred stock at $5.00 per share in August 1999 to three investors, including Philip Monego, Sr. The following table sets forth the number of shares of Series A-1, Series B- 1, Series C-1, Series D and Series D-X preferred stock purchased by our directors, five percent stockholders and their respective affiliates.
Series A-1* Series B-1* Series C-1 Series D Series D-X Holders Preferred Preferred Preferred Preferred Preferred - ------- ----------- ----------- ---------- --------- ---------- Macrovision Corporation............ -- -- 524,475 400,000 -- Reuters Group........... -- -- 699,300 200,000 -- AVI Capital L.P. and affiliates............. -- 252,000 233,549 150,000 -- Adobe Ventures L.P...... -- 250,000 231,692 115,000 -- Philip Monego, Sr....... 16,000 -- 34,965 50,000 40,000 Justsystem, Inc......... -- 200,000 87,412 -- -- Softbank Ventures, Inc.................... -- 200,000 -- -- --
- -------- * Each share of Series A-1 and Series B-1 Preferred converts into two shares of common stock. 58 Investors' Rights Agreement Certain holders of common stock and preferred stock have registration rights with respect to their shares of common stock, including common stock issuable upon conversion of their preferred stock. See "Description of Capital Stock-- Registration Rights of Certain Holders." Transactions with Directors and Executive Officers In July 1996, we repurchased 170,000 shares of our common stock from Mr. Rhoads for an aggregate purchase price of $85,000, which was the same price as the exercise price of stock options granted to other purchasers at approximately the same time. See "Management--Executive Compensation" for a description of stock transactions entered into with our directors and executive officers. Transactions with Affiliates In September 1996, we entered into a software development and distribution agreement with Adobe Systems Incorporated. Under that agreement, we granted a non-exclusive license to Adobe for the use of our licensed software to be bundled with Adobe products in exchange for a one-time engineering fee of $100,000 for the development and license of the software. We believe that all of the transactions set forth above were made on terms no less favorable to us than could have been obtained from unaffiliated third parties. We intend that all future transactions, including loans, between us and our officers, directors, principal shareholders and their affiliates will be approved by the board of directors, including a majority of the disinterested outside directors on the board of directors, and will be on terms no less favorable to us than could be obtained from unaffiliated third parties. 59 PRINCIPAL STOCKHOLDERS The following table sets forth the beneficial ownership of our common stock as of October 21, 1999 and as adjusted to reflect the sale of the shares of common stock in this offering by: . each person or entity known by us to own beneficially more than five percent of our common stock; . our chief executive officer, each of the other named executive officers and each of our directors; and . all of our executive officers and directors as a group. The beneficial ownership is calculated based on 8,013,255 shares of our common stock outstanding as of October 21, 1999 and 11,013,255 shares immediately following the closing of this offering. Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission and generally includes voting or investment power with respect to securities. Unless otherwise indicated, each person or entity named in the table has sole voting power and investment power, or shares voting and investment power with his or her spouse, with respect to all shares of capital stock listed as owned by that person. Shares issuable upon the exercise of options that are currently exercisable or become exercisable within sixty days of October 21, 1999 are considered outstanding for the purpose of calculating the percentage of outstanding shares of our common stock held by the individual, but not for the purpose of calculating the percentage of outstanding shares of our common stock held by any other individual. The address of each of the executive officers and directors is c/o Digimarc Corporation, One Centerpointe Drive, Suite 500, Lake Oswego, Oregon 97035-8615.
Percentage of Shares Beneficially Owned Number of ------------------------- Shares Beneficially Prior to After Name and Address Owned the Offering the Offering - ---------------- ------------------- ------------ ------------ 5% Stockholders Macrovision Corporation .... 924,475 11.5% 8.4% 1341 Orleans Drive Sunnyvale, California 94089 Reuters Group PLC(1)........ 899,300 11.2% 8.2% c/o Reuters Ltd. 85 Fleet Street London, EC4P 4AJ England AVI Capital Management L.P. and affiliates(2).......... 887,549 11.1% 8.1% One First Street Los Altos, California 94022 Adobe Systems Incorporated(3) ........... 507,189 6.3% 4.6% c/o Adobe Incentive Partners 345 Park Avenue San Jose, California 95110 Justsystem Corporation(4)... 487,412 6.1% 4.4% c/o Justsystem, Inc. 2460 Sand Hill Road, Suite 201 Menlo Park, California 94025 Softbank Corp.(5)........... 400,000 5.0% 3.6% c/o Softbank Ventures, Inc. 333 West San Carlos Avenue, Suite 1225 San Jose, California 95110
60
Percentage of Shares Beneficially Owned Number of ------------------------- Shares Beneficially Prior to After Name and Address Owned the Offering the Offering - ---------------- ------------------- ------------ ------------ Named Executive Officers and Directors Philip J. Monego, Sr.(6)... 246,965 3.0% 2.2% Bruce Davis(7)............. 175,000 2.1% 1.6% Geoffrey Rhoads(8)......... 754,280 9.4% 6.8% J. Scott Carr(9)........... 88,125 1.1% 0.8% Brian J. Grossi(10)........ 887,549 11.1% 8.6% John Taysom(11)............ 899,300 11.2% 8.2% All executive officers and directors as a group (6 persons)(12).............. 3,051,219 36.7% 30.1%
- -------- * Less than 1%. (1) Represents 699,300 shares held by Reuters, Ltd. and 200,000 shares held by Reuters Holdings Switzerland, S.A., affiliates of Reuters Group PLC. (2) Brian Grossi is a partner of AVI Capital Management, L.P. and of AVI Management Partners III, L.P. The shares listed represent 754,531 shares held by AVI Capital, L.P., 104,325 shares held by Associated Venture Investors III, L.P., 21,452 shares held by AVI Partners Growth Fund II, L.P. and 7,241 shares held by AVI Silicon Valley Partners, L.P. AVI Capital Management, L.P. is the general partner of AVI Capital, L.P., and AVI Management Partners III, L.P. is the general partner of Associated Ventures Investors III, L.P., AVI Partners Growth Fund II, L.P. and AVI Silicon Valley Partners, L.P. In such capacity, AVI Capital Management. L.P. and AVI Management Partners III, L.P., through a committee comprised of all of their partners, exercises sole voting and investment power with respect to all shares held of record by the respective named investment partnerships; individually, no partner of AVI Capital Management, L.P. or of AVI Management Partners III, L.P., is deemed to have or share such voting or investment power. (3) Represents 507,189 shares held by Adobe Incentive Partners. Adobe Systems Incorporated is the general partner of Adobe Incentive Partners. (4) Represents 487,412 shares held by Justsystem, Inc., a subsidiary of Justsystem Corporation. (5) Represents 400,000 shares held by Softbank Ventures, Inc., a subsidiary of Softbank Corp. (6) Includes options for 90,000 shares of common stock exercisable within 60 days of October 21, 1999. (7) Includes options for 135,000 shares exercisable within 60 days of October 21, 1999 and 5,000 shares owned by Gary and Kimberly Davis, 5,000 shares owned by Joseph and Barbara Davis, 5,000 shares owned by Thomas and Donna Davis, 5,000 shares owned by George and Candace Richard, 5,000 shares owned by John and Halene Richard, 5,000 shares owned by Robert Bradford, Jr. and Grace Richard, 5,000 shares owned by Robert Bradford III and Darcy Richard and 5,000 shares owned by Gary and Karen Gorney, all of whom are relatives of Bruce Davis. Mr. Davis disclaims beneficial ownership of these shares owned by his relatives. (8) Includes 13,000 shares owned by Amanda Rhoads Trust, 13,000 shares owned by Hudson Rhoads Trust, 1,050 shares owned by Craig and Laura Mikkelson, 10,210 shares owned by Barbara K. Rhoads, 850 shares owned by Bryan Gurrie Rhoads, 950 shares owned by Cynthia Brooke Rhoads, 44,920 shares owned by Gurrie and Alice Rhoads, 100 shares owned by Nicole Rhoads--Trustee for the Children of Geoffrey and Nicole Rhoads, 13,000 shares owned by Trevor Rhoads Trust, 750 shares owned by Mittie Hellmich, 750 shares owned by Taylor James Pierce and 750 shares owned by Dirk Pierce, all of whom are relatives of Geoffrey Rhoads or trusts established for their benefit. Mr. Rhoads disclaims beneficial ownership of these shares owned by his relatives. (9) Represents options for 88,125 shares of common stock exercisable within 60 days of October 21, 1999. (10) Represents shares held by AVI Capital L.P. and affiliates of which Mr. Grossi is a general partner. Mr. Grossi disclaims beneficial ownership of these shares except to the extent of his pecuniary interest as a general partner. (11) Represents shares held by Reuters Group. Mr. Taysom disclaims beneficial ownership of these shares. (12) Includes options for 313,125 shares of common stock exercisable within 60 days of October 21, 1999. 61 DESCRIPTION OF CAPITAL STOCK Following the closing of this offering, our authorized capital stock will consist of 30,000,000 shares of common stock and 5,000,000 shares of undesignated preferred stock. The following description of our capital stock is subject to, and qualified in its entirety by, the provisions of our certificate of incorporation and bylaws, which are included as exhibits to the registration statement of which this prospectus is a part, and by the provisions of applicable law. Common Stock As of October 21, 1999, there were 2,428,469 shares of common stock outstanding that were held of record by approximately 96 shareholders. Based on the shares outstanding as of October 21, 1999, there will be 11,013,255 shares of common stock outstanding, assuming no exercise of the underwriters' over- allotment option and no exercise of outstanding options, after giving effect to the sale of the common stock we are offering. The holders of our common stock are entitled to one vote for each share held of record on all matters submitted to a vote of the stockholders, including the election of directors. Subject to preferences that may be granted to any then outstanding preferred stock, holders of common stock are entitled to receive ratably those dividends as may be declared by the board of directors out of funds legally available for such purpose, as well as any distributions to the stockholders. In the event of our liquidation, dissolution or winding up, holders of common stock are entitled to share ratably in all of our assets remaining after payment of liabilities and the liquidation preference of any then outstanding preferred stock. Holders of common stock have no preemptive or other subscription or conversion rights. There are no redemption or sinking fund provisions applicable to the common stock. All outstanding shares of common stock are fully paid and non-assessable. Preferred Stock As of October 21, 1999, there were 4,520,286 shares of preferred stock outstanding and held of record by 24 stockholders. In connection with the closing of this offering, all outstanding shares of Series A and Series B preferred stock will automatically be converted into common stock on a two-for- one basis, and all outstanding shares of Series C, Series D and Series D-X preferred stock will automatically be converted into common stock on a one-for- one basis, and all these shares of preferred stock will be cancelled. From and after the closing of this offering, we will be authorized to issue 5,000,000 shares of preferred stock that will not be designated as a particular class. Our board of directors will have the authority to issue the undesignated preferred stock in one or more series and to determine the powers, preferences and rights and the qualifications, limitations or restrictions granted to or imposed upon any wholly unissued series of undesignated preferred stock and to fix the number of shares constituting any series and the designation of such series, without any further vote or action by the stockholders. The issuance of preferred stock may have the effect of delaying, deferring or preventing a change of control of our company without further action by the stockholders and may adversely affect the voting and other rights of the holders of common stock. At present, we have no plans to issue any shares of preferred stock. Registration Rights of Certain Holders After the closing of this offering, and assuming we comply with other requirements, the holders of approximately 5,584,786 shares of common stock will have the right to cause us to register their 62 shares under the Securities Act. These rights are held under the terms of an investors' rights agreement between us and the holders of these registrable securities. Under the terms of this agreement, if we propose to register any of our securities under the Securities Act, we must give the holders of these registrable securities 30 days' prior notice of registration and include a portion of their shares of common stock in the registration. Additionally, upon written demand of holders of more than 50% of the then-outstanding registrable securities, we will use our best efforts to promptly register the securities that the holders request to be registered, provided, among other limitations, that the aggregate offering price to the public exceeds $10 million. We are not required to register securities more than twice under the holders' rights to demand these registrations. We will be required to file a registration statement on form S-3 or any similar short-form registration statement if requested to do so by any of these holders, provided that the aggregate offering price for the securities to be sold is more than $1,000,000. Furthermore, we are only required to effect one demand registration on form S-3 within any 12-month period. The holders cannot demand that we file a registration statement prior to the date 180 days following the effective date of any registration statement filed by us. All expenses in effecting these registrations will be borne by us, excluding underwriting discounts, selling commissions and stock transfer taxes, which shall be borne proportionately by the holders of the securities that have been registered. These registration rights are subject to conditions and limitations, among them the right of the underwriters of an offering to limit the number of shares included in the registration. We have agreed to indemnify the holders of these registration rights, and each selling holder has agreed to indemnify us, against liabilities under the Securities Act, the Securities Exchange Act or other applicable federal or state law. Anti-Takeover Provisions Delaware Takeover Statute Following our reincorporation in the State of Delaware, we will be subject to the provisions of Section 203 of the Delaware General Corporation Law, as amended from time to time. Section 203 provides, with certain exceptions, that a publicly-held corporation is prohibited from engaging in a "business combination" with an "interested stockholder" for a period of three years after the date of the transaction in which the person became an interested stockholder, unless: . prior to such date, the board of directors of the corporation approved either the business combination or the transaction that resulted in the stockholder becoming an interested stockholder; or . upon consummation of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, excluding for purposes of determining the number of shares outstanding those shares owned by persons who are directors and also officers, and by employee stock plans in which employee participants do not have the right to determine confidentially whether shares held subject to the plan will be tendered in a tender or exchange offer; or . at or subsequent to such date, the business combination is approved by the board of directors and authorized at an annual or special meeting of stockholder, and not by written consent, by the affirmative vote of at least 66 2/3% of the outstanding voting stock that is not owned by the interested stockholder. 63 A "business combination" includes the following: . any merger or consolidation involving the corporation and the interested stockholder; . any sale, transfer, pledge or other disposition of 10% or more of the assets of the corporation involving the interested stockholder; . subject to certain exceptions, any transaction that results in the issuance or transfer by the corporation of any stock of the corporation to the interested stockholder; . any transaction involving the corporation that has the effect of increasing the proportionate share of the stock of any class or series of the corporation beneficially owned by the interested stockholder; or . the receipt by the interested stockholder of the benefit of any loans, advances, guarantees, pledges or other financial benefits provided by or through the corporation. Subject to certain exceptions, an "interested stockholder" is a person who, together with affiliates and associates, owns, or within three years did own, 15% or more of the corporation's voting stock. The Delaware takeover statute may render the removal of directors and management more difficult. Certificate of Incorporation and Bylaws Our certificate of incorporation and bylaws contain provisions that could have the effect of discouraging potential acquisition proposals or making a tender offer or delaying or preventing a change in control of Digimarc. In particular, our certificate of incorporation and bylaws, as applicable, among other things, will: . Provide that our board of directors will be divided into three classes of directors (disregarding the effect of any voting rights of holders of convertible preferred stock), as nearly equal in number as is reasonably possible, serving staggered terms so that directors' initial terms will expire at the first, second and third succeeding annual meeting of the stockholders following our initial public offering, respectively. At each succeeding annual meeting, directors elected to succeed those directors whose terms are expiring at that meeting shall be elected for a three- year term of office. A vote of at least 80% of our capital stock would be required to amend this provision. . Provide that special meetings of the stockholders may be called only by our president, by our secretary or at the direction of the board. Advance written notice is required, which generally must be received by the secretary not less than 30 days nor more than 60 days prior to the meeting, by a stockholder of a proposal or director nomination which that stockholder desires to present at a meeting of stockholders. Any amendment of this provision would require a vote of at least 80% of our capital stock. . Not include a provision for cumulative voting in the election of directors. Under cumulative voting, a minority stockholder holding a sufficient number of shares may be able to ensure the election of one or more directors. The absence of cumulative voting may have the effect of limiting the ability of minority stockholders to effect changes in the board and, as a result, may have the effect of deterring a hostile takeover or delaying or preventing changes in control or management of Digimarc. . Provide that vacancies on our board may be filled by a majority of directors in office, although less than a quorum, and not by the stockholders. 64 . Allow us to issue up to 5,000,000 shares of undesignated preferred stock with rights senior to those of the common stock and that otherwise could adversely affect the rights and powers, including voting rights, of the holders of common stock. In certain circumstances, this issuance could have the effect of decreasing the market price of the common stock, as well as having the anti-takeover effect discussed above. These provisions are intended to enhance the likelihood of continuity and stability in the composition of our board and in the policies formulated by them, and to discourage certain types of transactions that may involve an actual or threatened change in control of Digimarc. These provisions are designed to reduce our vulnerability to an unsolicited acquisition proposal and to discourage certain tactics that may be used in proxy fights. However, these provisions could have the effect of discouraging others from making tender offers for our shares that could result from actual or rumored takeover attempts. These provisions also may have the effect of preventing changes in our management. Transfer Agent and Registrar The transfer agent and registrar for our common stock is EquiServe. Its address is: 150 Royale Street, Canton, Massachusetts 02021, its telephone number is (201) 222-5610, and its website is www.equiserve.com. 65 SHARES ELIGIBLE FOR FUTURE SALE Excluding the 3,000,000 shares of common stock offered hereby (which will be freely tradable except if held by our "affiliates" as defined in Rule 144 of the Securities Act) and assuming no exercise of the underwriters' over- allotment option, as of the effective date of the registration statement, there will be 8,013,255 shares of common stock outstanding, all of which are "restricted" shares under the Securities Act. 7,435,356 of the restricted shares are subject to lock-up agreements with the underwriters where the holders of the restricted shares have agreed not to sell, pledge or otherwise dispose of such shares for a period of 180 days after the date of this prospectus. BancBoston Robertson Stephens Inc. may release the shares subject to the lock-up agreements in whole or in part at any time with or without notice. However, BancBoston Robertson Stephens Inc. has no current plans to do so. The following table indicates approximately when the 8,013,255 shares of our common stock that are not being sold in the offering but that will be outstanding at the time the offering is complete will be eligible for sale in the public market:
Eligibility of Restricted Shares for Sale in Public Market ---------------------------------------------------------- At effective date................................................. 475,927 90 days after effective date...................................... 59,920 180 days after effective date..................................... 7,435,356 More than 181 days after effective date upon expiration of the one-year holding periods applicable to those shares.............. 42,054
Approximately 2,683,684 of the restricted shares that will become available for sale in the public market beginning 180 days after the effective date will be subject to the volume and other resale restrictions of Rule 144 because the holders are affiliates of Digimarc. In general, a person who has beneficially owned restricted shares for at least one year, will be entitled to sell in any three-month period a number of shares that does not exceed the greater of . 1% of the then outstanding shares of the common stock, approximately 110,133 shares immediately after this offering, or . the average weekly trading volume during the four calendar weeks preceding the date on which notice of the sale is filed with the SEC. Sales made in accordance with Rule 144 are subject to requirements relating to manner of sale, notice and availability of current public information about Digimarc. A person who is not deemed to have been an affiliate of Digimarc at any time during the 90 days immediately preceding the sale and who has beneficially owned his or her shares for at least two years is entitled to sell such shares in accordance with Rule 144(k) without regard to the limitations described above. Any employee, officer or director of or consultant to Digimarc who purchased his or her shares prior to the Effective Date or who holds vested options as of that date under a written compensatory plan or contract is entitled to rely on the resale provisions of Rule 701, which permits non-affiliates to sell their Rule 701 shares without having to comply with the public-information, holding- period, volume-limitation or notice provisions of Rule 144 and permits affiliates to sell their Rule 701 shares without having to comply with Rule 144's holding-period restrictions, in each case commencing 90 days after the Effective Date. However, we and our officers, directors and a majority of our other stockholders have agreed not to sell or otherwise dispose of any shares of our common stock for the 66 180-day period after the date of this prospectus without the prior written consent of the underwriters. See "Underwriting." As soon as practicable after the Effective Date, we intend to file a registration statement on Form S-8 under the Securities Act to register the 4,925,000 shares of common stock reserved for issuance under the 1995 stock incentive plan, the 1999 stock incentive plan and the 1999 employee stock purchase plan, thus permitting the resale of such shares by non-affiliates in the public market without restriction under the Securities Act. As of September 30, 1999, options to purchase 2,255,961 shares of common stock were outstanding. However, holders of approximately of the shares that will be registered have agreed with BancBoston Robertson Stephens Inc. not to sell their shares into the public market during the 180-day period after the effective date of the registration statement. Lock-Up Agreements All officers and directors and a majority of holders of common stock and options to purchase common stock have agreed that they will not offer, sell, contract to sell, pledge, grant any option to sell, or otherwise dispose of any shares of common stock or securities convertible into common stock, or warrants or other rights to purchase common stock, for a period of 180 days after the date of this prospectus without the prior written consent of BancBoston Robertson Stephens Inc. 67 UNDERWRITING The underwriters named below, acting through their representatives, BancBoston Robertson Stephens Inc., Hambrecht & Quist LLC and U.S. Bancorp Piper Jaffray Inc., have severally agreed with us, subject to the terms and conditions of the underwriting agreement, to purchase from us the number of shares of common stock indicated opposite their names below. The underwriters are committed to purchase and pay for all of the shares if any are purchased.
Number Of Underwriters Shares ------------ --------- BancBoston Robertson Stephens Inc................................ Hambrecht & Quist LLC............................................ U.S. Bancorp Piper Jaffray Inc. ................................. --------- Total.......................................................... 3,000,000 =========
We have been advised that the underwriters propose to offer the shares of common stock to the public at the public offering price located on the cover page of this prospectus and to dealers at that price less a concession of not in excess of $ per share, of which $ may be reallowed to their dealers. After the initial public offering, the public offering price, concession and reallowance to dealers may be reduced by the representatives. No reduction in this price will change the amount of proceeds to be received by us as indicated on the cover page of this prospectus. The underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. Over-Allotment Option. We have granted to the underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to 450,000 additional shares of common stock at the same price per share as we will receive for the 3,000,000 shares that the underwriters have agreed to purchase. To the extent that the underwriters exercise this option, each of the underwriters will have a firm commitment to purchase approximately the same percentage of these additional shares that the number of shares of common stock to be purchased by it shown in the above table represents as a percentage of the 3,000,000 shares offered by this prospectus. If purchased, such additional shares will be sold by the underwriters on the same terms as those on which the 3,000,000 shares are being sold. We will be obligated, under this option, to sell shares to the extent the option is exercised. The underwriters may exercise the option only to cover over-allotments made in connection with the sale of the shares of common stock offered by this prospectus. The following table shows the per share and total underwriting discounts and commissions to be paid by us to the underwriters. This information is presented assuming either no exercise or full exercise by the underwriters of their over- allotment option.
Per Without With Share Option Option ----- ------- ------ Public offering price................................. $ $ $ Underwriting discounts and commissions................ $ $ $ Proceeds, before expenses, to us...................... $ $ $
The other expenses of the offering are estimated at $1,068,000 and are payable entirely by us. BancBoston Robertson Stephens Inc. expects to deliver the shares of common stock to purchasers on , 1999. 68 Indemnity. The underwriting agreement contains covenants of indemnity among the underwriters and us against certain civil liabilities, including liabilities under the Securities Act and liabilities arising from breaches of representations and warranties contained in the underwriting agreement. Lock-Up Agreements. All of our executive officers and directors, and a majority of our stockholders, optionholders and warrantholders have agreed, for a period of 180 days after the date of this prospectus, not to offer to sell, contract to sell or otherwise sell, dispose of, loan, pledge or grant any rights to, any shares of common stock, any options or warrants to purchase any shares of common stock or any securities convertible into or exchangeable for shares of common stock owned as of the date of this prospectus or subsequently acquired directly by the holders or to which they have or subsequently acquire the power of disposition, without the prior written consent of BancBoston Robertson Stephens Inc. However, BancBoston Robertson Stephens Inc., in some instances may, in its sole discretion and at any time without notice, release all or any portion of the securities subject to lock-up agreements. There are no agreements between the representatives and any of our stockholders providing consent by the representatives to the sale of shares prior to the expiration of the period of 180 days after the date of this prospectus. Future Sales. In addition, we have agreed that during the period of 180 days after this prospectus, we will not, subject to certain exceptions, without the prior written consent of BancBoston Robertson Stephens Inc.: . Consent to the disposition of any shares held by stockholders prior to the expiration of the period of 180 days after this prospectus; or . Issue, sell, contract to sell or otherwise dispose of any shares of common stock, any options or warrants to purchase any shares of common stock or any securities convertible into, exercisable for or exchangeable for shares of common stock other than (1) the sale of shares in this offering, (2) the issuance of common stock upon the exercise or conversion of outstanding options, warrants or convertible securities, (3) our issuance of stock options under existing stock option plans and (4) our issuance of common stock under the Employee Stock Purchase Plan. See "Shares Eligible for Future Sale." Listing. We have applied to have our common stock quoted on the Nasdaq National Market under the symbol DMRC. No Prior Public Market. Prior to this offering, there has been no public market for our common stock. Consequently, the initial public offering price for the common stock offered hereby was determined through negotiations between us and the representatives. Among the factors considered in such negotiations were prevailing market conditions, certain of our financial information, market valuations of other companies that we and the representatives believed to be comparable to us, estimates of our business potential, the present state of our development and other factors deemed relevant. Stabilization. The representatives have advised us that, in accordance with Regulation M under the Securities Act, some participants in the offering may engage in transactions, including stabilizing bids, syndicate covering transactions or the imposition of penalty bids, that may have the effect of stabilizing or maintaining the market price of the common stock at a level above that which might otherwise prevail in the open market. A "stabilizing bid" is a bid for or the purchase of the common 69 stock on behalf of the underwriters for the purpose of fixing or maintaining the price of the common stock. A "syndicate covering transaction" is a bid for or the purchase of the common stock on behalf of the underwriters to reduce a short position incurred by the underwriters in connection with this offering. A "penalty bid" is an arrangement permitting the representatives to reclaim the selling concession otherwise accruing to an underwriter or syndicate member in connection with this offering if the common stock originally sold by such underwriter or syndicate member is purchased by the representatives in a syndicate covering transaction and has therefore not been effectively placed by these underwriter or syndicate member. The representatives have advised us that these transactions may be effected on the Nasdaq National Market or otherwise and, if commenced, may be discontinued at any time. Directed Share Program. We have requested that the underwriters have reserved up to 300,000 shares of common stock to be issued by us and offered hereby for sale, at the initial public offering price, to directors, officers, employees, business associates and related persons of Digimarc. The number of shares of common stock available for sale to the general public will be reduced to the extent such individuals purchase such reserved shares. Any reserved shares which are not so purchased will be offered by the underwriters to the general public on the same basis as the other shares offered hereby. In August 1999, Bayview Investors, Ltd., an affiliate of BancBoston Robertson Stephens Inc., purchased 60,000 shares of our Series D-X preferred stock for $5.00 per share on the same terms and conditions as the other purchasers of Series D-X preferred stock. All of these shares will automatically convert into common stock upon the closing of this offering. LEGAL MATTERS The validity of the common stock offered hereby will be passed upon for us by Morrison & Foerster LLP, San Francisco, California. Certain legal matters in connection with the offering will be passed upon for the underwriters by Wilson Sonsini Goodrich & Rosati, Professional Corporation, Palo Alto, California. Attorneys employed by Morrison & Foerster LLP or investment partnerships of which they are the beneficial owners hold approximately 60,000 shares of common stock. Attorneys employed by Morrison & Foerster LLP will also purchase shares in our directed share program. EXPERTS The financial statements of Digimarc as of December 31, 1997 and 1998, and for each of the years in the three-year period ended December 31, 1998 have been included herein and in the registration statement in reliance upon the report of KPMG LLP, independent certified public accountants, upon the authority of the firm as experts in accounting and auditing. 70 WHERE YOU CAN FIND ADDITIONAL INFORMATION We have filed with the SEC a registration statement on Form S-1 under the Securities Act with respect to the common stock offered in this prospectus. This prospectus does not contain all of the information in the registration statement and its exhibits and schedules, portions of which have been omitted as permitted by the rules and regulations of the SEC. For further information about us and the common stock, we refer you to the registration statement and to its exhibits and schedules. Statements in this prospectus about the contents of any contract, agreement or other document are not necessarily complete and, in each instance, we refer you to the copy of such contract, agreement or document filed as an exhibit to the registration statement. Each such statement is qualified in all respects by reference to the document to which it refers. Anyone may inspect the registration statement and its exhibits and schedules without charge at the public reference facilities the SEC maintains at 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional offices of the SEC located at 7 World Trade Center, Suite 1300, New York, New York 10048, and 500 West Madison Street, Suite 1400, Chicago, Illinois 60661. You may obtain copies of all or any part of these materials from the SEC upon the payment of fees prescribed by the SEC. You may obtain information on the operation of the Public Reference Room by calling 1-800-SEC-0300. You may also inspect these reports and other information without charge at a Web site maintained by the SEC. The address of this site is http://www.sec.gov. Upon completion of this offering, we will become subject to the informational requirements of the Exchange Act and, in accordance therewith, file reports, proxy statements and other information with the SEC. You will be able to inspect and copy these reports, proxy statements and other information at the public reference facilities maintained by the SEC and at the SEC's regional offices at the addresses noted above. You also will be able to obtain copies of this material from the Public Reference Room of the SEC as described above, or inspect them without charge at the SEC's Web site. 71 DIGIMARC CORPORATION INDEX TO FINANCIAL STATEMENTS
Page ---- Report of KPMG LLP........................................................ F-2 Balance Sheets............................................................ F-3 Statements of Operations.................................................. F-4 Statements of Stockholders' Equity (Deficit).............................. F-5 Statements of Cash Flows.................................................. F-6 Notes to Financial Statements............................................. F-7
F-1 When the reverse stock split referred to in Note 12(b) of the Notes to the Financial Statements has been consummated, we will render the following opinion. FORM OF INDEPENDENT AUDITORS' REPORT The Board of Directors Digimarc Corporation: We have audited the accompanying balance sheets of Digimarc Corporation as of December 31, 1997 and 1998, and the related statements of operations, stockholders' equity (deficit), and cash flows for each of the years in the three-year period ended December 31, 1998. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of Digimarc Corporation as of December 31, 1997 and 1998, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 1998 in conformity with generally accepted accounting principles. Portland, Oregon March 9, 1999, except as to note 12(b) which is as of November , 1999 F-2 DIGIMARC CORPORATION BALANCE SHEETS (In thousands, except share and per share data)
December 31, ---------------- 1997 1998 September 30, 1999 ------- ------- ----------------------- (unaudited) (unaudited) (Pro Forma) ASSETS Current assets: Cash and cash equivalents........... $ 5,638 $ 2,137 $ 8,039 Trade accounts receivable, net...... 102 298 1,653 Prepaid expenses and other current assets............................. 81 98 1,026 ------- ------- -------- Total current assets............... 5,821 2,533 10,718 Property and equipment, net.......... 251 329 501 Other assets, net.................... 96 116 55 ------- ------- -------- Total assets....................... $ 6,168 $ 2,978 $ 11,274 ======= ======= ======== LIABILITIES, REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Short-term borrowings............... $ 400 $ 250 $ -- Accounts payable.................... 335 228 723 Current portion of capital lease obligations........................ 79 124 119 Accrued payroll and related costs... 186 390 615 Deferred revenue.................... 190 345 1,734 Current portion of notes payable to stockholders....................... -- -- 308 ------- ------- -------- Total current liabilities.......... 1,190 1,337 3,499 Capital lease obligations, less current portion..................... 111 171 182 Notes payable to stockholders, less current portion..................... 284 298 -- Other long-term liabilities.......... 78 82 80 ------- ------- -------- Total liabilities.................. 1,663 1,888 3,761 ------- ------- -------- Convertible redeemable preferred stock; 10,874,000 shares authorized; 2,931,786 shares issued and outstanding at December 31, 1997 and 1998 and 4,357,786 shares outstanding at September 30, 1999; aggregate liquidation preference $10,315 and $17,445 at December 31, 1998 and September 30, 1999, respectively (unaudited); pro forma no shares issued and outstanding..................... 10,185 10,185 17,266 $ -- ------- ------- -------- -------- Commitments and contingencies Stockholders' equity (deficit): Convertible preferred stock; 325,000 shares authorized; aggregate liquidation preference $429: Series A-1, $.001 par value; issued and outstanding 162,500 shares at December 31, 1997 and 1998 and September 30, 1999; pro forma no shares issued and outstanding..... -- -- -- -- Series A-N, $.001 par value; no shares issued and outstanding..... -- -- -- -- Common stock, $.001 par value; authorized 12,500,000 shares; issued and outstanding 2,252,993 and 2,313,623 and 2,398,469 shares at December 31, 1997 and 1998 and September 30, 1999, respectively; pro forma 7,983,255 shares issued and outstanding.................... 2 2 3 8 Additional paid-in capital.......... 851 878 4,509 21,770 Deferred stock compensation......... -- -- (3,466) (3,466) Accumulated deficit................. (6,533) (9,975) (10,799) (10,799) ------- ------- -------- -------- Total stockholders' equity (deficit)......................... (5,680) (9,095) (9,753) $ 7,513 ------- ------- -------- ======== Total liabilities, convertible redeemable preferred stock and stockholders' equity (deficit).... $ 6,168 $ 2,978 $ 11,274 ======= ======= ========
See accompanying notes to financial statements. F-3 DIGIMARC CORPORATION STATEMENTS OF OPERATIONS (in thousands, except share and per share data)
Nine Months Ended Years Ended December 31, September 30, ------------------------------- -------------------- 1996 1997 1998 1998 1999 --------- --------- --------- --------- --------- (unaudited) Revenue: License and subscription......... $ 186 $ 161 $ 484 $ 379 $ 175 Service............... 50 25 500 312 4,010 --------- --------- --------- --------- --------- Total revenue....... 236 186 984 691 4,185 --------- --------- --------- --------- --------- Cost of revenue: License and subscription......... 7 126 114 93 62 Service............... -- -- 1,466 775 1,814 --------- --------- --------- --------- --------- Total cost of revenue............ 7 126 1,580 868 1,876 --------- --------- --------- --------- --------- Operating expenses: Sales and marketing... 376 1,330 825 742 731 Research and development.......... 690 934 658 546 450 Impairment charge..... -- 453 -- -- -- General and administrative....... 834 1,282 1,407 913 1,961 --------- --------- --------- --------- --------- Total operating expenses........... 1,900 3,999 2,890 2,201 3,142 --------- --------- --------- --------- --------- Operating loss...... (1,671) (3,939) (3,486) (2,378) (833) Other income (expense): Interest income....... 68 76 189 162 88 Interest expense...... (71) (86) (119) (13) (75) Other................. 96 (30) (26) (92) (4) --------- --------- --------- --------- --------- Loss before provision for income taxes....... (1,578) (3,979) (3,442) (2,321) (824) Provision for income taxes.................. -- -- -- -- -- --------- --------- --------- --------- --------- Net loss............ $ (1,578) $ (3,979) $ (3,442) $ (2,321) $ (824) ========= ========= ========= ========= ========= Net loss per share-- basic and diluted...... $ (0.71) $ (1.88) $ (1.50) $ (1.02) $ (0.35) ========= ========= ========= ========= ========= Weighted average shares used in computing net loss per share--basic and diluted............ 2,226,519 2,120,477 2,288,442 2,284,642 2,342,732 ========= ========= ========= ========= =========
See accompanying notes to financial statements. F-4 DIGIMARC CORPORATION STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT) (In thousands, except share and per share data)
Convertible preferred stock Common stock Additional Total ----------------- ----------------- paid-in Deferred Accumulated stockholders' Shares Amount Shares Amount capital compensation deficit deficit --------- ------- --------- ------ ---------- ------------ ----------- ------------- BALANCE AT DECEMBER 31, 1995................... -- $ -- 2,047,364 $ 2 $ 182 $ -- $ (874) $ (690) Issuance of common stock through conversion of note payable........... -- -- 272,000 -- 41 -- -- 41 Repurchase and cancellation of common stock previously issued................. -- -- (288,340) -- -- -- (102) (102) Issuance of common stock in exchange for services............... -- -- 36,369 -- 5 -- -- 5 Issuance of Series A-1 preferred stock, net... 162,500 -- -- -- 439 -- -- 439 Net loss................ -- -- -- -- -- -- (1,578) (1,578) --------- ------ --------- --- ------ ------- -------- ------- BALANCE AT DECEMBER 31, 1996................... 162,500 -- 2,067,393 2 667 -- (2,554) (1,885) Exercise of stock options................ -- -- 62,600 -- 13 -- -- 13 Repurchase and cancellation of common stock previously issued................. -- -- (56,000) -- (8) -- -- (8) Common stock issued for the acquisition of assets................. -- -- 179,000 -- 179 -- -- 179 Net loss................ -- -- -- -- -- -- (3,979) (3,979) --------- ------ --------- --- ------ ------- -------- ------- BALANCE AT DECEMBER 31, 1997................... 162,500 -- 2,252,993 2 851 -- (6,533) (5,680) Stock issued............ -- -- 27,144 -- 13 -- -- 13 Exercise of stock options................ -- -- 33,486 -- 14 -- -- 14 Net loss................ -- -- -- -- -- -- (3,442) (3,442) --------- ------ --------- --- ------ ------- -------- ------- BALANCE AT DECEMBER 31, 1998................... 162,500 -- 2,313,623 2 878 -- (9,975) (9,095) Exercise of stock options (unaudited).... -- -- 84,846 1 44 -- -- 45 Deferred compensation related to stock options (unaudited)............ -- -- -- -- 3,587 (3,587) -- -- Stock compensation expense (unaudited).... -- -- -- -- -- 121 -- 121 Net loss (unaudited).... -- -- -- -- -- -- (824) (824) --------- ------ --------- --- ------ ------- -------- ------- BALANCE AT SEPTEMBER 30, 1999 (unaudited)....... 162,500 $ -- 2,398,469 $ 3 $4,509 $(3,466) $(10,799) $(9,753) ========= ====== ========= === ====== ======= ======== =======
See accompanying notes to financial statements. F-5 DIGIMARC CORPORATION STATEMENTS OF CASH FLOWS (in thousands, except share and per share data)
Nine Months Years Ended December Ended 31, September 30, ------------------------- ---------------- 1996 1997 1998 1998 1999 ------- ------- ------- ------- ------- (unaudited) Cash flows from operating activities: Net loss......................... $(1,578) $(3,979) $(3,442) $(2,321) $ (824) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization... 23 100 178 130 203 Amortization of discount on note payable........................ 19 13 14 10 10 Asset impairment................ -- 453 -- -- -- Non-cash expenses............... 15 27 20 7 121 Gain on forgiveness of debt..... (96) (33) -- -- -- Changes in assets and liabilities: Trade accounts receivable....... -- (102) (196) 64 (1,355) Prepaid expenses and other assets......................... (54) (36) (33) (18) (906) Accounts payable................ 118 43 (107) (199) 495 Accrued payroll and related costs.......................... 32 199 204 (100) 225 Deferred revenue................ (26) 173 152 150 1,387 ------- ------- ------- ------- ------- Net cash used in operating activities.................... (1,547) (3,142) (3,210) (2,277) (644) ------- ------- ------- ------- ------- Cash flows from investing activities: Purchase of property and equipment....................... (165) (23) (8) (10) (209) Purchases of patents............. -- -- (50) (50) (10) Sale of tradename................ -- -- -- -- 10 Acquisition of assets............ -- (417) -- -- -- ------- ------- ------- ------- ------- Net cash used in investing activities.................... (165) (440) (58) (60) (209) ------- ------- ------- ------- ------- Cash flows from financing activities: Proceeds (repayment) of short- term borrowings................. -- 400 (150) (3) (250) Net proceeds from issuance of preferred stock................. 4,510 5,744 -- (1) 7,081 Net proceeds from issuance of common stock.................... -- 13 14 7 45 Proceeds from issuance of notes payable......................... 350 -- -- -- -- Principal payments of notes payable......................... (111) -- -- -- -- Proceeds from sale-leaseback..... 142 -- -- -- -- Repurchase of common stock previously issued............... (102) (8) -- -- -- Principal payments under capital lease obligations............... (10) (42) (97) (70) (121) ------- ------- ------- ------- ------- Net cash provided by (used in) financing activities.......... 4,779 6,107 (233) (67) 6,755 ------- ------- ------- ------- ------- Net (decrease) increase in cash and cash equivalents............. 3,067 2,525 (3,501) (2,404) 5,902 Cash and cash equivalents at beginning of period.............. 46 3,113 5,638 5,638 2,137 ------- ------- ------- ------- ------- Cash and cash equivalents at end of period........................ $ 3,113 $ 5,638 $ 2,137 $ 3,234 $ 8,039 ======= ======= ======= ======= ======= Supplemental disclosure of cash flow information: Cash paid for interest........... $ 3 $ 38 $ 125 $ 85 $ 76 ======= ======= ======= ======= ======= Summary of non-cash investing and financing activities: Conversion of note payable to common stock.................... $ 41 $ -- $ -- $ -- $ -- Equipment acquired or exchanged under capital lease obligations..................... 40 64 202 127 167 Common stock issued for the acquisition of assets........... -- 179 -- -- -- ======= ======= ======= ======= =======
See accompanying notes to financial statements. F-6 DIGIMARC CORPORATION NOTES TO FINANCIAL STATEMENTS (In thousands, except share and per share data) (1) Summary of Significant Accounting Policies (a) The Company Digimarc Corporation (the Company) was incorporated on January 3, 1995. The Company has developed digital watermarking technology used to identify, track, manage and enhance visual communications. Digitally watermarked images contain hidden messages which are imperceptible during normal use but detectable by software or other devices. (b) Interim Financial Statements The financial information included herein for the nine-month periods ended September 30, 1998 and 1999 is unaudited; however, such information reflects all adjustments (consisting only of normal recurring adjustments) which are, in the opinion of management, necessary for a fair presentation of the financial position, results of operations and cash flows for the interim periods. The interim consolidated financial statements should be read in conjunction with the financial statements and the notes included in the financial statements. The results of operations for the interim period presented are not necessarily indicative of the results to be expected for the full year. (c) Accounts Receivable Trade accounts receivable are shown net of allowance for doubtful accounts. The amount of the allowance and the charges were as follows:
December 31, -------------- September 30, 1996 1997 1998 1999 ---- ---- ---- ------------- (unaudited) Balance--beginning of period................... $ -- $ -- $17 $ 2 Provision (recovery)........................... -- 17 (7) 4 Charge offs.................................... -- -- (8) -- ---- ---- --- --- Balance--end of period......................... $ -- $ 17 $ 2 $ 6 ==== ==== === ===
(d) Property and Equipment Property and equipment are stated at cost. Property and equipment under capital lease obligations are stated at the lower of the present value of minimum lease payments at the beginning of the lease term or fair value of the leased assets at the inception of the lease. Repairs and maintenance are charged to expense when incurred. Depreciation on property and equipment is calculated by the straight-line method over the estimated useful lives of the assets, generally three to five years. Property and equipment held under capital leases are amortized by the straight-line method over the lease term. Amortization of property and equipment under capital lease is included in depreciation expense. (e) Software Development Costs Under Statement of Financial Accounting Standards No. 86 (SFAS No. 86), software development costs are to be capitalized beginning when a product's technological feasibility has been F-7 DIGIMARC CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share data) established and ending when a product is made available for general release to customers. To date, the establishment of technological feasibility of the Company's products has occurred shortly before general release and, therefore, software development costs qualifying for capitalization have been immaterial. Accordingly, the Company has not capitalized any software development costs and has charged all such costs to research and development expense. (f) Funded Research and Development The Company accounts for amounts received under its funded research and development arrangements in accordance with the provisions of SFAS No. 68, Research and Development Arrangements. Under the terms of the arrangements, the Company is not obligated to repay any of the amounts provided by the funding parties. As a result, the Company recognizes revenue as the services are performed. Revenues recognized under vendor and end-user funding arrangements totaled $500 for the year ended December 31, 1998. Direct costs allocated to the arrangement were $1,466 for the year ended December 31, 1998. There were no such revenues recognized or cost incurred related to a funding arrangement in 1996 or 1997. (g) Other Assets Other assets consist primarily of the costs of acquired patents and trademarks, and are amortized by the straight-line method over a useful life of three to five years. They are shown net of accumulated amortization of $16 and $63 at December 31, 1997 and 1998, respectively. (h) Advertising Costs Advertising costs are expensed as incurred. Total advertising expenses were $13, $157 and $135 for the years ended December 31, 1996, 1997 and 1998, respectively. (i) Impairment of Long-Lived Assets and Long-Lived Assets to Be Disposed Of The Company accounts for long-lived assets in accordance with the provisions of SFAS No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of. This Statement requires that long-lived assets and certain identifiable intangibles be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net cash flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. Assets to be disposed of are reported at the lower of the carrying amount or fair value less costs to sell. (j) Revenue Recognition In October 1997, the American Institute of Certified Public Accountants (AICPA) issued Statement of Position (SOP) No. 97-2, Software Revenue Recognition. Subsequently, in March 1998, the Financial Accounting Standards Board (FASB) approved SOP 98-4, Deferral of the Effective Date F-8 DIGIMARC CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share data) of a Provision of 97-2, Software Revenue Recognition. SOP 98-4 defers for one year the application of several paragraphs and examples in SOP 97-2 that limit the definition of vendor specific objective evidence (VSOE) of the fair value of various elements in a multiple-element arrangement. SOP 97-2 generally requires revenue earned on software arrangements involving multiple elements to be allocated to each element based on VSOE of the relative fair values of each element in the arrangement. The Company establishes VSOE based on the price when the element is sold separately. The provisions of SOPs 97-2 and 98-4 have been applied by the Company to transactions entered into beginning January 1, 1998. Prior to 1997, the Company's revenue policy was in accordance with the preceding authoritative guidance provided by SOP No. 91-1, Software Revenue Recognition. Software license revenue consists of fees for licenses of the Company's software products. Revenue allocated to software licenses is recognized upon delivery of software, assuming no significant future obligations or customer acceptance rights exist. Software license agreements have not contained significant obligations or customer acceptance rights to date. Revenue allocated to subscriptions are paid in advance and revenues are recognized ratably over the term of the subscription. Revenue allocated to contracted professional services is recognized as the services are performed. The Company recognizes revenues on service contracts on a method that approximates the percentage of completion basis using budgeted amounts established with the customer at the inception of the contract. Progress towards completion is measured using allowable costs incurred as compared to the budgeted amounts contained in the basic contract. Losses on contracts, if any, are provided for in the period in which the loss becomes determinable. The contract is considered complete upon completion of the deliverables specified in the contract. Deferred revenue consists of payments received in advance for consulting services and subscriptions to the Company's internet service for service and support not yet performed. In December 1998, the AICPA issued SOP 98-9, Modification of SOP 97-2 Software Revenue Recognition, with Respect to Certain Transactions. This SOP amends SOP 97-2 to require recognition of revenue using the "residual method" in circumstances outlined in the SOP. Under the residual method, revenue is recognized as follows: (1) the total fair value of undelivered elements, as indicated by VSOE, is deferred and subsequently recognized in accordance with the relevant sections of SOP 97-2 and (2) the difference between the total arrangement fee and the amount deferred for the undelivered elements is recognized as revenue related to the delivered elements. SOP 98-9 is effective for fiscal years beginning after March 15, 1999. Also the provisions of SOP 97-2 that were deferred by SOP 98-4 will continue to be deferred until the date SOP 98-9 becomes effective. (k) Use of Estimates Generally accepted accounting principles require management to make estimates and assumptions that affect the reported amounts of assets, liabilities and contingencies at the date of the financial statements and the reported amounts of revenues and expense during the reporting periods. Actual results could differ from those estimates. F-9 DIGIMARC CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share data) (l) Income Taxes The Company accounts for income taxes under the asset and liability method. Under the asset and liability method, deferred income taxes reflect the future tax consequences of differences between the tax bases of assets and liabilities and their financial reporting amounts at each year-end. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce tax assets to the amount expected to be realized. (m) Concentrations of Credit Risk Financial instruments which potentially subject the Company to concentrations of credit risk consist primarily of cash and trade receivables. The credit risk associated with cash is minimal. The Company had accounts receivable from three customers representing approximately 83% of trade accounts receivable at December 31, 1998. Loss of or non-performance by these significant customers could adversely affect the Company's financial position, liquidity or results of operations. (n) Fair Value of Financial Instruments The carrying amounts of cash and cash equivalents, accounts receivable, accounts payable and accrued payroll approximate fair value due to the short- term nature of these instruments. The carrying amounts of capital leases and notes payable approximate fair value as the stated interest rates reflect current market rates. Fair value estimates are made at a specific point in time, based on relevant market information about the financial instrument when available. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and, therefore, cannot be determined with precision. Changes in assumptions could significantly affect the estimates. (o) Stock-Based Employee Compensation The Company adopted SFAS No. 123, Accounting for Stock-Based Compensation, which permits entities to recognize expense over the vesting period based on the fair value of all stock-based awards on the date of grant. Alternatively, SFAS No. 123 also allows entities to continue to apply the provisions of Accounting Principles Board (APB) Opinion No. 25 and provide pro forma net income and pro forma earnings per share disclosures as if the fair-value-based method defined in SFAS No. 123 had been applied. The Company has elected to apply the provisions of APB Opinion No. 25 and provide the pro forma disclosure provisions of SFAS No. 123. (p) Contingencies and Factors that Could Affect Future Results A portion of the Company's revenues each year is generated from licensing of technology. In the extremely competitive industry environment in which the Company operates, such product generation, development and marketing processes are uncertain and complex, requiring accurate prediction of demand as well as successful management of various development risks inherent in F-10 DIGIMARC CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share data) technology development. In light of these dependencies, it is possible that failure to successfully manage future changes in technology with respect to the Company's technology could have long-term impact on the Company's growth and results of operations. (q) Net Income (Loss) Per Share In 1997, the Company adopted SFAS No. 128 "Earnings Per Share" which provides that "basic net income (loss) per share" and "diluted net income (loss) per share" for all prior periods presented are to be computed using the weighted average number of common shares outstanding during each period, with diluted net income per share including the effect of potentially dilutive common shares. Common stock equivalents related to stock options of 180,260, 640,857, and 1,327,426 are antidilutive in a net loss year and, therefore, are not included in 1996, 1997 and 1998 diluted net loss per share, respectively. (2) Acquisition of Assets In July 1997, the Company acquired substantially all of the assets of NetRights, LLC (NetRights) for approximately $417 and 179,000 shares of common stock. NetRights was developing a software product which would provide direct access to remote information, initiate direct connections to Web sites and commerce services and automate communications between suppliers of digitized creative works and consumers through the digital content pictures themselves. Assets acquired by the Company included certain office equipment, certain trademarks and tradenames, and all engineering drawings, designs and documentation, including patent applications. The allocation of the purchase price resulted in capitalization of purchased technology of $453, capitalization of office equipment of $48, and patent and tradename capitalizations of $95, which are being amortized over three years. Subsequent to the acquisition a decision was made not to use the purchased technology, and as a result the purchased technology was considered impaired and written off. (3) Cash and Cash Equivalents For purposes of the statements of cash flows, the Company considers all highly liquid instruments with an original maturity of three months or less to be cash equivalents. Cash and cash equivalents include various money market instruments and investments in government bonds totaling $125 and $2,137 at December 31, 1997 and 1998, respectively. Cash equivalents are carried at cost, which approximates market. F-11 DIGIMARC CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share data) (4) Property and Equipment
December 31, ----------- 1997 1998 ---- ----- Furniture and fixtures.......................................... $ 38 $ 51 Office equipment................................................ 311 504 Leasehold improvements.......................................... -- 4 ---- ----- 349 559 Less accumulated depreciation and amortization.................. (98) (230) ---- ----- $251 $ 329 ==== =====
(5) Leases The Company leases certain office equipment under long-term capital leases, which expire over the next four years. At December 31, 1997 and 1998, the cost of these assets was $245 and $447, respectively, and accumulated amortization was $68 and $168, respectively. Future minimum lease payments under non-cancelable operating leases and the present value of future minimum capital lease payments are as follows:
Capital Operating Year ending December 31: leases leases ------------------------ ------- --------- 1999....................................................... $156 $107 2000....................................................... 114 73 2001....................................................... 65 -- 2002....................................................... 9 -- ---- ---- Total minimum lease payments............................. 344 $180 ==== Less amount representing interest.......................... 49 ---- 295 Less current portion of capital lease...................... 124 ---- $171 ====
Rent expense on the operating leases for the years ended December 31, 1996, 1997 and 1998 totaled $22, $62 and $71, respectively. (6) Notes Payable
December 31, ------------- 1997 1998 ------ ------ Notes payable to stockholders, net of unamortized discount of $100 and $86 at December 31, 1997 and 1998, respectively, interest at 7% beginning in 1998, due and payable May 2005 or earlier under certain conditions, unsecured.................. $ 284 $ 298 ------ ------ 284 298 Less current portion.......................................... -- -- ------ ------ $ 284 $ 298 ====== ======
F-12 DIGIMARC CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share data) (7) Short-term Borrowings The Company has a $400 revolving line of credit with a bank which matures on August 20, 1999 and is secured by the assets of the Company. The line bears interest at the prime rate plus 1%. The interest rate on short-term borrowings during 1997 and 1998 was 11.5% and 8.75%, respectively. At December 31, 1997 and 1998, $400 and $250, respectively, was outstanding on this line. See note 14. (8) Defined Contribution Pension Plan The Company has an employee savings plan (the Plan) which qualifies as a deferred salary arrangement under Section 401(k) of the Internal Revenue Code. Employees become eligible to participate in the Plan after four months of service. Employees may contribute up to 15% of their pay to the Plan, subject to the limitations of the Internal Revenue Code. The Company made no contributions to the Plan during 1996, 1997 or 1998. (9) Convertible Redeemable Preferred Stock The Company has authorized several series of convertible redeemable preferred stock. The title, carrying amount, and number of shares issued and outstanding are as follows:
December 31, --------------- September 30, 1997 1998 1999 ------- ------- ------------- (unaudited) Series B-1, $.001 par value; issued and outstanding 902,000 shares at December 31, 1997 and 1998; liquidation preference $4,510...................................... $ 4,441 $ 4,441 $ 4,441 Series B-N, $.001 par value; no shares issued and outstanding............................. Series C-1, $.001 par value; issued and outstanding 2,029,786 shares at December 31, 1997 and 1998; liquidation preference $5,805...................................... 5,744 5,744 5,744 Series C-N, $.001 par value; no shares issued and outstanding............................. Series D, $.001 par value; issued and outstanding 1,266,000 shares at September 30, 1999; liquidation preference $6,330...................................... -- -- 6,281 Series D-X, $.001 par value; issued and outstanding 160,000 shares at September 30, 1999; liquidation preference $800........... -- -- 800 ------- ------- ------- Total convertible redeemable preferred stock....................................... $10,185 $10,185 $17,266 ======= ======= =======
Preferred Series B and Series C stock is subject to certain mandatory redemption features following the affirmative vote of at least 60% of the outstanding shares of the Series B and Series C preferred stock, effective no earlier than June 30, 2001. The Company shall redeem all of the then outstanding Series B and Series C preferred stock or an amount determined by the Company for which funds are available for redemption. The per share redemption price for the Series B and Series C preferred stock is equal to its per share issue price, plus any undeclared and unpaid dividends. Each Series B and Series C preferred stockholder may, but is not obligated to, participate in the Series B and Series C redemption up to that holder's pro rata share of the total number of shares specified in the redemption request. See note 10 for additional features of convertible redeemable preferred stock. See note 14. F-13 DIGIMARC CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share data) (10) Stockholders' Equity (a) Stockholders' Agreement The Company and its stockholders have an agreement that includes restrictions on the purchase and sale of the Company's common stock. Except for expressly provided exceptions, no stockholder is allowed to transfer ownership of common stock without the prior written consent of the Company. If a stockholder desires to sell any shares, the stockholder must first offer to sell those shares to the Company or its designee before offering shares to a third party. These restrictions lapse upon the effectiveness of a registration of common stock under the Securities Act of 1933, as amended, and the consummation of the sale of common stock under that registration statement. (b) Preferred Stock The Company has issued Series A-1, Series B-1 and Series C-1 preferred stock. In addition, the Company is also authorized to issue Series A-N, Series B-N and Series C-N preferred stock. The terms for each series of preferred stock are similar and are summarized below: Dividends Preferred stockholders are entitled to receive dividends when and if declared by the Board of Directors at an annual rate of $.25 per share for Series A-1 and A-N, $.50 per share for Series B-1 and B-N and $.286 per share for Series C-1 and C-N. The right to receive dividends on preferred stock is not cumulative and no right to receive dividends shall accrue to holders of the preferred stock in the event the Board of Directors does not declare dividends. No dividends may be declared or paid on common stock until equal dividends on preferred stock have been declared and paid. After payment of all dividends on preferred stock, the holders of preferred stock are entitled to participate, on an as-converted basis, with the outstanding common stock as to any dividends paid on such common stock. As of December 31, 1998, no dividends had been declared or paid. Liquidation Preferences Upon dissolution, liquidation, or winding-up of the affairs of the Company (Liquidation), either voluntary or involuntary, the preferred stockholders receive preference over the common stockholders of the Company. The liquidation value for each outstanding share is $2.50 for Series A-1 and A-N (Series A), $5.00 for Series B-1 and B-N (Series B) and $2.86 for Series C-1 and C-N (Series C), adjusted for any stock dividends. If upon liquidation the assets of the Company available for distribution are insufficient to pay the holders of preferred stock the full preference, then the entire assets and funds of the Company legally available for distribution to its stockholders will be distributed ratably among all holders of preferred stock. After paying the full preference, any assets of the Company remaining available for distribution to stockholders upon liquidation will be distributed ratably among all holders of common and preferred stock in proportion to the amount of common stock each stockholder holds, treating each holder of Series B and Series C preferred stock as if such stock were converted into common stock at the existing conversion price. Series A preferred stock automatically converts to common stock prior to a liquidation, if as a result of the conversion the consideration per share to be received with respect to the preferred stock would be F-14 DIGIMARC CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share data) larger than the Series A preferred stock preference. The conversion price for Series A-1, Series B-1 and Series C-1 is $1.25, $2.50 and $2.86, respectively, at December 31, 1998. Voting The holder of each share of each series of preferred stock shall have the right to the number of votes such holders would be entitled to if the shares of preferred stock were converted to common stock. Conversion Each share of preferred stock is voluntarily convertible into common stock at any time after the date of issuance at a rate that equals the original issue price divided by the conversion price at the time in effect, subject to certain adjustments as set forth in the purchase agreements. Automatic conversion of the Series A preferred into common stock at the then effective conversion rate will occur upon the closing and issuance of shares following the effectiveness of a registration statement under the Securities Act of 1933, or upon the approval of the conversion by holders of a majority of the originally issued shares of Series A preferred stock, or approval of the conversion by 67% of the originally outstanding shares of all series of preferred stock, or in the case of a liquidation where the consideration per share to be received with respect to the preferred stock would be larger than the Series A preferred stock preference. Automatic conversion of the Series B preferred into common stock at the then effective conversion rate will occur upon the closing of the issuance shares following the effectiveness of a registration statement under the Securities Act of 1933 in which the aggregate price to the public equals or exceeds $10,000 and in which the public offering price per share of common stock equals or exceeds $10, or on the approval of the conversion by holders of 67% of the outstanding shares of preferred stock. Automatic conversion of the Series C preferred into common stock at the then effective conversion rate will occur upon the consummation of a designated initial public offering, or on the approval of conversion by the holders of 67% of the outstanding shares of preferred stock. As of December 31, 1998, the Company has reserved a total of 4,158,786 shares of its common stock expressly for the conversion privileges of preferred stock. (c) Stock Incentive Plan The Company has a Stock Incentive Plan (the Plan). Under the terms of the Plan, the Board of Directors is authorized to grant incentive stock options, non-qualified stock options and restricted stock to employees or consultants. Prices for all options or stock granted under the Plan are determined by the Board of Directors. Option prices for incentive stock options are set at not less than the fair market value of the common stock at the date of grant. Options vest over periods determined by the Board of Directors. Options are contingent upon continued employment with the Company and, unless otherwise specified, expire ten years from the date of grant. The Company has reserved 1,800,000 shares of its common stock for issuance under the Plan. F-15 DIGIMARC CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share data) SFAS No. 123 "Accounting for Stock-Based Compensation" defines a fair value based method of accounting for an employee stock option and similar equity instrument. As is permitted under SFAS No. 123, the Company has elected to continue to account for its stock-based compensation plans under APB Opinion No. 25. The Company has computed, for pro forma disclosure purposes, the value of all options granted during 1996, 1997 and 1998 using the Black-Scholes option pricing model as prescribed by SFAS No. 123 with the following weighted average assumption for grants:
1996 1997 1998 -------- -------- -------- Risk-free interest rate........................ 6.0% 6.25% 6.0% Expected dividend yield........................ -- -- -- Expected life (in years)....................... 4 4 4 Expected volatility............................ 100% 100% 100% Using the Black-Scholes methodology, the total value of options granted during 1996, 1997 and 1998 was $86, $97 and $175, respectively, which would be amortized on a pro forma basis over the vesting period of the options. The weighted average fair value of options granted during 1996, 1997 and 1998 was $.055, $.077 and $.090 per share, respectively. If the Company had accounted for its stock-based compensation plans in accordance with SFAS No. 123, the Company's net income (loss) and net income (loss) per share would approximate the pro forma disclosures below: Years Ended December 31, ---------------------------- 1996 1997 1998 -------- -------- -------- Net loss....................................... $ (1,578) $(3,979) $(3,442) Pro forma net loss............................. (1,613) (4,053) (3,552) Net loss per share............................. (0.71) (1.88) (1.50) Pro forma net loss per share................... (0.72) (1.91) (1.55)
The effects of applying SFAS No. 123 in this pro forma disclosure are not indicative of future amounts. SFAS No. 123 does not apply to awards prior to January 1, 1995, and additional awards are anticipated in future years. F-16 DIGIMARC CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share data) Transactions involving the Plan are summarized as follows:
Weighted average Number of exercise shares price --------- -------- Options outstanding, December 31, 1995...................................... 147,000 $ .15 Granted................................................. 526,550 .32 Exercised............................................... -- -- Canceled................................................ (96,000) .15 --------- ----- Options outstanding, December 31, 1996...................................... 577,550 .30 Granted................................................. 416,900 .50 Exercised............................................... (62,600) .22 Canceled................................................ (19,650) .50 --------- ----- Options outstanding, December 31, 1997...................................... 912,200 .40 Granted................................................. 646,800 .50 Exercised............................................... (33,486) .50 Canceled................................................ (220,714) .50 --------- ----- Options outstanding, December 31, 1998...................................... 1,304,800 .42 Granted (unaudited)..................................... 1,084,000 1.94 Exercised (unaudited)................................... (84,846) .50 Canceled (unaudited).................................... (47,992) .50 --------- ----- Options outstanding, September 30, 1999 (unaudited)..... 2,255,962 $1.16 ========= =====
At December 31, 1998, the range of exercise prices and the weighted average remaining contractual life of outstanding options were $.15-$.50 and nine years, respectively. At December 31, 1997 and 1998, options to purchase 224,668 and 386,137 shares of common stock, respectively, were exercisable. The weighted average exercise price of those options was $.26 and $.30 at December 31, 1997 and 1998, respectively, and 183,114 shares were available for grant at December 31, 1998. (11) Income Taxes The Company incurred a loss for both financial reporting and tax return purposes and, as such, there was no current or deferred tax provision for the years ended December 31, 1996, 1997 and 1998. F-17 DIGIMARC CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share data) The actual income tax expense differs from the expected tax expense (computed by applying the U.S. federal corporate income tax rate of 34% to net income (loss) before income taxes) as follows:
Years Ended December 31, ------------------ 1996 1997 1998 ---- ---- ---- Computed expected income tax (benefit) expense.............. (34)% (34)% (34)% Increase (reduction) in income tax expense (benefit) resulting from: State income tax (benefit) expense....................... (4) (4) (4) Increase in valuation allowance........................... 39 39 40 Other..................................................... (1) (1) (2) --- --- --- Income tax expense...................................... -- % -- % -- % === === ===
The tax effects of temporary differences that give rise to significant portions of the deferred tax assets and deferred tax liabilities as of December 31 are as follows:
1997 1998 ------- ------- Deferred tax assets: Net operating loss carryforwards....................... $ 1,865 $ 3,284 Capitalized research and experimentation costs......... 326 238 Tax basis intangible assets, due to differences in amortization.......................................... 104 82 Research and experimentation credits................... 42 113 Other.................................................. 25 22 ------- ------- Total gross deferred tax assets...................... 2,362 3,739 Less valuation allowance................................. (2,314) (3,699) ------- ------- Net deferred tax assets.............................. 48 40 ------- ------- Deferred tax liabilities: Unamortized discount on notes payable.................. 10 33 Plant and equipment, due to differences in depreciation.......................................... 38 7 ------- ------- Total deferred tax liabilities....................... 48 40 ------- ------- Net deferred tax liability (asset)................... $ -- $ -- ======= =======
The valuation allowance for deferred tax assets as of December 31, 1998 was approximately $3.7 million. The net change in the total valuation allowance for the years ended December 31, 1996, 1997 and 1998 was an increase (decrease) of approximately $896, $1,418 and $1,385, respectively. At December 31, 1998, the Company had net operating loss carryforwards of approximately $8,562 to offset against future income for federal and state tax purposes, and research and experimentation credits of $113. These carryforwards expire through 2018. A provision of the Internal Revenue Code requires that the utilization of net operating losses and research and experimentation credits be limited when there is a change of more than 50% in ownership of the Company. Such a change occurred with the sale of preferred stock Series A in June 1996 and the sale of preferred stock Series B in July 1996. Accordingly, the utilization of the F-18 DIGIMARC CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share data) net operating loss carryforwards generated from periods prior to July of 1996 is limited; the amount subject to limitation is approximately $915. (12) Subsequent Event (a) Sale of a Trademark In January 1999, the Company sold the trademark associated with NetRights, LLC. The sales price approximated the net book value of the trademark. This transaction is not expected to have a material effect on the financial position, results of operations or liquidity of the Company. (b) Stock Split On November , 1999, the Board of Directors approved a one-for-two reverse stock split of outstanding common and preferred shares. Common and preferred share and per share data for all periods presented in the accompanying financial statements have been adjusted to reflect this stock split. (13) Segment Information (a ) Geographic Information Digimarc derives its revenue from a single operating segment, digital watermarking applications. Revenue is generated in this segment through licensing and subscription of its products and the delivery of contracted and consulting services. The Company operates solely within the United States, and all assets are located within the United States. Sales to identifiable foreign customers were approximately $85, $17 and $89 for the years ended December 31, 1996, 1997 and 1998, respectively. (b) Major Customers Revenue from the Company's major customers was as follows:
Nine Months Ended Years Ended September 30, December 31, 1999 -------------- ------------- 1996 1997 1998 ---- ---- ---- (unaudited) Customer A...................................... $ -- $30 $ -- $ -- Customer B...................................... -- 25 503 3,860 Customer C...................................... 100 -- -- -- ---- --- ---- ------ $100 $55 $503 $3,860 ==== === ==== ======
No single customer accounted for more than 10% of trade accounts receivable outstanding at December 31, 1997. The Company had accounts receivable from three customers representing approximately 83% of trade accounts receivable at December 31, 1998. Accounts receivable from one customer represented 98% of trade receivables at September 30, 1999 (unaudited). F-19 DIGIMARC CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share data) (14) Unaudited Recent Developments (a) Issuance of Preferred Stock On June 30, 1999, the Company authorized 1,400,000 shares of Series D-1 convertible redeemable preferred stock. The terms of the Series D-1 stock are substantially identical to the Series B-1 and C-1 stock as described in note 10. There were 1,266,000 shares of Series D-1 stock outstanding at September 30, 1999. On August 26, 1999, the Company issued 160,000 shares of Series D-X convertible redeemable preferred stock at $5.00 per share. The terms of the Series D-X stock are substantially identical to the Series B and C stock as described in note 10. (b) Lease Transactions On June 22, 1999, the Company entered into a five-year operating lease agreement for office space. The lease requires a letter of credit in lieu of a cash security deposit in the amount of $350 which was entered into in August 1999. The letter of credit is secured by a certificate of deposit in the amount of $350. The letter of credit is to be released over two years in increments upon the Company's meeting certain milestones. (c) Short-term Borrowings In August 1999, the Company's bank extended the maturity date on the Company's revolving line of credit. As a result, the revolving line of credit currently expires on November 20, 1999. (d) Stock Incentive Plan In April 1999, the Company increased the number of common shares reserved for issuance under the Stock Incentive Plan to 2.8 million shares. (e) Strategic Partnerships In October 1999, the Company entered into a binding letter of agreement with Wired magazine (Wired) in which the Company and Wired will jointly promote Internet-enabled advertising. Under the agreement the Company has agreed to provide a non-exclusive license to Wired for MediaBridge, as well as provide Wired with all reasonable and necessary development tools, training, software and cameras for it to comply with its obligations under the agreement. Wired has agreed to remit to the Company a portion of the revenue it receives from MediaBridge-enabled advertising. In October 1999, the Company entered into a two-year agreement with Hearst Communications, Inc. (Hearst) in which the Company and Hearst will jointly promote Internet-enabled advertising. This agreement will commence at a date mutually agreed by both parties. In connection with the agreement the Company issued a warrant to purchase 150,000 shares of common stock to Hearst at an exercise price per share equal to the initial public offering price or other equity financing. The warrant is exercisable for a period of three years with 62,500 shares exercisable immediately after F-20 DIGIMARC CORPORATION NOTES TO FINANCIAL STATEMENTS--(Continued) (In thousands, except share and per share data) the consummation of an initial public offering, 62,500 shares exercisable based on the achievement of certain milestones and 25,000 shares exercisable upon the one-year anniversary of the agreement. The Company will record non-cash charges in their statement of operations for the fair value, as determined by the Black-Scholes valuation model, when the vesting milestones are achieved and the warrant becomes exercisable for these shares. (f) Deferred Stock Compensation Stock compensation expense is based on the difference between the estimated fair market value of the Company's common stock and the exercise price of options to purchase that stock on the date of grant, and is being recognized over the vesting period of the related options, usually four years. The estimated fair value per share used to determine unearned compensation was derived by reference to preferred stock values reduced by a discount factor, the execution of various contracts and letters of intent, the progress toward completion of new products, and the estimated price range of the common stock at the effective date. Stock compensation expense of $121 was recorded for the nine months ended September 30, 1999. The total unearned compensation recorded by the Company from inception to September 30, 1999 was $3.6 million. F-21 [THE DIGIMARC CORPORATION LOGO WITH IMAGES OF A BANK CARD, A DRIVER'S LICENSE, AN ACCESS CARD AND A PASSPORT, AND INCLUDING THE FOLLOWING TEXT: "SELF- AUTHENTICATING IDENTITY DOCUMENTS" AND "COMBAT PHOTO SWAPPING AND DEFEND AGAINST DOCUMENT ALTERATION."] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- [THE DIGIMARC CORPORATION LOGO AND WEB ADDRESS.] - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ +The information in this prospectus is not complete and may be changed. We may + +not sell these securities until the registration statement filed with the + +Securities and Exchange Commission is effective. This prospectus is not an + +offer to sell these securities, and we are not soliciting offers to buy these + +securities, in any state where the offer or sale is not permitted. + ++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++ SUBJECT TO COMPLETION, DATED NOVEMBER 24, 1999 3,000,000 Shares Common Stock Digimarc Corporation is offering 3,000,000 shares of its common stock. This is our initial public offering and no public market currently exists for our shares. We have applied to have our common stock quoted on the Nasdaq National Market under the symbol "DMRC." We anticipate that the initial public offering price will be between $13.00 and $15.00 per share. ------------ Investing in our common stock involves risks. See "Risk Factors" beginning on page 4. ------------
Per Share Total ----- ----- Public Offering Price............................................... $ $ Underwriting Discounts and Commissions.............................. $ $ Proceeds to Digimarc................................................ $ $
The Securities and Exchange Commission and state securities regulators have not approved or disapproved these securities, or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense. Digimarc has granted the underwriters a 30-day option to purchase up to an additional 450,000 shares of common stock to cover any over-allotments. ------------ Robertson Stephens International Hambrecht & Quist U.S. Bancorp Piper Jaffray The date of this Prospectus is , 1999. UNDERWRITING The underwriters named below, acting through their representatives, BancBoston Robertson Stephens Inc., Hambrecht & Quist LLC and U.S. Bancorp Piper Jaffray Inc., have severally agreed with us, subject to the terms and conditions of the underwriting agreement, to purchase from us the number of shares of common stock indicated opposite their names below. The underwriters are committed to purchase and pay for all of the shares if any are purchased.
Number Of Underwriters Shares ------------ --------- BancBoston Robertson Stephens Inc............................. Hambrecht & Quist LLC......................................... U.S. Bancorp Piper Jaffray Inc. .............................. International Underwriters -------------------------- BancBoston Robertson Stephens International Ltd............... Hambrecht & Quist LLC......................................... U.S. Bancorp Piper Jaffray Inc. .............................. --------- Total....................................................... 3,000,000 =========
We have been advised that the underwriters propose to offer the shares of common stock to the public at the public offering price located on the cover page of this prospectus and to dealers at that price less a concession of not in excess of $ per share, of which $ may be reallowed to their dealers. After the initial public offering, the public offering price, concession and reallowance to dealers may be reduced by the representatives. No reduction in this price will change the amount of proceeds to be received by us as indicated on the cover page of this prospectus. The underwriters do not intend to confirm sales to any accounts over which they exercise discretionary authority. Over-Allotment Option. We have granted to the underwriters an option, exercisable during the 30-day period after the date of this prospectus, to purchase up to 450,000 additional shares of common stock at the same price per share as we will receive for the 3,000,000 shares that the underwriters have agreed to purchase. To the extent that the underwriters exercise this option, each of the underwriters will have a firm commitment to purchase approximately the same percentage of these additional shares that the number of shares of common stock to be purchased by it shown in the above table represents as a percentage of the 3,000,000 shares offered by this prospectus. If purchased, such additional shares will be sold by the underwriters on the same terms as those on which the 3,000,000 shares are being sold. We will be obligated, under this option, to sell shares to the extent the option is exercised. The underwriters may exercise the option only to cover over-allotments made in connection with the sale of the shares of common stock offered by this prospectus. The following table shows the per share and total underwriting discounts and commissions to be paid by us to the underwriters. This information is presented assuming either no exercise or full exercise by the underwriters of their over- allotment option.
Per Without With Share Option Option ----- ------- ------ Public offering price................................. $ $ $ Underwriting discounts and commissions................ $ $ $ Proceeds, before expenses, to us...................... $ $ $
The other expenses of the offering are estimated at $1,068,000 and are payable entirely by us. BancBoston Robertson Stephens Inc. expects to deliver the shares of common stock to purchasers on , 1999. 68 PART II INFORMATION NOT REQUIRED IN PROSPECTUS Item 13. Other Expenses of Issuance and Distribution The expenses to be paid by the Registrant in connection with the distribution of the securities being registered, other than underwriting discounts and commissions, are as follows:
Amount* ---------- Securities and Exchange Commission Filing Fee.................... $ 14,387 NASD Filing Fee.................................................. 4,000 Nasdaq National Market Listing Fee............................... 95,000 Accounting Fees and Expenses..................................... 200,000 Blue Sky Fees and Expenses....................................... 5,000 Legal Fees and Expenses.......................................... 500,000 Transfer Agent and Registrar Fees and Expenses................... 8,000 Printing Expenses................................................ 225,000 Miscellaneous Expenses........................................... 16,455 ---------- Total........................................................ $1,067,842 ==========
- -------- * All amounts are estimates except the SEC filing fee, the NASD filing fee and the Nasdaq National Market listing fee. Item 14. Indemnification of Directors and Officers Section 145 of the Delaware General Corporation Law authorizes a court to award, or a corporation's board of directors to grant, indemnity to officers, director and other corporate agents under certain circumstances and subject to certain limitations. Digimarc's certificate of incorporation and bylaws provide that Digimarc shall indemnify its directors, officers, employees and agents to the full extent permitted by Delaware General Corporation Law, including in circumstances in which indemnification is otherwise discretionary under Delaware law. In addition, Digimarc intends to enter into separate indemnification agreements with its directors, officers and certain employees which would require Digimarc, among other things, to indemnify them against certain liabilities which may arise by reason of their status as directors, officers or certain other employees. Digimarc also intends to maintain director and officer liability insurance, if available on reasonable terms. These indemnification provisions and the indemnification agreement to be entered into between Digimarc and its officers and directors may be sufficiently broad to permit indemnification of Digimarc officers and directors for liabilities (including reimbursement of expenses incurred) arising under the Securities Act. The underwriting agreement, which is Exhibit 1.1 to this registration statement, provides for indemnification by our underwriters and their officers and directors for certain liabilities arising under the Securities Act or otherwise. Item 15. Recent Sales of Unregistered Securities Since January 1, 1996, the Registrant has issued and sold the following unregistered securities: 1. Between January 1, 1996 and October 21, 1999, the Registrant granted 3,033,750 shares of restricted common stock and options to purchase shares of common stock at prices ranging from $0.15 to $2.50 to employees, directors and consultants pursuant to its 1995 Stock Incentive Plan. Such sales were made in reliance on Rule 701 of the Securities Act. II-1 2. In May 1996, the Registrant issued an aggregate of 36,369 shares of its common stock to Alliance Consulting Group, Inc., Hugh Mackworth and Clay Davidson in exchange for services rendered. Such sales were made in reliance on Section 4(2) of the Securities Act. 3. In June 1996, the Registrant issued and sold an aggregate of 162,500 shares of its Series A-1 preferred stock to a total of 10 investors for an aggregate purchase price of $438,730. Such sales were made in reliance on Section 4(2) of the Securities Act. 4. In July 1996, the Registrant issued and sold an aggregate of 902,000 shares of its Series B-1 preferred stock to a total of seven investors for an aggregate purchase price of $4,510,000. Such sales were made in reliance on Section 4(2) of the Securities Act. 5. In July 1997, the Registrant issued an aggregate of 179,000 shares of its common stock in connection with its acquisition of certain assets of NetRights, LLC. Such issuance was made in reliance on Section 4(2) of the Securities Act. 6. In December 1997, the Registrant issued and sold an aggregate of 2,029,786 shares of its Series C-1 preferred stock to a total of 16 investors for an aggregate purchase price of $5,805,189. Such sales were made in reliance on Section 4(2) of the Securities Act. 7. In January 1998, the Registrant issued an aggregate of 13,572 shares of its common stock to each of Sandra Kinsler and Daniel Romano in exchange for the release of certain claims against the Registrant. Such issuances were made in reliance on Section 4(2) of the Securities Act. 8. In June 1999, the Registrant issued and sold an aggregate of 1,266,000 shares of its Series D preferred stock to a total of 14 investors for an aggregate purchase price of $6,330,000. Such sales were made in reliance on Section 4(2) of the Securities Act. 9. In August 1999, the Registrant issued and sold an aggregate of 160,000 shares of its Series D-X preferred stock to a total of 3 investors for an aggregate purchase price of $800,000. Such sales were made in reliance on Section 4(2) of the Securities Act. 10. In October 1999, the Registrant issued a warrant to purchase 150,000 shares of its common stock to Hearst Communications, Inc. as part of a marketing agreement. The warrant was issued in reliance on Section 4(2) of the Securities Act. The issuances of the securities in the transactions above were deemed to be exempt from registration under the Securities Act in reliance on Section 4(2) of the Securities Act as transactions by an issuer not involving a public offering, where the purchasers represented their intention to acquire the securities for investment only and not with a view to distribution and received or had access to adequate information about the Registrant, or Rule 701 promulgated under the Securities Act as transactions pursuant to a compensatory benefit plan or a written contract relating to compensation. Appropriate legends were affixed to the stock certificates issued in the above transactions. Similar legends were imposed in connection with any subsequent sales of any such securities. No underwriters were employed in any of the above transactions. II-2 Item 16. Exhibits and Financial Statement Schedules (a) Exhibits The exhibits are as set forth in the Exhibit Index. (b) Financial Statement Schedules All schedules have been omitted since they are not required or are not applicable or the required information is shown in the financial statements or related notes. Item 17. Undertakings The Registrant hereby undertakes to provide to the underwriters at the closing specified in the Underwriting Agreement certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser. Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers and controlling persons of the Registrant pursuant to the foregoing provisions, or otherwise, the Registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Registrant of expenses incurred or paid by a director, officer or controlling person of the Registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the Registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. The Registrant hereby undertakes that: (1) For purposes of any liability under the Securities Act, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act shall be deemed to be part of this registration statement as of the time it was declared effective. (2) For the purpose of determining any liability under the Securities Act, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof. II-3 SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the Registrant has duly caused this Amendment No. 3 to the Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized, in Lake Oswego, State of Oregon, on the 24th day of November 1999. Digimarc Corporation /s/ Bruce Davis By: _________________________________ Bruce Davis President and Chief Executive Officer Pursuant to the requirements of the Securities Act of 1933, this Amendment No. 3 to the Registration Statement has been signed by the following persons in the capacities and on the dates indicated:
Signature Title Date --------- ----- ---- /s/ Bruce Davis President, Chief Executive Officer November 24, 1999 ______________________________________ and Director (Principal Executive (Bruce Davis) Officer) ** Chief Financial Officer (Principal November 24, 1999 ______________________________________ Accounting Officer) and Secretary (E. K. Ranjit) ** Chief Technology Officer November 24, 1999 ______________________________________ and Director (Geoffrey Rhoads) ** Chairman of the Board of Directors November 24, 1999 ______________________________________ (Philip Monego, Sr.) ** Director November 24, 1999 ______________________________________ (Brian J. Grossi) ** Director November 24, 1999 ______________________________________ (John Taysom) /s/ Bruce Davis **By: ___________________________ Bruce Davis (Attorney-in-fact)
II-4 Exhibit Index
Exhibit Number Document ------- -------- 1.1 Form of Underwriting Agreement 3.1 Certificate of Incorporation of the Registrant 3.2 Bylaws of the Registrant 4.1 Reference is made to Exhibits 3.1 and 3.2 4.2 Second Amended and Restated Investor Rights Agreement, dated as of November 2, 1999, between the Registrant and the holders of the Registrant's preferred stock 4.3 Specimen Stock Certificate of the Registrant 5.1** Opinion of Morrison & Foerster LLP as to the legality of the common stock 10.1 Form of Indemnification Agreement between the Registrant and each of its executive officers and directors 10.2* Registrant's 1995 Stock Incentive Plan, as amended 10.3 Registrant's 1999 Stock Incentive Plan, including forms of agreements thereunder 10.4 Registrant's 1999 Employee Stock Purchase Plan, including forms of agreements thereunder 10.5* Office Lease Agreement, dated as of April 16, 1998, between the Registrant and Property Reserve, Inc. 10.6* Sublease, dated as of April 23, 1998, between the Registrant and Southern Pacific Funding Corporation 10.7* Sublease, dated as of April 27, 1998, between the Registrant and Southern Pacific Funding Corporation 10.8* Lease Agreement, dated as of June 25, 1999, between the Registrant and Southplace Associates LLC 10.9*** Counterfeit Deterrence System Development and License Agreement, dated as of January 1, 1999 23.1 Consent of Morrison & Foerster LLP. Reference is made to Exhibit 5.1 23.2 Consent of KPMG LLP, Independent Certified Public Accountants 24.1* Powers of Attorney 27.1* Financial Data Schedule
- -------- * Previously filed ** To be filed by amendment *** Confidential treatment has been requested with regard to certain portions of this document. Such portions have been omitted from this filing and have been filed separately with the Securities and Exchange Commission. EX-1.1 2 FORM OF UNDERWRITING AGREEMENT EXHIBIT 1.1 Underwriting Agreement December __, 1999 BancBoston Robertson Stephens Inc. Hambrecht & Quist LLC U.S. Bancorp Piper Jaffray Inc. c/o BancBoston Robertson Stephens Inc. 555 California Street, Suite 2600 San Francisco, CA 94104 As Representative of the several Underwriters Ladies and Gentlemen: Introductory. Digimarc Corporation, a Delaware corporation (the "Company), proposes to issue and sell to the several underwriters named in Schedule A (the "Underwriters") an aggregate of __________ shares (the "Firm - ---------- Shares") of its Common Stock, par value $0.001 per share (the "Common Shares"). In addition, the Company has granted to the Underwriters an option to purchase up to an additional __________ Common Shares (the "Option Shares") as provided in Section 2. The Firm Shares and, if and to the extent such option is exercised, the Option Shares are collectively called the "Shares". BancBoston Robertson Stephens Inc., Hambrecht & Quist LLC and U.S. Bancorp Piper Jaffray Inc., have agreed to act as representatives of the several Underwriters (in such capacity, the "Representatives") in connection with the offering and sale of the Shares. The Company has prepared and filed with the Securities and Exchange Commission (the "Commission") a registration statement on Form S-1 (File No. 333-87501), which contains a form of prospectus to be used in connection with the public offering and sale of the Shares. Such registration statement, as amended, including the financial statements, exhibits and schedules thereto, in the form in which it was declared effective by the Commission under the Securities Act of 1933 and the rules and regulations promulgated thereunder (collectively, the "Securities Act"), including any information deemed to be a part thereof at the time of effectiveness pursuant to Rule 430A or Rule 434 under the Securities Act, is called the "Registration Statement". Any registration statement filed by the Company pursuant to Rule 462(b) under the Securities Act is called the "Rule 462(b) Registration Statement", and from and after the date and time of filing of the Rule 462(b) Registration Statement the term "Registration Statement" shall include the Rule 462(b) Registration Statement. Such prospectus, in the form first used by the Underwriters to confirm sales of the Shares, is called the "Prospectus"; provided, however, if the Company has, with the consent of BancBoston Robertson Stephens Inc., elected to rely upon Rule 434 under the Securities Act, the term "Prospectus" shall mean the Company's prospectus subject to completion (each, a "preliminary prospectus") dated November 1, 1999 (such preliminary prospectus is called the "Rule 434 preliminary prospectus"), together with the applicable term sheet (the "Term Sheet") prepared and filed by the Company with the Commission under Rules 434 and 424(b) under the Securities Act and all references in this Agreement to the date of the Prospectus shall mean the date of the Term Sheet. All references in this Agreement to the Registration Statement, the Rule 462(b) Registration Statement, a preliminary prospectus, the Prospectus or the Term Sheet, or any amendments or supplements to any of the foregoing, shall include any copy thereof filed with the Commission pursuant to its Electronic Data Gathering, Analysis and Retrieval System ("EDGAR"). The Company hereby confirms its agreements with the Underwriters as follows: Section 1. Representations and Warranties of the Company. The Company hereby represents, warrants and covenants to each Underwriter as follows: (a) Compliance with Registration Requirements. The Registration Statement and any Rule 462(b) Registration Statement have been declared effective by the Commission under the Securities Act. The Company has complied to the Commission's satisfaction with all requests of the Commission for additional or supplemental information. No stop order suspending the effectiveness of the Registration Statement or any Rule 462(b) Registration Statement is in effect and no proceedings for such purpose have been instituted or are pending or, to the best knowledge of the Company, are contemplated or threatened by the Commission. Each preliminary prospectus and the Prospectus when filed complied in all material respects with the Securities Act and, if filed by electronic transmission pursuant to EDGAR (except as may be permitted by Regulation S-T under the Securities Act), was identical to the copy thereof delivered to the Underwriters for use in connection with the offer and sale of the Shares. Each of the Registration Statement, any Rule 462(b) Registration Statement and any post-effective amendment thereto, at the time it became effective and at all subsequent times, complied and will comply in all material respects with the Securities Act and did not and will not contain any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading. The Prospectus, as amended or supplemented, as of its date and at all subsequent times, did not and will not contain any untrue statement of a material fact or omit to state a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading. The representations and warranties set forth in the two immediately preceding sentences do not apply to statements in or omissions from the Registration Statement, any Rule 462(b) Registration Statement, or any post-effective amendment thereto, or the Prospectus, or any amendments or supplements thereto, made in reliance upon and in conformity with information relating to any Underwriter furnished to the Company in writing by the Representatives expressly for use therein. There are no contracts or other documents required to be described in the Prospectus or to be filed as exhibits to the Registration Statement which have not been described or filed as required. -2- (b) Offering Materials Furnished to Underwriters. The Company has delivered to the Representatives four complete conformed copies of the Registration Statement and of each consent and certificate of experts filed as a part thereof, and conformed copies of the Registration Statement (without exhibits) and preliminary prospectuses and the Prospectus, as amended or supplemented, in such quantities and at such places as the Representatives have reasonably requested for each of the Underwriters. (c) Distribution of Offering Material By the Company. The Company has not distributed and will not distribute, prior to the later of the Second Closing Date (as defined below) and the completion of the Underwriters' distribution of the Shares, any offering material in connection with the offering and sale of the Shares other than a preliminary prospectus, the Prospectus or the Registration Statement. (d) The Underwriting Agreement. This Agreement has been duly authorized, executed and delivered by, and is a valid and binding agreement of, the Company, enforceable in accordance with its terms, except as rights to indemnification hereunder may be limited by applicable law and except as the enforcement hereof may be limited by bankruptcy, insolvency, reorganization, moratorium or other similar laws relating to or affecting the rights and remedies of creditors or by general equitable principles. (e) Authorization of the Shares To Be Sold by the Company. The Shares to be purchased by the Underwriters from the Company have been duly authorized for issuance and sale pursuant to this Agreement and, when issued and delivered by the Company pursuant to this Agreement, will be validly issued, fully paid and nonassessable. (f) No Applicable Registration or Other Similar Rights. There are no persons with registration or other similar rights to have any equity or debt securities registered for sale under the Registration Statement or included in the offering contemplated by this Agreement, except for such rights as have been duly waived. (g) No Material Adverse Change. Subsequent to the respective dates as of which information is given in the Prospectus: (i) there has been no material adverse change, or any development that could reasonably be expected to result in a material adverse change, in the condition, financial or otherwise, or in the earnings, business, operations or prospects, whether or not arising from transactions in the ordinary course of business, of the Company (any such change or effect, where the context so requires, is called a "Material Adverse Change" or a "Material Adverse Effect"); (ii) the Company has not incurred any material liability or obligation not in the ordinary course of business nor entered into any material transaction or agreement not in the ordinary course of business; and (iii) there has been no dividend or distribution of any kind declared, paid or made by the Company on any class of capital stock or repurchase or redemption by the Company of any class of capital stock. (h) Independent Accountants. KPMG LLP, who have expressed their opinion with respect to the financial statements (which term as used in this Agreement includes the related notes thereto) -3- filed with the Commission as a part of the Registration Statement and included in the Prospectus, are independent public or certified public accountants within the meaning of by the Securities Act. (i) Preparation of the Financial Statements. The financial statements filed with the Commission as a part of the Registration Statement and included in the Prospectus present fairly the consolidated financial position of the Company as of and at the dates indicated and the results of their operations and cash flows for the periods specified. Such financial statements have been prepared in conformity with generally accepted accounting principles applied on a consistent basis throughout the periods involved, except as may be expressly stated in the related notes thereto. No other financial statements or supporting schedules are required to be included in the Registration Statement. The financial data set forth in the Prospectus under the captions "Prospectus Summary--Summary Selected Financial Data", "Selected Financial Data" and "Capitalization" fairly present the information set forth therein on a basis consistent with that of the audited financial statements contained in the Registration Statement. (j) Company's Accounting System. The Company maintains a system of accounting controls sufficient to provide reasonable assurances that (i) transactions are executed in accordance with management's general or specific authorization; (ii) transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles and to maintain accountability for assets; (iii) access to assets is permitted only in accordance with management's general or specific authorization; and (iv) the recorded accountability for assets is compared with existing assets at reasonable intervals and appropriate action is taken with respect to any differences. (k) Subsidiaries of the Company. The Company does not own or control, directly or indirectly, any corporation, association or other entity. (l) Incorporation and Good Standing of the Company. The Company has been duly organized and is validly existing as a corporation in good standing under the laws of the jurisdiction in which it is organized with full corporate power and authority to own its properties and conduct its business as described in the prospectus, and is duly qualified to do business as a foreign corporation and is in good standing under the laws of each jurisdiction which requires such qualification, except where the failure to be so qualified or be in good standing would not have a Material Adverse Effect (as defined below). (m) Capitalization and Other Capital Stock Matters. The authorized, issued and outstanding capital stock of the Company is as set forth in the Prospectus under the caption "Capitalization" (other than for subsequent issuances, if any, pursuant to employee benefit plans described in the Prospectus or upon exercise of outstanding options described in the Prospectus). The Common Shares (including the Shares) conform in all material respects to the description thereof contained in the Prospectus. All of the issued and outstanding Common Shares have been duly authorized and validly issued, fully paid and nonassessable and have been issued in compliance with federal and state securities laws. None of the outstanding Common Shares were issued in violation of any preemptive rights, rights of first refusal or other similar rights to subscribe for or purchase securities -4- of the Company. There are no authorized or outstanding options, warrants, preemptive rights, rights of first refusal or other rights to purchase, or equity or debt securities convertible into or exchangeable or exercisable for, any capital stock of the Company other than those accurately described in the Prospectus. The description of the Company's stock option, stock bonus and other stock plans or arrangements, and the options or other rights granted thereunder, set forth in the Prospectus accurately and fairly presents the information required to be shown with respect to such plans, arrangements, options and rights. (n) Stock Exchange Listing. The Shares have been approved for inclusion on the Nasdaq National Market, subject only to official notice of issuance. (o) No Consents, Approvals or Authorizations Required. No consent, approval, authorization, filing with or order of any court or governmental agency or regulatory body is required in connection with the transactions contemplated herein, except such as have been obtained or made under the Securities Act and such as may be required (i) under the blue sky laws of any jurisdiction in connection with the purchase and distribution of the Shares by the Underwriters in the manner contemplated here and in the Prospectus, (ii) by the National Association of Securities Dealers, LLC and (iii) by the federal and provincial laws of Canada. (p) Non-Contravention of Existing Instruments Agreements. Neither the issue and sale of the Shares nor the consummation of any other of the transactions herein contemplated nor the fulfillment of the terms hereof will conflict with, result in a breach or violation or imposition of any lien, charge or encumbrance upon any property or assets of the Company pursuant to, (i) the charter or by- laws of the Company (ii) the terms of any indenture, contract, lease, mortgage, deed of trust, note agreement, loan agreement or other agreement, obligation, condition, covenant or instrument to which the Company is a party or bound or to which its property is subject or (iii) any statute, law, rule, regulation, judgment, order or decree applicable to the Company of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company or any of its properties. (q) No Defaults or Violations. The Company is not in violation or default of (i) any provision of its charter or by-laws, (ii) the terms of any indenture, contract, lease, mortgage, deed of trust, note agreement, loan agreement or other agreement, obligation, condition, covenant or instrument to which it is a party or bound or to which its property is subject or (iii) any statute, law, rule, regulation, judgment, order or decree of any court, regulatory body, administrative agency, governmental body, arbitrator or other authority having jurisdiction over the Company or any of its properties, as applicable, except any such violation or default which would not, singly or in the aggregate, result in a Material Adverse Change except as otherwise disclosed in the Prospectus. (r) No Actions, Suits or Proceedings. No action, suit or proceeding by or before any court or governmental agency, authority or body or any arbitrator involving the Company or its property is pending or, to the best knowledge of the Company, threatened that (i) could reasonably be expected to prevent the consummation of any of the transactions contemplated hereby or (ii) could reasonably be expected to result in a Material Adverse Effect. -5- (s) All Necessary Permits, Etc. The Company possesses such valid and current certificates, authorizations or permits issued by the appropriate state, federal or foreign regulatory agencies or bodies necessary to conduct their respective businesses, and the Company has not received any notice of proceedings relating to the revocation or modification of, or non-compliance with, any such certificate, authorization or permit which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, could result in a Material Adverse Change. (t) Title to Properties. The Company has good and marketable title to all the properties and assets reflected as owned in the financial statements referred to in Section 1(i) above, in each case free and clear of any security interests, mortgages, liens, encumbrances, equities, claims and other defects, except such as do not materially and adversely affect the value of such property and do not materially interfere with the use made or proposed to be made of such property by the Company. The real property, improvements, equipment and personal property held under lease by the Company are held under valid and enforceable leases, with such exceptions as are not material and do not materially interfere with the use made or proposed to be made of such real property, improvements, equipment or personal property by the Company. (u) Tax Law Compliance. The Company has filed all necessary federal, state and foreign income and franchise tax returns, or has properly requested extensions thereof, and has paid all taxes required to be paid by it and, if due and payable, any related or similar assessment, fine or penalty levied against it. The Company has made adequate charges, accruals and reserves in the applicable financial statements referred to in Section 1(i) above in respect of all federal, state and foreign income and franchise taxes for all periods as to which the tax liability of the Company has not been finally determined. The Company is not aware of any tax deficiency that has been or might be asserted or threatened against the Company that could result in a Material Adverse Change. (v) Intellectual Property Rights. Except as disclosed in the Prospectus, the Company owns or possesses adequate rights to use all patents, patent rights or licenses, inventions, collaborative research agreements, trade secrets, know- how, trademarks, service marks, trade names and copyrights which are necessary to conduct its businesses as described in the Registration Statement and Prospectus; the expiration of any patents, patent rights, trade secrets, trademarks, service marks, trade names or copyrights would not result in a Material Adverse Change that is not otherwise disclosed in the Prospectus; the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of the Company by others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights; and the Company has not received any notice of, and has no knowledge of, any infringement of or conflict with asserted rights of others with respect to any patent, patent rights, inventions, trade secrets, know-how, trademarks, service marks, trade names or copyrights which, singly or in the aggregate, if the subject of an unfavorable decision, ruling or finding, might have a Material Adverse Change. Except as disclosed in the Prospectus, there is no claim being made against the Company regarding patents, patent rights or licenses, inventions, collaborative research, trade secrets, know-how, trademarks, service marks, trade names or copyrights. The Company does not in the conduct of their business as now or proposed to be conducted as described in the Prospectus infringe or conflict with any right or patent of any third party, or any discovery, -6- invention, product or process which is the subject of a patent application filed by any third party, known to the Company, which such infringement or conflict is reasonably likely to result in a Material Adverse Change. (w) Year 2000 Preparedness. There are no issues related to the Company's preparedness for the Year 2000 that (i) are of a character required to be described or referred to in the Registration Statement or Prospectus by the Securities Act which have not been accurately described in the Registration Statement or Prospectus or (ii) might reasonably be expected to result in any Material Adverse Change or that might materially affect their properties, assets or rights. The Company has inquired of material vendors as to their preparedness for the Year 2000 and has disclosed in the Registration Statement or Prospectus any issues that might reasonably be expected to result in any Material Adverse Change. (x) No Transfer Taxes or Other Fees. There are no transfer taxes or other similar fees or charges under Federal law or the laws of any state, or any political subdivision thereof, required to be paid in connection with the execution and delivery of this Agreement or the issuance and sale by the Company of the shares. (y) Company Not an "Investment Company." The Company has been advised of the rules and requirements under the Investment Company Act of 1940, as amended (the "Investment Company Act"). The Company is not, and after receipt of payment for the Shares will not be, an "investment company" or an entity "controlled" by an "investment company" within the meaning of the Investment Company Act and will conduct its business in a manner so that it will not become subject to the Investment Company Act. (z) Insurance. The Company is insured by recognized, financially sound and reputable institutions with policies in such amounts and with such deductibles and covering such risks as are generally deemed adequate and customary for their businesses including, but not limited to, policies covering real and personal property owned or leased by the Company against theft, damage, destruction, acts of vandalism and earthquakes, general liability and Directors and Officers liability. The Company has no reason to believe that it will not be able (i) to renew its existing insurance coverage as and when such policies expire or (ii) to obtain comparable coverage from similar institutions as may be necessary or appropriate to conduct its business as now conducted and at a cost that would not result in a Material Adverse Change. The Company has not been denied any insurance coverage which it has sought or for which it has applied. (aa) Labor Matters. To the best of Company's knowledge, no labor disturbance by the employees of the Company exists or is imminent; and the Company is not aware of any existing or imminent labor disturbance by the employees of any of its principal suppliers, subassemblers, value added resellers, subcontractors, original equipment manufacturers, authorized dealers or international distributors that might be expected to result in a Material Adverse Change. (bb) No Price Stabilization or Manipulation. The Company has not taken and will not take, directly or indirectly, any action designed to or that might be reasonably expected to cause or -7- result in stabilization or manipulation of the price of the Common Stock to facilitate the sale or resale of the Shares. (cc) Lock-Up Agreements. Each officer and director of the Company and each beneficial owner of capital of the Company has agreed to sign an agreement substantially in the form attached hereto as Exhibit A (the "Lock-up --------- Agreements"). The Company has provided to counsel for the Underwriters a complete and accurate list of all securityholders of the Company and the number and type of securities held by each securityholder. The Company has provided to counsel for the Underwriters true, accurate and complete copies of all of the Lock-up Agreements presently in effect or effected hereby. The Company hereby represents and warrants that it will not release any of its officers, directors or other stockholders from any Lock-up Agreements currently existing or hereafter effected without the prior written consent of BancBoston Robertson Stephens Inc. (dd) Related Party Transactions. To the best of the Company's knowledge, there are no business relationships or related-party transactions involving the Company or any other person required to be described in the Prospectus which have not been described as required. Any certificate signed by an officer of the Company and delivered to the Representatives or to counsel for the Underwriters shall be deemed to be a representation and warranty by the Company to each Underwriter as to the matters set forth therein. SECTION 2. Purchase, Sale and Delivery of the Shares. (a) The Firm Shares. The Company agrees to issue and sell to the several Underwriters the Firm Shares upon the terms herein set forth. On the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Underwriters agree, severally and not jointly, to purchase from the Company the respective number of Firm Shares set forth opposite their names on Schedule A. The purchase price ---------- per Firm Share to be paid by the several Underwriters to the Company shall be $___ per share. (b) The First Closing Date. Delivery of the Firm Shares to be purchased by the Underwriters and payment therefor shall be made by the Company and the Representatives at 6:00 a.m. San Francisco time, at the offices of Morrison & Foerster LLP (or at such other place as may be agreed upon among the Representatives and the Company), (i) on the third (3rd) full business day following the first day that Shares are traded, (ii) if this Agreement is executed and delivered after 1:30 P.M., San Francisco time, the fourth (4th) full business day following the day that this Agreement is executed and delivered or (iii) at such other time and date not later that seven (7) full business days following the first day that Shares are traded as the Representatives and the Company may determine (or at such time and date to which payment and delivery shall have been postponed pursuant to Section 8 hereof), such time and date of payment and delivery being herein called the "Closing Date;" provided, however, that if the Company has not made available to the Representatives copies of the Prospectus within the time provided in Section 4(d) hereof, the Representatives may, in their sole discretion, postpone the Closing Date until no later that two (2) full business days following delivery of copies of the Prospectus to the Representatives. -8- (c) The Option Shares; the Second Closing Date. In addition, on the basis of the representations, warranties and agreements herein contained, and upon the terms but subject to the conditions herein set forth, the Company hereby grants an option to the several Underwriters to purchase, severally and not jointly, up to an aggregate of __________ Option Shares from the Company at the purchase price per share to be paid by the Underwriters for the Firm Shares. The option granted hereunder is for use by the Underwriters solely in covering any over- allotments in connection with the sale and distribution of the Firm Shares. The option granted hereunder may be exercised at any time upon notice by the Representatives to the Company, which notice may be given at any time within 30 days from the date of this Agreement. The time and date of delivery of the Option Shares, if subsequent to the First Closing Date, is called the "Second Closing Date" and shall be determined by the Representatives and shall not be earlier than three nor later than five full business days after delivery of such notice of exercise. If any Option Shares are to be purchased, (i) each Underwriter agrees, severally and not jointly, to purchase the number of Option Shares (subject to such adjustments to eliminate fractional shares as the Representatives may determine) that bears the same proportion to the total number of Option Shares to be purchased as the number of Firm Shares set forth on Schedule A opposite the name of such Underwriter bears to the total number of ---------- Firm Shares. The Representatives may cancel the option at any time prior to its expiration by giving written notice of such cancellation to the Company. (d) Public Offering of the Shares. The Representatives hereby advise the Company that the Underwriters intend to offer for sale to the public, as described in the Prospectus, their respective portions of the Shares as soon after this Agreement has been executed and the Registration Statement has been declared effective as the Representatives, in their sole judgment, has determined is advisable and practicable. (e) Payment for the Shares. Payment for the Shares shall be made at the First Closing Date (and, if applicable, at the Second Closing Date) by wire transfer in immediately available-funds to the order of the Company. It is understood that the Representatives have been authorized, for its own account and the accounts of the several Underwriters, to accept delivery of and receipt for, and make payment of the purchase price for, the Firm Shares and any Option Shares the Underwriters have agreed to purchase. BancBoston Robertson Stephens Inc., individually and not as the Representative of the Underwriters, may (but shall not be obligated to) make payment for any Shares to be purchased by any Underwriter whose funds shall not have been received by the Representatives by the First Closing Date or the Second Closing Date, as the case may be, for the account of such Underwriter, but any such payment shall not relieve such Underwriter from any of its obligations under this Agreement. (f) Delivery of the Shares. The Company shall deliver, or cause to be delivered, a credit representing the Firm Shares to an account or accounts at The Depository Trust Company, as designated by the Representatives for the accounts of the Representatives and the several Underwriters at the First Closing Date, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor. The Company shall also -9- deliver, or cause to be delivered a credit representing the Option Shares the Underwriters have agreed to purchase at the First Closing Date (or the Second Closing Date, as the case may be), to an account or accounts at The Depository Trust Company as designated by the Representatives for the accounts of the Representatives and the several Underwriters, against the irrevocable release of a wire transfer of immediately available funds for the amount of the purchase price therefor. Time shall be of the essence, and delivery at the time and place specified in this Agreement is a further condition to the obligations of the Underwriters. (g) Delivery of Prospectus to the Underwriters. Not later than 12:00 noon on the second business day following the date the Shares are released by the Underwriters for sale to the public, the Company shall deliver or cause to be delivered copies of the Prospectus in such quantities and at such places as the Representatives shall request. SECTION 3. Covenants of the Company. The Company further covenants and agrees with each Underwriter as follows: (a) Registration Statement Matters. The Company will (i) use its best efforts to cause a registration statement on Form 8-A (the "Form 8-A Registration Statement") as required by the Securities Exchange Act of 1934 (the "Exchange Act") to become effective simultaneously with the Registration Statement, (ii) use its best efforts to cause the Registration Statement to become effective or, if the procedure in Rule 430A of the Securities Act is followed, to prepare and timely file with the Commission under Rule 424(b) under the Securities Act a Prospectus in a form approved by the Representatives containing information previously omitted at the time of effectiveness of the Registration Statement in reliance on Rule 430A of the Securities Act and (iii) not file any amendment to the Registration Statement or supplement to the Prospectus of which the Representatives shall not previously have been advised and furnished with a copy or to which the Representatives shall have reasonably objected in writing or which is not in compliance with the Securities Act. If the Company elects to rely on Rule 462(b) under the Securities Act, the Company shall file a Rule 462(b) Registration Statement with the Commission in compliance with Rule 462(b) under the Securities Act prior to the time confirmations are sent or given, as specified by Rule 462(b)(2) under the Securities Act, and shall pay the applicable fees in accordance with Rule 111 under the Securities Act. (b) Securities Act Compliance. The Company will advise the Representatives promptly (i) when the Registration Statement or any post-effective amendment thereto shall have become effective, (ii) of receipt of any comments from the Commission, (iii) of any request of the Commission for amendment of the Registration Statement or for supplement to the Prospectus or for any additional information and (iv) of the issuance by the Commission of any stop order suspending the effectiveness of the Registration Statement or the use of the Prospectus or of the institution of any proceedings for that purpose. The Company will use its best efforts to prevent the issuance of any such stop order preventing or suspending the use of the Prospectus and to obtain as soon as possible the lifting thereof, if issued. -10- (c) Blue Sky Compliance. The Company will cooperate with the Representatives and counsel for the Underwriters in endeavoring to qualify the Shares for sale under the securities laws of such jurisdictions (both national and foreign) as the Representatives may reasonably have designated in writing and will make such applications, file such documents, and furnish such information as may be reasonably required for that purpose, provided the Company shall not be required to qualify as a foreign corporation or to file a general consent to service of process in any jurisdiction where it is not now so qualified or required to file such a consent. The Company will, from time to time, prepare and file such statements, reports and other documents, as are or may be required to continue such qualifications in effect for so long a period as the Representatives may reasonably request for distribution of the Shares. (d) Amendments and Supplements to the Prospectus and Other Securities Act Matters. The Company will comply with the Securities Act and the Exchange Act, and the rules and regulations of the Commission thereunder, so as to permit the completion of the distribution of the Shares as contemplated in this Agreement and the Prospectus. If during the period in which a prospectus is required by law to be delivered by an Underwriter or dealer, any event shall occur as a result of which, in the judgment of the Company or in the reasonable opinion of the Representatives or counsel for the Underwriters, it becomes necessary to amend or supplement the Prospectus in order to make the statements therein, in the light of the circumstances existing at the time the Prospectus is delivered to a purchaser, not misleading, or, if it is necessary at any time to amend or supplement the Prospectus to comply with any law, the Company promptly will prepare and file with the Commission, and furnish at its own expense to the Underwriters and to dealers, an appropriate amendment to the Registration Statement or supplement to the Prospectus so that the Prospectus as so amended or supplemented will not, in the light of the circumstances when it is so delivered, be misleading, or so that the Prospectus will comply with the law. (e) Copies of any Amendments and Supplements to the Prospectus. The Company agrees to furnish the Representatives, without charge, during the period beginning on the date hereof and ending on the later of the First Closing Date or such date, as in the opinion of counsel for the Underwriters, the Prospectus is no longer required by law to be delivered in connection with sales by an Underwriter or dealer (the "Prospectus Delivery Period"), as many copies of the Prospectus and any amendments and supplements thereto as the Representatives may request. (f) Insurance. The Company shall (i) obtain Directors and Officers liability insurance in the minimum amount of $10 million which shall apply to the offering contemplated hereby. (g) Notice of Subsequent Events. If at any time during the ninety (90) day period after the Registration Statement becomes effective, any rumor, publication or event relating to or affecting the Company shall occur as a result of which in your opinion the market price of the Company Shares has been or is likely to be materially affected (regardless of whether such rumor, publication or event necessitates a supplement to or amendment of the Prospectus), the Company will, after written notice from you advising the Company to the effect set forth above, forthwith prepare, consult with you concerning the substance of and disseminate a press release or other public statement, reasonably satisfactory to you, responding to or commenting on such rumor, publication or event. -11- (h) Use of Proceeds. The Company shall apply the net proceeds from the sale of the Shares sold by it substantially in the manner described under the caption "Use of Proceeds" in the Prospectus. (i) Transfer Agent. The Company shall engage and maintain, at its expense, a registrar and transfer agent for the Company Shares. (j) Earnings Statement. As soon as practicable, the Company will make generally available to its security holders and to the Representatives an earnings statement (which need not be audited) covering the twelve-month period ending December 31, 2000 that satisfies the provisions of Section 11(a) of the Securities Act. (k) Periodic Reporting Obligations. During the Prospectus Delivery Period the Company shall file, on a timely basis, with the Commission and the Nasdaq National Market all reports and documents required to be filed under the Exchange Act. (l) Agreement Not to Offer or Sell Additional Securities. The Company will not, without the prior written consent of BancBoston Robertson Stephens Inc., for a period of 180 days following the date of the Prospectus, offer, sell or contract to sell, or otherwise dispose of or enter into any transaction which is designed to, or could be expected to, result in the disposition (whether by actual disposition or effective economic disposition due to cash settlement or otherwise by the Company or any affiliate of the Company or any person in privity with the Company or any affiliate of the Company) directly or indirectly, or announce the offering of, any other Common Shares or any securities convertible into, or exchangeable for, Common Shares; provided, however, that (i) the Company may issue and sell Common Shares pursuant to any director or employee stock option plan, stock ownership plan or dividend reinvestment plan of the Company in effect at the date of the Prospectus and described in the Prospectus so long as none of those shares may be transferred on during the period of 180 days from the date that the Registration Statement is declared effective (the "Lock-Up Period") and the Company shall enter stop transfer instructions with its transfer agent and registrar against the transfer of any such Common Shares and (ii) the Company may issue Common Shares issuable upon the conversion of securities or the exercise of warrants outstanding at the date of the Prospectus and described in the Prospectus, and (iii) the Company may issue Common Shares (or securities convertible into, or exchangeable for, Common Shares) in connection with the formation or furtherance of a strategic alliance so long as none of those shares may be transferred on during the Lock- Up Period. (m) Future Reports to the Representatives. During the period of three years hereafter the Company will furnish to the Representatives as soon as available, copies of any report or communication of the Company mailed generally to holders of its capital stock. Section 4. Conditions of the Obligations of the Underwriters. The obligations of the several Underwriters to purchase and pay for the Shares as provided herein on the First Closing Date and, with respect to the Option -12- Shares, the Second Closing Date, shall be subject to the accuracy of the representations and warranties on the part of the Company set forth in Section 1 hereof as of the date hereof and as of the First Closing Date as though then made and, with respect to the Option Shares, as of the Second Closing Date as though then made, to the timely performance by the Company of its covenants and other obligations hereunder, and to each of the following additional conditions: (a) Compliance with Registration Requirements; No Stop Order; No Objection from the National Association of Securities Dealers, LLC. The Registration Statement shall have become effective prior to the execution of this Agreement, or at such later date as shall be consented to in writing by you; and no stop order suspending the effectiveness thereof shall have been issued and no proceedings for that purpose shall have been initiated or, to the knowledge of the Company or any Underwriter, threatened by the Commission, and any request of the Commission for additional information (to be included in the Registration Statement or the Prospectus or otherwise) shall have been complied with to the satisfaction of Underwriters' Counsel; and the National Association of Securities Dealers, LLC shall have raised no objection to the fairness and reasonableness of the underwriting terms and arrangements. (b) Corporate Proceedings. All corporate proceedings and other legal matters in connection with this Agreement, the form of Registration Statement and the Prospectus, and the registration, authorization, issue, sale and delivery of the Shares, shall have been reasonably satisfactory to Underwriters' Counsel, and such counsel shall have been furnished with such papers and information as they may reasonably have requested to enable them to pass upon the matters referred to in this Section. (c) No Material Adverse Change. Subsequent to the execution and delivery of this Agreement and prior to the First Closing Date, or the Second Closing Date, as the case may be, there shall not have been any Material Adverse Change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company considered as one enterprise from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. (d) Opinion of Counsel for the Company. You shall have received on the First Closing Date, or the Second Closing Date, as the case may be, an opinion of Morrison & Foerster LLP, counsel for the Company, substantially in the form of Exhibit B attached hereto, dated the First Closing Date, or the Second --------- Closing Date, addressed to the Underwriters and with reproduced copies or signed counterparts thereof for each of the Underwriters. Counsel rendering the opinion contained in Exhibit B may rely as to --------- questions of law not involving the laws of the United States or the State of California upon opinions of local counsel, and as to questions of fact upon representations or certificates of officers of the Company, and of government officials, in which case their opinion is to state that they are so relying and that they have no knowledge of any material misstatement or inaccuracy in any such opinion, representation or certificate. Copies of any opinion, representation or certificate so relied upon shall be delivered to you, as Representatives of the Underwriters, and to Underwriters' Counsel. -13- (e) Opinion of Counsel for the Underwriters. You shall have received on the First Closing Date or the Second Closing Date, as the case may be, an opinion of Wilson Sonsini Goodrich & Rosati, Professional Corporation, substantially in the form of Exhibit C hereto. The Company shall have furnished --------- to such counsel such documents as they may have requested for the purpose of enabling them to pass upon such matters. (f) Accountants' Comfort Letter. You shall have received on the First Closing Date and on the Second Closing Date, as the case may be, a letter from KPMG LLP addressed to the Underwriters, dated the First Closing Date or the Second Closing Date, as the case may be, confirming that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations and based upon the procedures described in such letter delivered to you concurrently with the execution of this Agreement (herein called the "Original Letter"), but carried out to a date not more than four (4) business days prior to the First Closing Date or the Second Closing Date, as the case may be, (i) confirming, to the extent true, that the statements and conclusions set forth in the Original Letter are accurate as of the First Closing Date or the Second Closing Date, as the case may be, and (ii) setting forth any revisions and additions to the statements and conclusions set forth in the Original Letter which are necessary to reflect any changes in the facts described in the Original Letter since the date of such letter, or to reflect the availability of more recent financial statements, data or information. The letter shall not disclose any change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company from that set forth in the Registration Statement or Prospectus, which, in your sole judgment, is material and adverse and that makes it, in your sole judgment, impracticable or inadvisable to proceed with the public offering of the Shares as contemplated by the Prospectus. The Original Letter from KPMG LLP shall be addressed to or for the use of the Underwriters in form and substance satisfactory to the Underwriters and shall (i) represent, to the extent true, that they are independent certified public accountants with respect to the Company within the meaning of the Act and the applicable published Rules and Regulations, (ii) set forth their opinion with respect to their examination of the consolidated balance sheet of the Company as of [December 31, 1998] and related consolidated statements of operations, shareholders' equity, and cash flows for the twelve (12) months ended [December 31, 1998], (iii) state that KPMG LLP has performed the procedures set out in Statement on Auditing Standards No. 71 ("SAS 71") for a review of interim financial information and providing the report of KPMG LLP as described in SAS 71 on the financial statements for each of the quarters in the ten-quarter period ended June 30, 1999 (the "Quarterly Financial Statements"), (iv) state that in the course of such review, nothing came to their attention that leads them to believe that any material modifications need to be made to any of the Quarterly Financial Statements in order for them to be in compliance with generally accepted accounting principles consistently applied across the periods presented, and address other matters agreed upon by KPMG LLP and you. In addition, you shall have received from KPMG LLP a letter addressed to the Company and made available to you for the use of the Underwriters stating that their review of the Company's system of internal accounting controls, to the extent they deemed necessary in establishing the scope of their examination of the Company's consolidated financial statements as of December 31, 1998 did not disclose any weaknesses in internal controls that they considered to be material weaknesses. -14- (g) Officers' Certificate. You shall have received on the First Closing Date and the Second Closing Date, as the case may be, a certificate of the Company, dated the First Closing Date or the Second Closing Date, as the case may be, signed by the Chief Executive Officer and Chief Financial Officer of the Company, to the effect that, and you shall be satisfied that: (i) The representations and warranties of the Company in this Agreement are true and correct, as if made on and as of the First Closing Date or the Second Closing Date, as the case may be, and the Company has complied with all the agreements and satisfied all the conditions on its part to be performed or satisfied at or prior to the First Closing Date or the Second Closing Date, as the case may be; (ii) No stop order suspending the effectiveness of the Registration Statement has been issued and no proceedings for that purpose have been instituted or are pending or threatened under the Act; (iii) When the Registration Statement became effective and at all times subsequent thereto up to the delivery of such certificate, the Registration Statement and the Prospectus, and any amendments or supplements thereto, contained all material information required to be included therein by the Securities Act and the applicable rules and regulations of the Commission thereunder and in all material respects conformed to the requirements of the Securities Act and the applicable rules and regulations of the Commission thereunder, the Registration Statement and the Prospectus, and any amendments or supplements thereto, did not and do not include any untrue statement of a material fact or omit to state a material fact required to be stated therein or necessary to make the statements therein not misleading; and, since the effective date of the Registration Statement, there has occurred no event required to be set forth in an amended or supplemented Prospectus which has not been so set forth; and (iv) Subsequent to the respective dates as of which information is given in the Registration Statement and Prospectus, there has not been (a) any material adverse change in the condition (financial or otherwise), earnings, operations, business or business prospects of the Company, (b) any transaction that is material to the Company, except transactions entered into in the ordinary course of business, (c) any obligation, direct or contingent, that is material to the Company, incurred by the Company, except obligations incurred in the ordinary course of business, (d) any change in the capital stock or outstanding indebtedness of the Company that is material to the Company, (e) any dividend or distribution of any kind declared, paid or made on the capital stock of the Company, or (f) any loss or damage (whether or not insured) to the property of the Company which has been sustained or will have been sustained which has a material adverse effect on the condition (financial or otherwise), earnings, operations, business or business prospects of the Company. (h) Lock-up Agreement from Certain Stockholders of the Company. The Company shall have obtained and delivered to you an agreement substantially in the form of Exhibit A attached hereto from each officer and director of the --------- Company and each beneficial owner of the outstanding issued share capital of the Company. -15- (i) Stock Exchange Listing. The Shares shall have been approved for inclusion on the Nasdaq National Market, subject only to official notice of issuance. (j) Compliance with Prospectus Delivery Requirements. The Company shall have complied with the provisions of Sections 2(g) and 3(e) hereof with respect to the furnishing of Prospectuses. (k) Additional Documents. On or before each of the First Closing Date and the Second Closing Date, as the case may be, the Representatives and counsel for the Underwriters shall have received such information, documents and opinions as they may reasonably require for the purposes of enabling them to pass upon the issuance and sale of the Shares as contemplated herein, or in order to evidence the accuracy of any of the representations and warranties, or the satisfaction of any of the conditions or agreements, herein contained. If any condition specified in this Section 4 is not satisfied when and as required to be satisfied, this Agreement may be terminated by the Representatives by notice to the Company at any time on or prior to the First Closing Date and, with respect to the Option Shares, at any time prior to the Second Closing Date, which termination shall be without liability on the part of any party to any other party, except that Section 5 (Payment of Expenses), Section 6 (Reimbursement of Underwriters' Expenses), Section 7 (Indemnification and Contribution) and Section 10 (Representations and Indemnities to Survive Delivery) shall at all times be effective and shall survive such termination. Section 5. Payment of Expenses. The Company agrees to pay all costs, fees and expenses incurred in connection with the performance of its obligations hereunder and in connection with the transactions contemplated hereby, including without limitation (i) all expenses incident to the issuance and delivery of the Common Shares (including all printing and engraving costs), (ii) all fees and expenses of the registrar and transfer agent of the Common Stock, (iii) all necessary issue, transfer and other stamp taxes in connection with the issuance and sale of the Shares to the Underwriters, (iv) all fees and expenses of the Company's counsel, independent public or certified public accountants and other advisors, (v) all costs and expenses incurred in connection with the preparation, printing, filing, shipping and distribution of the Registration Statement (including financial statements, exhibits, schedules, consents and certificates of experts), each preliminary prospectus and the Prospectus, and all amendments and supplements thereto, and this Agreement, (vi) all filing fees, attorneys' fees and expenses incurred by the Company or the Underwriters in connection with qualifying or registering (or obtaining exemptions from the qualification or registration of) all or any part of the Shares for offer and sale under the state securities or blue sky laws or the provincial securities laws of Canada or any other country, and, if requested by the Representatives, preparing and printing a "Blue Sky Survey", an "International Blue Sky Survey" or other memorandum, and any supplements thereto, advising the Underwriters of such qualifications, registrations and exemptions, (vii) the filing fees incident to, and the reasonable fees and expenses of counsel for the Underwriters in connection with, the National Association of Securities Dealers, LLC review and approval of the Underwriters' participation in the offering and distribution of the Common Shares, (viii) the fees and expenses associated with including the Common Shares on the Nasdaq National Market, (ix) all costs and expenses incident to the preparation and undertaking of -16- "road show" preparations to be made to prospective investors, and (x) all other fees, costs and expenses referred to in Item 13 of Part II of the Registration Statement. Except as provided in this Section 5, Section 6, and Section 7 hereof, the Underwriters shall pay their own expenses, including the fees and disbursements of their counsel. Section 6. Reimbursement of Underwriters' Expenses. If this Agreement is terminated by the Representatives pursuant to Section 4, Section 7, Section 8, Section 9, or if the sale to the Underwriters of the Shares on the First Closing Date is not consummated because of any refusal, inability or failure on the part of the Company to perform any agreement herein or to comply with any provision hereof, the Company agrees to reimburse the Representatives and the other Underwriters (or such Underwriters as have terminated this Agreement with respect to themselves), severally, upon demand for all out-of-pocket expenses that shall have been reasonably incurred by the Representatives and the Underwriters in connection with the proposed purchase and the offering and sale of the Shares, including but not limited to fees and disbursements of counsel, printing expenses, travel expenses, postage, facsimile and telephone charges. Section 7. Indemnification and Contribution. (a) Indemnification of the Underwriters. The Company agrees to indemnify and hold harmless each Underwriter, its officers and employees, and each person, if any, who controls any Underwriter within the meaning of the Securities Act and the Exchange Act against any loss, claim, damage, liability or expense, as incurred, to which such Underwriter or such controlling person may become subject, under the Securities Act, the Exchange Act or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of the Company, which consent shall not be unreasonably withheld), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based (i) upon any untrue statement or alleged untrue statement of a material fact contained in the Registration Statement, or any amendment thereto, including any information deemed to be a part thereof pursuant to Rule 430A or Rule 434 under the Securities Act, or the omission or alleged omission therefrom of a material fact required to be stated therein or necessary to make the statements therein not misleading; or (ii) upon any untrue statement or alleged untrue statement of a material fact contained in any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or the omission or alleged omission therefrom of a material fact necessary in order to make the statements therein, in the light of the circumstances under which they were made, not misleading; or (iii) in whole or in part upon any inaccuracy in the representations and warranties of the Company contained herein; or (iv) in whole or in part upon any failure of the Company to perform its obligations hereunder or under law; or (v) any act or failure to act or any alleged act or failure to act by any Underwriter in connection with, or relating in any manner to, the Shares or the offering contemplated hereby, and which is included as part of or referred to in any loss, claim, damage, liability or action arising out of or based upon any matter covered by clause (i), (ii), (iii) or (iv) above, provided that the Company shall not be liable under this clause (v) to the extent that a court of competent jurisdiction shall have determined by a final judgment that such loss, -17- claim, damage, liability or action resulted directly from any such acts or failures to act undertaken or omitted to be taken by such Underwriter through its bad faith or willful misconduct; and to reimburse each Underwriter and each such controlling person for any and all expenses (including the fees and disbursements of counsel chosen by BancBoston Robertson Stephens Inc.) as such expenses are reasonably incurred by such Underwriter or such controlling person in connection with investigating, defending, settling, compromising or paying any such loss, claim, damage, liability, expense or action; provided, however, that the foregoing indemnity agreement shall not apply to any loss, claim, damage, liability or expense to the extent, but only to the extent, arising out of or based upon any untrue statement or alleged untrue statement or omission or alleged omission made in reliance upon and in conformity with written information furnished to the Company by the Representatives expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto); and provided, further, that with respect to any preliminary prospectus, the foregoing indemnity agreement shall not inure to the benefit of any Underwriter from whom the person asserting any loss, claim, damage, liability or expense purchased Shares, or any person controlling such Underwriter, if copies of the Prospectus were timely delivered to the Underwriter pursuant to Section 2 and a copy of the Prospectus (as then amended or supplemented if the Company shall have furnished any amendments or supplements thereto) was not sent or given by or on behalf of such Underwriter to such person, if required by law so to have been delivered, at or prior to the written confirmation of the sale of the Shares to such person, and if the Prospectus (as so amended or supplemented) would have cured the defect giving rise to such loss, claim, damage, liability or expense. The indemnity agreement set forth in this Section 7(a) shall be in addition to any liabilities that the Company may otherwise have. (b) Indemnification of the Company, its Directors and Officers. Each Underwriter agrees, severally and not jointly, to indemnify and hold harmless the Company, each of its directors, each of its officers who signed the Registration Statement and each person, if any, who controls the Company within the meaning of the Securities Act or the Exchange Act, against any loss, claim, damage, liability or expense, as incurred, to which the Company, or any such director, officer or controlling person may become subject, under the Securities Act, the Exchange Act, or other federal or state statutory law or regulation, or at common law or otherwise (including in settlement of any litigation, if such settlement is effected with the written consent of such Underwriter), insofar as such loss, claim, damage, liability or expense (or actions in respect thereof as contemplated below) arises out of or is based upon any untrue or alleged untrue statement of a material fact contained in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto), or arises out of or is based upon the omission or alleged omission to state therein a material fact required to be stated therein or necessary to make the statements therein not misleading, in each case to the extent, but only to the extent, that such untrue statement or alleged untrue statement or omission or alleged omission was made in the Registration Statement, any preliminary prospectus, the Prospectus (or any amendment or supplement thereto), in reliance upon and in conformity with written information furnished to the Company by the Representatives expressly for use therein; and to reimburse the Company, or any such director, officer or controlling person for any legal and other expense reasonably incurred by the Company, or any such director, officer or controlling person in connection with investigating, defending, settling, compromising or -18- paying any such loss, claim, damage, liability, expense or action. The indemnity agreement set forth in this Section 7(b) shall be in addition to any liabilities that each Underwriter may otherwise have. (c) Information Provided by the Underwriters. The Company hereby acknowledges that the only information that the Underwriters have furnished to the Company expressly for use in the Registration Statement, any preliminary prospectus or the Prospectus (or any amendment or supplement thereto) are the statements set forth in the table in the first, second and third paragraphs under the caption "Underwriting" in the Prospectus; and the Underwriters confirm that such statements are correct. (d) Notifications and Other Indemnification Procedures. Promptly after receipt by an indemnified party under this Section 7 of notice of the commencement of any action, such indemnified party will, if a claim in respect thereof is to be made against an indemnifying party under this Section 7, notify the indemnifying party in writing of the commencement thereof, but the omission so to notify the indemnifying party will not relieve it from any liability which it may have to any indemnified party for contribution or otherwise than under the indemnity agreement contained in this Section 7 or to the extent it is not prejudiced as a proximate result of such failure. In case any such action is brought against any indemnified party and such indemnified party seeks or intends to seek indemnity from an indemnifying party, the indemnifying party will be entitled to participate in, and, to the extent that it shall elect, jointly with all other indemnifying parties similarly notified, by written notice delivered to the indemnified party promptly after receiving the aforesaid notice from such indemnified party, to assume the defense thereof with counsel reasonably satisfactory to such indemnified party; provided, however, if the defendants in any such action include both the indemnified party and the indemnifying party and the indemnified party shall have reasonably concluded that a conflict may arise between the positions of the indemnifying party and the indemnified party in conducting the defense of any such action or that there may be legal defenses available to it and/or other indemnified parties which are different from or additional to those available to the indemnifying party, the indemnified party or parties shall have the right to select separate counsel to assume such legal defenses and to otherwise participate in the defense of such action on behalf of such indemnified party or parties. Upon receipt of notice from the indemnifying party to such indemnified party of such indemnifying party's election so to assume the defense of such action and approval by the indemnified party of counsel, the indemnifying party will not be liable to such indemnified party under this Section 7 for any legal or other expenses subsequently incurred by such indemnified party in connection with the defense thereof unless (i) the indemnified party shall have employed separate counsel in accordance with the proviso to the next preceding sentence (it being understood, however, that the indemnifying party shall not be liable for the expenses of more than one separate counsel (together with local counsel), approved by the indemnifying party (BancBoston Robertson Stephens Inc. in the case of Section 7(b) and Section 8), representing the indemnified parties who are parties to such action), (ii) the indemnifying party shall not have employed counsel satisfactory to the indemnified party to represent the indemnified party within a reasonable time after notice of commencement of the action, or (iii) the indemnifying party has authorized the employment of counsel for the indemnified party at the expense of the indemnifying party, in each of which cases the fees and expenses of counsel shall be at the expense of the indemnifying party. -19- (e) Settlements. The indemnifying party under this Section 7 shall not be liable for any settlement of any proceeding effected without its written consent, which consent shall not be unreasonably withheld, but if settled with such consent or if there be a final judgment for the plaintiff, the indemnifying party agrees to indemnify the indemnified party against any loss, claim, damage, liability or expense by reason of such settlement or judgment. Notwithstanding the foregoing sentence, if at any time an indemnified party shall have requested an indemnifying party to reimburse the indemnified party for fees and expenses of counsel as contemplated by Section 7(d) hereof, the indemnifying party agrees that it shall be liable for any settlement of any proceeding effected without its written consent if (i) such settlement is entered into more than 30 days after receipt by such indemnifying party of the aforesaid request and (ii) such indemnifying party shall not have reimbursed the indemnified party in accordance with such request prior to the date of such settlement. No indemnifying party shall, without the prior written consent of the indemnified party, effect any settlement, compromise or consent to the entry of judgment in any pending or threatened action, suit or proceeding in respect of which any indemnified party is or could have been a party and indemnity was or could have been sought hereunder by such indemnified party, unless such settlement, compromise or consent includes (i) an unconditional release of such indemnified party from all liability on claims that are the subject matter of such action, suit or proceeding and (ii) does not include a statement as to or an admission of fault, culpability or a failure to act by or on behalf of any indemnified party. (f) Contribution. If the indemnification provided for in this Section 7 is unavailable to or insufficient to hold harmless an indemnified party under Section 7(a) or (b) above in respect of any losses, claims, damages or liabilities (or actions or proceedings in respect thereof) then each indemnifying party shall contribute to the aggregate amount paid or payable by such indemnified party in such proportion as is appropriate to reflect the relative benefits received by the Company on the one hand and the Underwriters on the other from the offering of the Shares. If, however, the allocation provided by the immediately preceding sentence is not permitted by applicable law then each indemnifying party shall contribute to such amount paid or payable by such indemnified party in such proportion as is appropriate to reflect not only such relative benefits but also the relative fault of the Company on the one hand and the Underwriters on the other in connection with the statements or omissions which resulted in such losses, claims, damages or liabilities, (or actions or proceedings in respect thereof), as well as any other relevant equitable considerations. The relative benefits received by the Company on the one hand and the Underwriter on the other shall be deemed to be in the same proportion as the total net proceeds from the offering (before deducting expenses) received by the Company bears to the total underwriting discounts and commissions received by the Underwriters, in each case as set forth in the table on the cover page of the Prospectus. The relative fault shall be determined by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission or alleged omission to state a material fact relates to information supplied by the Company on the one hand or the Underwriters on the other and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. The Company and Underwriters agree that it would not be just and equitable if contributions pursuant to this Section 7(f) were determined by pro rata allocation (even if the Underwriters were -20- treated as one entity for such purpose) or by any other method of allocation which does not take account of the equitable considerations referred to above in this Section 7(f). The amount paid or payable by an indemnified party as a result of the losses, claims, damages or liabilities (or actions or proceedings in respect thereof) referred to above in this Section 7(f) shall be deemed to include any legal or other expenses reasonably incurred by such indemnified party in connection with investigating or defending any such action or claim. Notwithstanding the provisions of this subsection (f), (i) no Underwriter shall be required to contribute any amount in excess of the underwriting discounts and commissions applicable to the Shares purchased by such Underwriter and (ii) no person guilty of fraudulent misrepresentation (within the meaning of Section 11(f) of the Securities Act) shall be entitled to contribution from any person who was not guilty of such fraudulent misrepresentation. The Underwriters' obligations in this Section 7(f) to contribute are several in proportion to their respective underwriting obligations and not joint. (g) Timing of Any Payments of Indemnification. Any losses, claims, damages, liabilities or expenses for which an indemnified party is entitled to indemnification or contribution under this Section 7 shall be paid by the indemnifying party to the indemnified party as such losses, claims, damages, liabilities or expenses are incurred, but in all cases, no later than thirty (30) days of invoice to the indemnifying party. (h) Survival. The indemnity and contribution agreements contained in this Section 7 and the representation and warranties of the Company set forth in this Agreement shall remain operative and in full force and effect, regardless of (i) any investigation made by or on behalf of any Underwriter or any person controlling any Underwriter, the Company, its directors or officers or any persons controlling the Company, (ii) acceptance of any Shares and payment therefor hereunder, and (iii) any termination of this Agreement. A successor to any Underwriter, or to the Company, its directors or officers, or any person controlling the Company, shall be entitled to the benefits of the indemnity, contribution and reimbursement agreements contained in this Section 7. (i) Acknowledgements of Parties. The parties to this Agreement hereby acknowledge that they are sophisticated business persons who were represented by counsel during the negotiations regarding the provisions hereof including, without limitation, the provisions of this Section 7, and are fully informed regarding said provisions. They further acknowledge that the provisions of this Section 7 fairly allocate the risks in light of the ability of the parties to investigate the Company and its business in order to assure that adequate disclosure is made in the Registration Statement and Prospectus as required by the Securities Act and the Exchange Act. Section 8. Default of One or More of the Several Underwriters. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the several Underwriters shall fail or refuse to purchase Shares that it or they have agreed to purchase hereunder on such date, and the aggregate number of Common Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase does not exceed 10% of the aggregate number of the Shares to be purchased on such date, the other Underwriters shall be obligated, severally, in the proportions that the number of Firm Common Shares set forth opposite their respective names on Schedule A bears to the aggregate number of ---------- Firm Shares set forth opposite the names of all such non-defaulting -21- Underwriters, or in such other proportions as may be specified by the Representatives with the consent of the non-defaulting Underwriters, to purchase the Shares which such defaulting Underwriter or Underwriters agreed but failed or refused to purchase on such date. If, on the First Closing Date or the Second Closing Date, as the case may be, any one or more of the Underwriters shall fail or refuse to purchase Shares and the aggregate number of Shares with respect to which such default occurs exceeds 10% of the aggregate number of Shares to be purchased on such date, and arrangements satisfactory to the Representatives and the Company for the purchase of such Shares are not made within 48 hours after such default, this Agreement shall terminate without liability of any party to any other party except that the provisions of Section 4, and Section 7 shall at all times be effective and shall survive such termination. In any such case either the Representatives or the Company shall have the right to postpone the First Closing Date or the Second Closing Date, as the case may be, but in no event for longer than seven days in order that the required changes, if any, to the Registration Statement and the Prospectus or any other documents or arrangements may be effected. As used in this Agreement, the term "Underwriter" shall be deemed to include any person substituted for a defaulting Underwriter under this Section 8. Any action taken under this Section 8 shall not relieve any defaulting Underwriter from liability in respect of any default of such Underwriter under this Agreement. Section 9. Termination of this Agreement. Prior to the First Closing Date, this Agreement may be terminated by the Representatives by notice given to the Company if at any time (i) trading or quotation in any of the Company's securities shall have been suspended or limited by the Commission or by the Nasdaq Stock Market, or trading in securities generally on either the Nasdaq Stock Market or the New York Stock Exchange shall have been suspended or limited, or minimum or maximum prices shall have been generally established on any of such stock exchanges by the Commission or the National Association of Securities Dealers, LLC; (ii) a general banking moratorium shall have been declared by any of federal, New York or California authorities; (iii) there shall have occurred any outbreak or escalation of national or international hostilities or any crisis or calamity, or any change in the United States or international financial markets, or any substantial change or development involving a prospective change in United States' or international political, financial or economic conditions, as in the judgment of the Representatives is material and adverse and makes it impracticable or inadvisable to market the Common Shares in the manner and on the terms described in the Prospectus or to enforce contracts for the sale of securities; (iv) in the judgment of the Representatives there shall have occurred any Material Adverse Change; or (v) the Company shall have sustained a loss by strike, fire, flood, earthquake, accident or other calamity of such character as in the judgment of the Representatives may interfere materially with the conduct of the business and operations of the Company regardless of whether or not such loss shall have been insured. Any termination pursuant to this Section 9 shall be without liability on the part of (a) the Company to any Underwriter, except that the Company shall be obligated to reimburse the expenses of the Representatives and the Underwriters pursuant to Sections 5 and 6 hereof, (b) any Underwriter to the Company, or (c) of any party hereto to any other party except that the provisions of Section 7 shall at all times be effective and shall survive such termination. -22- Section 10. Representations and Indemnities to Survive Delivery. The respective indemnities, agreements, representations, warranties and other statements of the Company, of its officers and of the several Underwriters set forth in or made pursuant to this Agreement will remain in full force and effect, regardless of any investigation made by or on behalf of any Underwriter or the Company or any of its or their partners, officers or directors or any controlling person, as the case may be, and will survive delivery of and payment for the Shares sold hereunder and any termination of this Agreement. Section 11. Notices. All communications hereunder shall be in writing and shall be mailed, hand delivered or telecopied and confirmed to the parties hereto as follows: If to the Representatives: BANCBOSTON ROBERTSON STEPHENS INC. 555 California Street San Francisco, California 94104 Facsimile: (415) 676-2696 Attention: General Counsel If to the Company: DIGIMARC CORPORATION One Centerpointe Drive, Suite 500 Lake Oswego, OR 97035 Facsimile: 503-968-0219 Attention: Chief Executive Officer Any party hereto may change the address for receipt of communications by giving written notice to the others. Section 12. Successors. This Agreement will inure to the benefit of and be binding upon the parties hereto, including any substitute Underwriters pursuant to Section 8 hereof, and to the benefit of the employees, officers and directors and controlling persons referred to in Section 7, and to their respective successors, and personal representatives, and no other person will have any right or obligation hereunder. The term "successors" shall not include any purchaser of the Shares as such from any of the Underwriters merely by reason of such purchase. Section 13. Partial Unenforceability. The invalidity or unenforceability of any Section, paragraph or provision of this Agreement shall not affect the validity or enforceability of any other Section, paragraph or provision hereof. If any Section, paragraph or provision of this Agreement is for any reason determined to be invalid or unenforceable, there shall be deemed to be made such minor changes (and only such minor changes) as are necessary to make it valid and enforceable. -23- Section 14. Governing Law Provisions. (a) Governing Law. This agreement shall be governed by and construed in accordance with the internal laws of the state of New York applicable to agreements made and to be performed in such state. (b) Consent to Jurisdiction. Any legal suit, action or proceeding arising out of or based upon this Agreement or the transactions contemplated hereby ("Related Proceedings") may be instituted in the federal courts of the United States of America located in the City and County of San Francisco or the courts of the State of California in each case located in the City and County of San Francisco (collectively, the "Specified Courts"), and each party irrevocably submits to the exclusive jurisdiction (except for proceedings instituted in regard to the enforcement of a judgment of any such court (a "Related Judgment"), as to which such jurisdiction is non-exclusive) of such courts in any such suit, action or proceeding. Service of any process, summons, notice or document by mail to such party's address set forth above shall be effective service of process for any suit, action or other proceeding brought in any such court. The parties irrevocably and unconditionally waive any objection to the laying of venue of any suit, action or other proceeding in the Specified Courts and irrevocably and unconditionally waive and agree not to plead or claim in any such court that any such suit, action or other proceeding brought in any such court has been brought in an inconvenient forum. Each party not located in the United States irrevocably appoints CT Corporation System, which currently maintains a San Francisco office at 49 Stevenson Street, San Francisco, California 94105, United States of America, as its agent to receive service of process or other legal summons for purposes of any such suit, action or proceeding that may be instituted in any state or federal court in the City and County of San Francisco. Section 15. General Provisions. This Agreement constitutes the entire agreement of the parties to this Agreement and supersedes all prior written or oral and all contemporaneous oral agreements, understandings and negotiations with respect to the subject matter hereof. This Agreement may be executed in two or more counterparts, each one of which shall be an original, with the same effect as if the signatures thereto and hereto were upon the same instrument. This Agreement may not be amended or modified unless in writing by all of the parties hereto, and no condition herein (express or implied) may be waived unless waived in writing by each party whom the condition is meant to benefit. The Section headings herein are for the convenience of the parties only and shall not affect the construction or interpretation of this Agreement. If the foregoing is in accordance with your understanding of our agreement, please sign and return to the Company the enclosed copies hereof, whereupon this instrument, along with all counterparts hereof, shall become a binding agreement in accordance with its terms. Very truly yours, DIGIMARC CORPORATION By: ____________________________ Name: Bruce Davis Title: Chief Executive Officer The foregoing Underwriting Agreement is hereby confirmed and accepted by the Representatives as of the date first above written. BANCBOSTON ROBERTSON STEPHENS INC. HAMBRECHT & QUIST LLC U.S. BANCORP PIPER JAFFRAY INC. On their behalf and on behalf of each of the several underwriters named in Schedule A hereto. - ---------- By BANCBOSTON ROBERTSON STEPHENS INC. By:_________________________________ Authorized Signatory -25- SCHEDULE A Number of Firm Common Shares Underwriters To be Purchased ------------ --------------- BANCBOSTON ROBERTSON STEPHENS INC.................. HAMBRECHT & QUIST LLC.............................. U.S. BANCORP PIPER JAFFRAY INC. ................... Total....................................... EX-3.1 3 CERTIFICATE OF INCORPORATION Exhibit 3.1 AMENDED AND RESTATED CERTIFICATE OF INCORPORATION OF DIGIMARC CORPORATION DIGIMARC CORPORATION., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), does hereby certify: 1. That the name of the Corporation is Digimarc Corporation. The Corporation was originally incorporated under the same name; and the original Certificate of Incorporation of the Corporation was filed with the Secretary of State of the State of Delaware on the 27th day of September, 1999. 2. That by unanimous written consent of the Board of Directors of the Corporation, filed with the minutes of the Corporation, resolutions were duly adopted setting forth the proposed amendment and restatement of the Certificate of Incorporation of the Corporation and declaring said amendment and restatement to be advisable. The resolution setting forth the proposed amendment and restatement is as follows: RESOLVED, that the Certificate of Incorporation of the Corporation be, and it hereby is, amended and restated in its entirety to read as set forth in the attached Restated Certificate of Incorporation. 3. That thereafter, the Directors and the stockholders of the Corporation took action by executing a written consent in lieu of a meeting in accordance with Section 108(c) and Section 228(a), respectively, of the General Corporation Law of the State of Delaware. 4. That said amendment and restatement was duly adopted in accordance with the provisions of Sections 242 and 245 of the General Corporation Law of the State of Delaware. This Restated Certificate of Incorporation restates and integrates and further amends the provisions of the Certificate of Incorporation of the Corporation as follows: SECTION 1. The name of the corporation is Digimarc Corporation (the "Corporation"). SECTION 2. The address of the Corporation's registered office in the State of Delaware is 1209 Orange Street, in the City of Wilmington, Delaware 19801, County of New Castle. The name of its registered agent at such address is The Corporation Trust Company. SECTION 3. The nature of the business or purposes to be conducted or promoted by the Corporation is to engage in any lawful act or activity for which corporations may be organized under the Delaware General Corporation Law. 1 SECTION 4. 4.1 The aggregate number of shares of Capital Stock which the Corporation shall have authority to issue is 46,199,000, consisting of 30,000,000 shares of common stock, $.001 par value ("Common Stock"), and 16,199,000 shares of preferred stock ("Preferred Stock"), $.001 par value. 4.2 Any of the shares of Preferred Stock may be issued from time to time in one or more series. Subject to the limitations and restrictions in this paragraph 4 set forth, the Board of Directors or a Committee of the Board of Directors, to the extent permitted by law and the bylaws of the Corporation or a resolution of the Board of Directors, by resolution or resolutions, is authorized to create or provide for any such series, and to fix the designations, preferences and relative, participating, optional or other special rights, and qualifications, limitations or restrictions thereof, including, without limitation, the authority to fix or alter the dividend rights, dividend rates, conversion rights, exchange rights, voting rights, rights and terms of redemption (including sinking and purchase fund provisions), the redemption price or prices, the dissolution preferences and the rights in respect to any distribution of assets of any wholly unissued series of Preferred Stock and the number of shares constituting any such series, and the designation thereof, or any of them and to increase or decrease the number of shares of any series so created, subsequent to the issue of that series but not below the number of shares of such series then outstanding. In case the number of shares of any series shall be so decreased, the shares constituting such decrease shall resume the status which they had prior to the adoption of the resolution originally fixing the number of shares of such series. There shall be no limitation or restriction on any variation between any of the different series of Preferred Stock as to the designations, preferences and relative, participating, optional or other special rights, and the qualifications, limitations or restrictions thereof; and the several series of Preferred Stock may, except as hereinafter in this paragraph 4 otherwise expressly provided, vary in any and all respects as fixed and determined by the resolution or resolutions of the Board of Directors or by Committee of the Board of Directors, providing for the issuance of the various series; provided, -------- however, that all shares of any one series of Preferred Stock shall have the - ------- same designation, preferences and relative, participating, optional or other special rights and qualifications, limitations and restrictions. Except as otherwise required by law, or as otherwise fixed by resolution or resolutions of the Board of Directors with respect to one or more series of Preferred Stock, the entire voting power and all voting rights shall be vested exclusively in the Common Stock, and each stockholder of the Corporation who at the time possesses voting power for any purpose shall be entitled to one vote for each share of such stock standing in his name on the books of the Corporation. 4.3 The Board of Directors, with the written consent of both the Series B Preferred Stock Director and the Series C Preferred Stock Director (as defined in Section 6.2.6 herein), is hereby authorized to fix or alter the rights, preferences, privileges and restrictions granted to or imposed upon series of Preferred Stock, and the number of shares constituting any such series and the designation thereof, or of any of them. Subject to securing the written consent of the holders of requisite majorities of Preferred Stock or series thereof that would be required by this 2 Certificate of Incorporation for issuance of new series of Preferred Stock ("Protective Provisions"), the rights privileges, preferences and restrictions of any such series may be subordinated to, made pari passu with (including, without limitation, inclusion in provisions with respect to liquidation and acquisition preferences, redemption and /or approval of matters by vote or written consent), or made senior to any of those of any present or future class or series of Preferred Stock or Common Stock. SECTION 5. Common Stock 5.1 Common Stock. Except as expressly set forth in this Certificate, the ------------ shares of Common Stock have voting rights of one vote per share on all matters, and are entitled to receive the net assets of the Corporation upon liquidation. 5.2 Repurchase of Shares. Subject to the Protective Provisions of Section -------------------- 6.2.7 and Delaware law, this Corporation is authorized to purchase shares of Common Stock from holders thereof pursuant to arrangements approved by the Board of Directors, without taking into account the preferential liquidation rights of holders of Preferred Stock set forth herein when applying the provisions of the Delaware General Corporation Law to determine the lawfulness of the purchase. SECTION 6. Preferred Stock 6.1 Designation of Preferred Stock Series. ------------------------------------- (a) Of the authorized Preferred Stock, 162,500 shares are designated Series A-1 Preferred Stock, and 162,500 are designated Series A-N Preferred Stock (collectively, the "Series A Preferred Stock"); 902,000 are designated Series B-1 Preferred Stock, and 902,000 are designated Series B-N Preferred Stock (collectively, the "Series B Preferred Stock"); and 2,035,000 are designated Series C-1 Preferred Stock and 2,035,000 are designated Series C- N Preferred Stock (collectively, the "Series C Preferred Stock"); 1,400,000 shares are designated Series D Preferred Stock (the "Series D Preferred Stock"); and 300,000 shares are designated Series D-X Preferred Stock (the "Series D-X Preferred Stock"). Collectively, these series are referred to as the "Preferred Stock." The "Issue Price" applicable to Series A-1 Preferred Stock and Series A- N Preferred Stock is $2.50 per share. The "Issue Price" applicable to Series B-1 Preferred Stock and Series B-N Preferred Stock is $5.00 per share. The "Issue Price" applicable to Series C-1 Preferred Stock and Series C-N Preferred Stock is $2.86 per share. The "Issue Price" applicable to Series D Preferred Stock is $5.00 per share. The "Issue Price" applicable to Series D-X Preferred Stock is $5.00 per share. Series A-N Preferred Stock, Series B-N Preferred Stock and Series C-N Preferred Stock shall be identical in every respect to Series A-1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock, respectively, except that Series A-N Preferred Stock, Series B-N Preferred Stock and Series C-N Preferred Stock shall not be entitled to the weighted average anti-dilution benefits described in Section 6.2.3(d)), from the date of original issuance, and shall further be issuable only through conversion of the Series A- 1 Preferred Stock, Series B-1 Preferred Stock and Series C-1 Preferred Stock, respectively, pursuant to Section 6.2.3(e). 3 (b) Except as expressly noted in this Section 6.1, the preferences, limitations and relative rights of the Series D Preferred Stock and the Series D-X Preferred Stock shall be identical to and in pari passu with the Series C-1 Preferred Stock, the Series D Preferred Stock, and the Series D-X Preferred Stock shall act with the Series C Preferred Stock as a single class (with relative weight of each share of Series C Preferred Stock, Series D Preferred Stock, or Series D-X Preferred Stock determined on an "as converted to Common Stock" basis) on all issues on which Series C Preferred Stock has a designated right to separate vote or consent from the Common Stock, and all issues with respect to which consent of or action by the majority of shares of the class outstanding binds or commits the rest of the class. 6.1.2 Conversion Price Adjustments. The Conversion Price applicable ---------------------------- to each share of Series D Preferred Stock and each share of Series D-X Preferred Stock shall be $5.00 per share. Adjustments may be made to the Conversion Price applicable to the Series D Preferred Stock only if the events giving rise to such adjustments occurred after June 2, 1999, and not for events occurring before that date. Adjustments may be made to the Conversion Price applicable to the Series D-X Preferred Stock, only if the events giving rise to such adjustments occurred after August 26, 1999 and not for events occurring before that date. 6.1.3 Exclusion From Section 6.2.3(e). The Series D Preferred Stock ------------------------------- and the Series D-X Preferred Stock shall not be covered by or subject to the terms of Section 6.2.3(e) of this Certificate of Incorporation, as amended, but shall retain rights analogous to those of Series C-1 Preferred Stock even under conditions that would compel the conversion of Series C-1 Preferred Stock into Series C-N Preferred Stock. 6.2 Rights, Preferences and Restrictions of Preferred Stock. Other than as ------------------------------------------------------- set forth in Section 6.1 above, the rights, preferences, privileges, and restrictions granted to and imposed on Preferred Stock are as follows: 6.2.1 Dividends. Holders of Preferred Stock shall be entitled to --------- receive dividends at the rate of 10% per year, in preference to Common Stock, when, as, and if declared by the Board of Directors. No dividends will be paid on Common Stock until equal dividends have been declared and paid on Preferred Stock. After payment of all dividends on Preferred Stock, the holders of Preferred Stock shall be entitled to participate, on an as-converted basis, with the outstanding Common Stock as to any dividends paid on such Common Stock. 6.2.2 Liquidation Preference. ---------------------- (a) In the event of any liquidation, dissolution or winding up of this Corporation, including a Qualified Consolidation or Merger as defined below (collectively, "Liquidation"), either voluntary or involuntary, each holder of Preferred Stock shall be entitled to receive prior to any distribution of any of the assets of this Corporation to the holders of Common Stock, upon Liquidation of this Corporation, by reason of their ownership thereof, the Issue Price applicable to that Series, per share (as adjusted to reflect any stock splits, stock dividends or other recapitalizations) (that sum being referred to herein as the "Preference"). If, upon Liquidation, the assets of this Corporation available for distribution to its stockholders are insufficient to pay the holders of Preferred Stock the full Preference, then the entire assets and funds of this Corporation legally available for distribution to its stockholders shall be distributed 4 ratably among all holders of Preferred Stock in proportion to the full Preference applicable to each holder. (b) After setting apart or paying in full the Preference, any assets of this Corporation remaining available for distribution to stockholders upon Liquidation shall be distributed ratably among all holders of Common Stock and all holders of Series B Preferred Stock and Series C Preferred Stock (after full payment pursuant to subsection (a) above to the holders of the Preferred Stock) in proportion to the amount of Common Stock each holder holds (treating each holder of Series B Preferred Stock or Series C Preferred Stock as holding that number of shares of Common Stock into which that holder's Series B Preferred Stock or Series C Preferred Stock could then be converted pursuant to the then Existing Conversion Price). (c) A "Qualifying Consolidation or Merger" is (i) a consolidation or merger of this Corporation with or into any other corporation or other entity or person or any other corporate reorganization in which the holders of Preferred Stock and Common Stock immediately prior to the consolidation or merger own less than 50% of the voting securities of the Corporation or successor entity by virtue of the securities received immediately following such consolidation or merger or other corporate reorganization, (ii) any transaction or series of transactions in which in excess of 50% of the Corporation's voting power is transferred, or (iii) a sale, lease or disposition of all or substantially all of the assets of the Corporation. If, assuming conversion of all Preferred Stock into Common Stock and exercise of all outstanding options, warrants or other rights to purchase Common Stock or Preferred Stock, each share of Common Stock would receive, on a Qualifying Consolidation or Merger, consideration whose fair market value is less than $10.00 per share (adjusted for intervening stock splits, stock dividends or other recapitalizations of the Common Stock and assuming no weighted average antidilution adjustments have occurred pursuant to Section 6.2.3(d), then the Qualifying Consolidation or Merger shall be treated as a Liquidation hereunder for purposes of determining entitlement to the Preference for Series B Preferred Stock and Series C Preferred Stock. If the fair market value of the consideration is $10.00 per share or more (subject to the same adjustments), then the Qualifying Consolidation or Merger shall be treated as a Designated IPO (defined below), and all Preferred Stock shall automatically convert into Common Stock immediately before the closing of the transaction. 6.2.3 Conversion. The holders of Preferred Stock shall have ---------- conversion rights as follows (the "Conversion Rights"): (a) Right to Convert. ---------------- (1) The Conversion Price applicable to each share of Series A Preferred Stock shall be $1.25 per share. The Conversion Price applicable to each share of Series B Preferred Stock shall be $2.50 per share. The Conversion Price applicable to each share of Series C Preferred Stock shall be $2.86 per share. Such Conversion Prices shall be adjusted from time to time in accordance with this Section 6.2.3. (2) Each share of Preferred Stock shall be convertible, at the option of its holder, at any time after the date it issues, into that number of fully paid and 5 nonassessable shares of Common Stock expressed by the Conversion Rate, which is defined as the quotient obtained by dividing the Issue Price by the then Existing Conversion Price (as defined below). Conversion will take place at the office of the Corporation or any transfer agent for the Preferred Stock. (3) Each share of Series A Preferred Stock shall automatically be converted into that number of shares of Common Stock expressed by the Conversion Rate applicable to that share, immediately upon (i) the consummation of this Corporation's sale of its Common Stock in a bona fide, firm commitment underwriting pursuant to an effective registration statement under the Securities Act of 1933, as amended (the "Securities Act"), or (ii) the approval of the conversion or election to convert by holders of a majority of the originally issued shares of Series A Preferred Stock, or (iii) approval of the conversion or election to convert by holders of 67% of the outstanding shares of Preferred Stock. Each share of Series A Preferred Stock shall also automatically be converted into Common Stock immediately prior to a Liquidation, if as a result of the conversion, the consideration per share to be received with respect to the Series A Preferred Stock would be larger than the Series A Preferred Stock Preference. Each share of Series B Preferred Stock shall automatically be converted into that number of shares of Common Stock expressed by the Conversion Rate applicable to that share of Series B Preferred Stock, immediately upon (i) the consummation of this Corporation's sale of its Common Stock in a bona fide, firm commitment underwriting pursuant to an effective registration statement under the Securities Act in which the price per share is $5.00 or more (as adjusted for intervening stock splits, stock dividends or recapitalizations, and assuming no weighted average antidilution adjustments pursuant to Section 6.2.3(d) have occurred) and the total offering is for at least $10,000,000 (a "Designated IPO"); or (ii) on the approval of the conversion by holders of 67% of the outstanding shares of Preferred Stock. Each share of Series C Preferred Stock shall automatically be converted into that number of shares of Common Stock expressed by the Conversion Rate applicable to that share of Series C Preferred Stock, immediately upon (i) the consummation of a Designated IPO; or (ii) on the approval of the conversion by the holders of 67% of the outstanding shares of Preferred Stock. Each share of Series D Preferred Stock and Series D-X Preferred Stock shall automatically be converted into that number of shares of Common Stock expressed by the Conversion Rate applicable to that share of Series D Preferred Stock, immediately upon (i) the consummation of a Designated IPO; or (ii) on the approval of the conversion by the holders of 67% of the outstanding shares of Preferred Stock. (b) Mechanics of Conversion. ----------------------- (1) What the holder does. Before any holder of -------------------- Preferred Stock shall be entitled to convert the holder's Preferred Stock into shares of Common Stock, the holder shall (i) surrender the certificate or certificates for the Preferred Stock, duly endorsed, at the office of this Corporation or of any transfer agent for the Preferred Stock, (ii) give written notice to this Corporation at its principal corporate office of the election to convert the Preferred Stock, and (iii) state in the notice the name or names in which the certificate or certificates for shares of Common Stock are to be issued. (2) What the Corporation does. This Corporation shall, ------------------------- as soon as practicable thereafter, issue and deliver to the holder or the holder's nominee or nominees, a 6 certificate or certificates for the number of shares of Common Stock to which the holder shall be entitled. (3) Effective date of Conversion. The conversion shall ---------------------------- be deemed effective immediately prior to the close of business on the date the Preferred Stock was surrendered to be converted. The person or persons entitled to receive the shares of Common Stock issuable upon the conversion shall be treated for all purposes as the record holder or holders of the Common Stock shares as of the date conversion is deemed to have occurred. (4) Offering Contingencies, Effective Date. If the -------------------------------------- conversion is in connection with an underwritten offer of securities registered pursuant to the Securities Act, the conversion may, at the option of the holder tendering Preferred Stock for conversion, be conditioned upon the closing with the underwriter of the sale of securities pursuant to the offering. In that case, the person(s) entitled to receive the Common Stock issuable upon such conversion of the Preferred Stock shall not be deemed to have converted such Preferred Stock until immediately prior to the closing of the sale of securities. (c) Conversion Adjustments. ---------------------- (1) Adjustments for Recapitalizations. If the --------------------------------- Corporation shall at any time or from time to time after December 29, 1997 (the "Filing Date") effect a recapitalization of the outstanding Common Stock without corresponding changes being made to split the Preferred Stock to grant the Preferred Stock the same percentage ownership as prior to the recapitalization, the Conversion Price in effect immediately before that recapitalization shall be proportionately adjusted as appropriate. Any adjustment under this Section 6.2.3(c)(1) shall become effective at the close of business on the date the recapitalization becomes effective. (2) Adjustments for Stock Splits and Combinations. If --------------------------------------------- the Corporation shall at any time or from time to time after the Filing Date effect a split of the outstanding Common Stock without a corresponding split of the Preferred Stock, the Conversion Price for each series in effect immediately before the split shall be proportionately decreased. Conversely, if the Corporation shall at any time or from time to time after the Filing Date combine the outstanding shares of Common Stock into a smaller number of shares without a corresponding combination of the Preferred Stock, the Conversion Price in effect immediately before the combination shall be proportionately increased. Any adjustment under this Section 6.2.3(c)(2) shall become effective at the close of business on the date the subdivision or combination becomes effective. (3) Adjustments for Common Stock Dividends and ------------------------------------------ Distributions. If the Corporation at any time or from time to time after the - ------------- Filing Date makes, or fixes a record date for the determination of holders of Common Stock entitled to receive a dividend or other distribution payable in additional shares of Common Stock, in each such event the Conversion Price that is then in effect shall be decreased as of the time of such issuance or, in the event such record date is fixed, as of the close of business on such record date, by multiplying the Conversion Price then in effect by a fraction (i) the numerator of which is the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date, and (ii) the denominator of which is 7 the total number of shares of Common Stock issued and outstanding immediately prior to the time of such issuance or the close of business on such record date plus the number of shares of Common Stock issuable in payment of such dividend or distribution; provided, however, that if such record date is fixed and such -------- ------- dividend is not fully paid or if such distribution is not fully made on the date fixed therefor, the Conversion Price shall be recomputed accordingly as of the close of business on such record date and thereafter the Conversion Price shall be adjusted pursuant to this Section 6.2.3(c)(3) to reflect the actual payment of such dividend or distribution. (4) Adjustments for Other Dividends and Distributions. ------------------------------------------------- If the Corporation at any time or from time to time after the Filing Date makes, or fixes a record date for the determination of holders of Common Stock entitled to receive, a dividend or other distribution payable in securities of the Corporation other than shares of Common Stock, in each such event provision shall be made so that the holders of the Preferred Stock shall receive upon conversion thereof, in addition to the number of shares of Common Stock receivable thereupon, the amount of other securities of the Corporation which they would have received had their Preferred Stock been converted into Common Stock on the date of such event and had they thereafter, during the period from the date of such event to and including the conversion date, retained such securities receivable by them as aforesaid during such period, subject to all other adjustments called for during such period under this Section 6.2.3(c)(4) with respect to the rights of the holders of the Preferred Stock or with respect to such other securities by their terms. (5) Adjustment for Reclassification, Exchange and --------------------------------------------- Substitution. If at any time or from time to time after the Filing Date, the - ------------ Common Stock issuable upon the conversion of the Preferred Stock is changed into the same or a different number of shares of any class or classes of stock, whether by recapitalization, reclassification or otherwise (other than a Qualifying Consolidation or Merger as defined in Section 6.2.2(c) or a split or combination of shares or stock dividend or a reorganization, merger, consolidation or sale of assets provided for elsewhere in this Section 6.2.3), in any such event each holder of Preferred Stock shall have the right thereafter to convert such stock into the kind and amount of stock and other securities and property receivable upon such recapitalization, reclassification or other change by holders of the maximum number of shares of Common Stock into which such shares of Preferred Stock could have been converted immediately prior to such recapitalization, reclassification or change, all subject to further adjustment as provided herein or with respect to such other securities or property by the terms thereof. (6) Reorganizations, Mergers, Consolidations or Sales ------------------------------------------------- of Assets. If at any time or from time to time after the Filing Date, there is a - --------- capital reorganization of the Common Stock (other than a Qualifying Consolidation or Merger as defined in Section 6.2.2(c)) or a recapitalization, split, combination, reclassification, exchange or substitution of shares provided for elsewhere in this Section 6.2.3, as a part of such capital reorganization, provision shall be made so that the holders of the Preferred Stock shall thereafter be entitled to receive upon conversion of the Preferred Stock the number of shares of stock or other securities or property of the Corporation to which a holder of the number of shares of Common Stock deliverable upon conversion would have been entitled on such capital reorganization, subject to adjustment in respect of such stock or securities by the terms thereof. In any such case, appropriate adjustment shall be made in the application of the provisions of this Section 6.2.3 with respect to the rights of the holders of Preferred Stock after the capital 8 reorganization to the end that the provisions of this Section 6.2.3 (including adjustment of the Conversion Price then in effect and the number of shares issuable upon conversion of the Preferred Stock) shall be applicable after that event and be as nearly equivalent as practicable. (d) Weighted Average Antidilution Adjustment. If the Corporation at any ---------------------------------------- time after the Filing Date shall issue any Additional Stock (as defined below) without consideration or for a consideration per share less than the Conversion Price for Series A-1 Preferred Stock, Series B-1 Preferred Stock or Series C-1 Preferred Stock then in effect (the "Existing Conversion Price" or "ECP"), the Conversion Price applicable to that series (but not Series A-N Preferred Stock, Series B-N Preferred Stock or Series C-N Preferred Stock) shall be adjusted or readjusted, as follows. Multiply the Existing Conversion Price by a fraction constructed as follows. The numerator of the fraction shall be the "Old Stock," defined as the number of shares of Common Stock outstanding immediately prior to such issue or sale, "fully diluted," plus the number of shares of Common Stock that the aggregate consideration received by the Corporation for the new Additional Stock would purchase at the Existing Conversion Price (the "No dilution additional stock" or "NDAS"). The denominator of the fraction shall be the "Old Stock," plus the number of shares of new Additional Stock issued ("New Stock"). "Fully diluted" for this purpose means assuming that all outstanding Preferred Stock has been converted into Common Stock at conversion prices in effect before the issuance or sale. The formula for determining the new Conversion Price is thus: New Conversion Price = ECP X (Old Stock plus NDAS) / (Old Stock plus New Stock). No adjustment of the Conversion Price for Preferred Stock shall be made in an amount less than one cent per share, provided that any adjustments which are not required to be made by reason of this sentence shall be carried forward and taken into account in any subsequent adjustment. (1) Determining Additional Stock Consideration. In the case of the ------------------------------------------ issuance of Common Stock for cash, the consideration shall be deemed to be the amount of cash paid therefor before deducting any reasonable discounts, commissions or other expenses allowed, paid or incurred by the Corporation for any underwriting or otherwise in connection with the issuance and sale thereof. Non-cash consideration shall be treated as if it is cash, at the fair value thereof as determined by the Board of Directors in good faith irrespective of any accounting treatment. (2) Additional Stock. "Additional Stock" shall mean any shares of ---------------- Common Stock issued by the Corporation after the Filing Date other than "Reserved Shares," defined as follows: (A) Common Stock issued pursuant to a transaction described in subsection 6.2.3(c), or upon conversion of Preferred Stock; (B) Up to 1,521,400 shares of Common Stock issued to employees, consultants, directors or advisory board members of the Corporation primarily for the purpose of soliciting or retaining their employment directly or pursuant to a stock option plan or restricted stock plan approved by the shareholders and directors of the Corporation, or such higher number of shares as may be approved from time to time by a majority of the Board of 9 Directors including both the Series B Preferred Stock Director and the Series C Preferred Stock Director (as each term is defined in Section 6.2.6), or shares reissued after repurchase pursuant to any restricted stock purchase agreement following a termination in status as an employee, consultant, director, or advisory board member; and (C) Common Stock issued in equipment lease financing or otherwise issued or issuable in standard commercial line of credit transactions approved by the Board of Directors in good faith. (e) Conversion to Series A-N Preferred Stock, Series B-N Preferred -------------------------------------------------------------- Stock and Series C-N Preferred Stock on Failure to Participate in Future - ------------------------------------------------------------------------ Financings on Call of Board. In case any subsequent financing is offered, the - --------------------------- Board of Directors (including the Series B Preferred Stock Director and Series C Preferred Stock Director) may establish in good faith the amount of funds required to be invested in such financing by all holders of Preferred Stock (collectively, the "Preferred Stock Contribution"). If a holder of Preferred Stock is offered the opportunity to participate in such financing by at least thirty (30) days notice, but declines or fails to participate at 100% of that holder's proportionate share of the Preferred Stock Contribution (proportionality to be determined on an as-converted-to-common-stock basis, where each holder's Preferred Stock as so converted is expressed as a proportion of all Preferred Stock so converted), then those shares of Series A-1 Preferred Stock, Series B-1 Preferred Stock or Series C-1 Preferred Stock held by that holder shall automatically convert into Series A-N Preferred Stock, Series B-N Preferred Stock or Series C-N Preferred Stock, respectively, on a one-for-one basis immediately prior to the close of the financing. Such conversion will be effective whether or not certificates representing Series A-1 Preferred Stock, Series B-1 Preferred Stock or Series C-1 Preferred Stock that has been converted are tendered for exchange. The Corporation will notify each holder of such converted stock of the conversion, and on request of the holder, certificates representing Series A-1 Preferred Stock, Series B-1 Preferred Stock or Series C- 1 Preferred Stock that has been converted shall be exchanged for certificates expressly representing Series A-N Preferred Stock, Series B-N Preferred Stock or Series C-N Preferred Stock. (f) No Impairment. This Corporation will not, by amendment of its ------------- Certificate of Incorporation or through any reorganization, recapitalization, transfer of assets, consolidation, merger, dissolution, issue or sale of securities or any other voluntary action, avoid or seek to avoid the observance or performance of any of the terms to be observed or performed hereunder by this Corporation, but will at all times in good faith assist in the carrying out of all the provisions of this Section 6.2.3 and in the taking of all such action as may be necessary or appropriate in order to protect the Conversion Rights of the holders of the Preferred Stock against impairment. (g) No Fractional Shares. No fractional shares shall be issued upon -------------------- any conversion of the Preferred Stock. Any fractional share determined on an aggregate conversion basis shall be rounded down to the nearest whole share. If, in the event of the aforementioned aggregation, in-the absence of such rounding down the conversion would result in the issuance of any fractional share, the Corporation shall pay in cash an amount equal to the product obtained by multiplying such fraction by the Common Stock's fair market value (as determined in good faith by the Board of Directors) on the date of such conversion. 10 (h) Reservation of Stock Issuable Upon Conversion. This Corporation --------------------------------------------- shall at all times reserve and keep available out of its authorized but unissued shares of Common Stock solely for the purpose of effecting the conversion of the shares of the Preferred Stock the number of its shares of Common Stock as shall from time to time be sufficient to effect the conversion of all outstanding shares of the Preferred Stock. If at any time the number of authorized but unissued shares of Common Stock shall be insufficient to effect the conversion of all then outstanding shares of the Preferred Stock, in addition to other remedies as shall be available to the holder of the Preferred Stock, this Corporation will take such corporate action as may, in the opinion of its counsel, be necessary to increase its authorized but unissued shares of Common Stock to the number of shares that shall be sufficient for the purpose. (i) No Reissuance of Preferred Stock. No share or shares of -------------------------------- Preferred Stock acquired by the Corporation by reason of redemption, purchase, conversion or otherwise shall be reissued. 6.2.4 Right to Participate in Subsequent Financings. In case the --------------------------------------------- Corporation proposes to issue any additional equity securities, or securities convertible into equity securities, in exchange for cash consideration (other than for Reserved Shares (as defined in Section 6.2.3(d), shares issued in the acquisition of another company, or shares offered to the public pursuant to an underwritten public offering), and unless waived in writing by the holder, each holder of Preferred Stock shall have the right to participate in that subsequent round. Each holder shall have the right to participate up to the percentage of that offering equal to the percentage which the holder's Preferred Stock, on an as-converted basis, represents of all outstanding equity of the Corporation, assuming exercise of all warrants, conversion of all convertible debt, and conversion of all Preferred Stock into Common Stock, and all options issued or issuable under the Corporation's Stock Incentive Plan(s) but not yet exercised. The Board of Directors shall have power to prescribe procedures to give effect to the intent of this paragraph. 6.2.5 Series B and Series C Preferred Stock Redemption Rights. The ------------------------------------------------------- holders of at least 60% of the outstanding shares of Series B Preferred Stock and Series C Preferred Stock, acting together as a single class, may give notice ("Redemption Request") to the Corporation at any time after five (5) years from the Filing Date, but no more often than one time per calendar year, that the Corporation redeem all or any portion of the Series B Preferred Stock and Series C Preferred Stock, as applicable, at a redemption price (each, a "Redemption Price") equal to (i) in the case of the Series B Preferred Stock, the Issue Price paid for each share of Series B Preferred Stock (as adjusted to account for intervening stock splits or recapitalizations of the Series B Preferred Stock) plus any accrued and unpaid dividends on such shares, or (ii) in the case of the Series C Preferred Stock, the Issue Price paid for each share of Series C Preferred Stock (as adjusted to account for intervening stock splits or recapitalizations of the Series C Preferred Stock), plus any declared and unpaid dividends on such shares. Upon receipt of such Redemption Request, the Corporation, to the extent that it has funds legally available therefor and will not otherwise violate any contracts or agreements to which it is a party, shall be obligated to notify ("Redemption Notice") all Series B Preferred Stock and Series C Preferred Stock holders of the Redemption Request and each holder may, but is not obligated to, participate in such redemption up to that holder's pro rata share of the total number of shares specified in the Redemption Request. 11 (a) The Redemption Notice shall provide at least twenty days from the Notice date within which holders of Series B Preferred Stock and Series C Preferred Stock may exercise their redemption rights by delivery of the shares they wish redeemed, together with such Letters of Transmittal as the Redemption Notice may reasonably prescribe, to a bank or trust company the Redemption Notice specifies (the final date for which is called the "Tender Date"), and shall also specify a Redemption Date, which shall be not later than fifteen days following the Tender Date, as of which the Redemption Price (or the first installment thereof) is to be paid. The Redemption Notice shall also specify whether the Redemption Price is to be paid all at once or in three equal annual installments, shall specify a Redemption Date, and shall contain such other provisions concerning the mechanics of redemption as may be necessary or useful to assist the redemption to proceed. (b) On or prior to the Redemption Date, the Corporation shall deposit the Redemption Price (or, if to be made in three annual installments, the first third of the Redemption Price) of all shares tendered for redemption (but not more than the number specified in the Redemption Request) with the bank or trust company specified in the Redemption Notice, as a trust fund, with irrevocable instructions and authority to the bank or trust company to pay, on and after such Redemption Date, the Redemption Price (or each third thereof as placed on deposit) of the shares tendered by the Tender Date to their respective holders. If the Corporation has elected to pay the Redemption Price in three equal annual installments, then on or prior to the second and third anniversaries of the Redemption Date, the Corporation shall deposit the second and third thirds of the Redemption Price, respectively, with the same bank or trust company, with irrevocable instructions and authority to the bank or trust company to pay, on and after such anniversary date, that third of the Redemption Price to the holders of the tendered shares. (c) If more shares are tendered than are specified in the Redemption Request, the Corporation may elect either to redeem all tendered shares, or to redeem only so many of them as are specified in the Redemption Request. If the Corporation has insufficient funds legally available to redeem all shares specified in the Redemption Request, then that number of shares for which there are insufficient funds shall be treated as an overtender of shares. The effects of any overtender of shares shall be allocated among all holders submitting shares such that the shares actually to be redeemed are, so nearly as possible, in the same ratio as the Preferred Stock holdings of all redeeming shareholders are to each other. Fractional shares to be redeemed shall in all cases be rounded down to the nearest whole share. (d) Tendered certificates shall be canceled following the final payment of the Redemption Price. In the event less than all the shares represented by such certificates are redeemed, a new certificate shall be issued representing the unredeemed shares. From and after such Redemption Date, all rights of the holder of such shares tendered for redemption as holder of Preferred Stock (except the right to receive the Redemption Price without interest) shall cease and terminate with respect to such shares, provided that in the event that there is a default in payment of the Redemption Price by the Corporation, or the Corporation is unable to pay the Redemption Price due to insufficient legally available funds, those shares tendered by each holder for which the payment actually made on the Redemption Date is insufficient shall be treated as unredeemed shares hereunder, and shall remain outstanding and be entitled to all of the rights and preferences provided herein. 12 6.2.6 Voting Rights. With respect to the election of directors, the ------------- Series B Preferred Stock shall vote as a separate class for the election of one director (the "Series B Preferred Stock Director"), and to remove such director and to fill any vacancy caused by the resignation, death or removal of such director, and the Series C Preferred Stock, the Series D Preferred Stock, and the Series D-X Preferred Stock, voting together as a class, shall vote as a separate class for the election of one director (the "Series C Preferred Stock Director"), and to remove such director and to fill any vacancy caused by the resignation, death or removal of such director. With respect to the election of all remaining directors, Preferred Stock and Common Stock shall vote as a single class. With respect to all other matters, the holders of Preferred Stock and the holders of Common Stock shall vote as a single class, provided that the holders of Preferred Stock must also approve, by the requisite majorities specified, decisions specified in Section 6.2.7. The holder of each share of Preferred Stock shall have the right to one vote for each share of Common Stock into which the holder's Preferred Stock could then be converted (with any fractional share determined on an aggregate conversion basis being rounded to the nearest whole share). With respect to that vote, the holder shall have full voting rights and powers equal to the voting rights and powers of the holders of Common Stock, and shall be entitled to notice of any shareholders' meeting in accordance with the Bylaws of this Corporation. 6.2.7 Protective Provisions. The consent of the holders of at least --------------------- 67% of the Preferred Stock, voting as a single class, shall be required for any action which: (1) amends or repeals any provision of the Corporation's Certificate of Incorporation or Bylaws if such action would materially and adversely alter or change the designations, preferences, and relative, participating, optional and other special rights or the restrictions provided for the benefit of the Preferred Stock; (2) authorizes or issues shares of any class of stock having any preference or priority as to dividends, liquidation, redemption, voting, conversion or other preferences superior to or on a parity with any such preference or priority of any series of the Preferred Stock (except any issuance of Series A-N Preferred Stock, Series B-N Preferred Stock or Series C-N Preferred Stock, which is issuable only upon conversion of Series A-1 Preferred Stock, Series B-1 Preferred Stock or Series C-1 Preferred Stock pursuant to Section 6.2.3(e)); or (3) pays or declares any dividend on any junior securities. The consent of holders of a majority of the Series B Preferred Stock and Series C Preferred Stock, each voting as a separate class, shall be required for (4) any merger, sale of substantially all the assets, consolidation, recapitalization, or reorganization of the Corporation, or (5) any repurchase or other acquisition by the Corporation of its own shares other than pursuant to this Certificate or stock repurchase agreements approved by a majority of the Board of Directors, including the Series B Preferred Stock Director and the Series C Preferred Stock Director, or entered into with respect to 13 Common Stock issued or to be issued pursuant to options issued under the Corporation's Stock Incentive Plans. 6.2.8 Directors. Except as otherwise provided herein or the General --------- Corporation Law of the State of Delaware, the business and affairs of the Corporation shall be managed by or under the direction of a board of directors consisting of one or more members. Directors need not be stockholders of the Corporation. The number of directors shall be fixed from time to time, within the limits specified in the Bylaws, by a Bylaw or amendment thereof duly adopted by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the board of directors. The directors shall be divided into three classes, designated Class I, Class II and Class III, as nearly equal in number as the then total number of directors permits, serving staggered terms so that the initial terms of each such class will expire, respectively, at the first, second and third succeeding annual meetings of the stockholders held following the initial public offering of the Corporation's Common Stock. At each such succeeding annual meeting of stockholders, directors elected to succeed those directors whose terms are expiring at such meeting shall be elected for a term of office to expire at the third succeeding annual meeting of stockholders following such election. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional directors of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of preferred stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of this Certificate of Incorporation or the Bylaws applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Section 6.2.8 unless expressly provided by such terms. Any amendment, change or repeal of this Section 6.2.8, or any other amendment to this Certificate of Incorporation that will have the effect of permitting circumvention of or modifying this Section 6.2.8, shall require the favorable vote, at a stockholders' meeting, of the holders of at least eighty percent (80%) of the then-outstanding shares of stock of the Corporation entitled to vote. Except as provided below, the directors shall be elected by a plurality vote of the shares represented in person or by proxy at the stockholders annual meeting in each year and entitled to vote on the election of directors. Elected directors shall hold office until the next annual meeting for the years in which their terms expire and until their successors shall be duly elected and qualified. If, for any cause, the board of directors shall not have been elected at an annual meeting, they may be elected as soon thereafter as convenient at a special meeting of the stockholders called for that purpose in the manner provided in this Certificate of Incorporation or the Bylaws. 14 Except as otherwise provided by the Certificate of Incorporation or any amendments thereto, vacancies and newly created directorships resulting from any increase in the number of authorized directors may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director, and each director so elected shall hold office for the unexpired portion of the term of the director whose place shall be vacant, and until his successor shall have been duly elected and qualified. A vacancy in the board of directors shall be deemed to exist under this paragraph in the case of the death, removal or resignation of any director, or if the stockholders fail at any meeting of stockholders at which directors are to be elected to elect the number of directors then constituting the whole board. Any director may resign by delivering his written resignation to the Corporation at its principal office, addressed to the president or secretary. Such resignation shall be effective upon receipt unless it is specified to be effective at some other time or upon the happening of some other event. When one or more directors shall resign from the board, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office for the unexpired portion of the term of the director whose place shall be vacated and until his successor shall have been duly elected and qualified. SECTION 7. 7.1 Number and Designation of Directors. For so long as there is Series B ----------------------------------- Preferred Stock outstanding, the Bylaws shall provide that one of the directors shall be the Series B Preferred Stock Director. For so long as there is Series C Preferred Stock, Series D Preferred Stock, or Series D-X Preferred Stock outstanding, the Bylaws shall provide that one of the directors shall be the Series C Preferred Stock Director. As of the Filing Date, the Bylaws shall provide that the number of directors shall be seven. The Bylaws may further provide that the Directors shall have power to change the number of directors by majority vote, provided that if there is then required to be a Series B Preferred Stock Director or a Series C Preferred Stock Director, the vote of the required Preferred Stock directors shall be required to change the size of the Board. 7.2 Liability of Directors. No director of the Corporation shall be ---------------------- personally liable to the Corporation or its shareholders for monetary damages for conduct as a director; provided that this Section 7 shall not eliminate the liability of a director for any act or omission for which such elimination of liability is not permitted under the Delaware General Corporation Law. No amendment to the Delaware General Corporation Law that further limits the acts or omissions for which elimination of liability is permitted shall affect the liability of a director for any act or omission that occurs prior to the effective date of such amendment. SECTION 8. 8.1 Indemnification. To the fullest extent permitted by Delaware --------------- statutory or decisional law, as amended or interpreted, no director of this Corporation shall be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty as 15 a director. This Section 8.1 does not affect the availability of equitable remedies for breach of fiduciary duties. 8.2 Amendments. Any amendment, change or repeal of this Section shall ---------- only be prospective and no repeal or modification hereof shall adversely affect the rights under this Section in effect at the time of the alleged occurrence of any action or omission to act that is the cause of any Proceeding. SECTION 9. The name and mailing address of the incorporator are as follows: Misako Sack c/o Morrison & Foerster llp 425 Market Street San Francisco, California 94105-2482 SECTION 10. The board of directors is expressly authorized to make, alter, or repeal the bylaws of the Corporation. SECTION 11. Elections of directors need not be by written ballot unless the bylaws of the Corporation shall so provide. SECTION 12. Whenever a compromise or arrangement is proposed between this Corporation and its creditors or any class of them and/or between this Corporation and its stockholders or any class of them, any court of equitable jurisdiction within the State of Delaware may, on the application in a summary way of this Corporation or of any creditor or stockholder thereof, or on the application of any receiver or receivers appointed for this Corporation under the provisions of Section 291 of Title 8 of the Delaware Code or on the application of trustees in dissolution or of any receiver or receivers appointed for this Corporation under the provisions of Section 279 of Title 8 of the Delaware Code order a meeting of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, to be summoned in such manner as the said court directs. If a majority in number representing three- fourths in value of the creditors or class of creditors, and/or of the stockholders or class of stockholders of this Corporation, as the case may be, agree to any compromise or arrangement and to any reorganization of this Corporation as a consequence of such compromise or arrangement, the said compromise or arrangement and the said reorganization shall, if sanctioned by the court to which the said application has been made, be binding on all the creditors or class of creditors, and/or on all the stockholders or class of stockholders, of this Corporation, as the case may be, and also on this Corporation. 16 SECTION 13. The Corporation reserves the right to amend, alter, change or repeal any provision contained in this Certificate of Incorporation, in the manner now or hereafter prescribed by statute, and all rights conferred upon stockholders herein are granted subject to this reservation. IN WITNESS WHEREOF, the Corporation has caused this Restated Certificate of Incorporation to be signed by its duly authorized officer, this 5th day of November, 1999. By: /s/ Bruce Davis, ----------------------- Bruce Davis, President 17 EX-3.2 4 BYLAWS OF THE REGISTRANT Exhibit 3.2 BYLAWS OF DIGIMARC CORPORATION a Delaware corporation BYLAWS OF DIGIMARC CORPORATION ARTICLE I Offices Section 1.1 Registered Office. The registered office of the corporation in the State of Delaware shall be in the City of Wilmington, County of New Castle. Section 1.2 Other Offices. The corporation shall also have and maintain an office or principal place of business at One Center Pointe Drive, Suite 500, Lake Oswego, Oregon 97035- 8615, and may also have offices at such other places, both within and without the State of Delaware as the Board of Directors may from time to time determine or the business of the corporation may require. ARTICLE II Stockholders' Meetings Section 2.1 Place of Meetings. Meetings of the stockholders of the corporation shall be held at such place, either within or without the State of Delaware, as may be designated from time to time by the Board of Directors, or, if not so designated, then at the office of the corporation required to be maintained pursuant to Section 1.2 of Article I hereof. Section 2.2 Annual Meetings. The annual meetings of the stockholders of the corporation, commencing with the year 2000, for the purpose of election of directors and for such other business as may lawfully come before it, shall be held on such date and at such time as may be designated from time to time by the Board of Directors, or, if not so designated, then at 10 a.m. on March 1 in each year if not a legal holiday, and, if a legal holiday, at the same hour and place on the next succeeding day not a holiday. Section 2.3 Special Meetings. Special Meetings of the stockholders of the corporation may be called, for any purpose or purposes, by the President, the Secretary, or by the Board of Directors at any time. 1 Section 2.4 Notice of Meetings. (a) Except as otherwise provided by law or the Certificate of Incorporation, written notice of each meeting of stockholders, specifying the place, date and hour and purpose or purposes of the meeting, shall be given not less than ten (10) nor more than sixty (60) days before the date of the meeting to each stockholder entitled to vote thereat, directed to his address as it appears upon the books of the corporation; except that where the matter to be acted on is a merger or consolidation of the Corporation or a sale, lease or exchange of all or substantially all of its assets, such notice shall be given not less than twenty (20) nor more than sixty (60) days prior to such meeting. (b) If at any meeting action is proposed to be taken which, if taken, would entitle shareholders fulfilling the requirements of section 262(d) of the Delaware General Corporation Law to an appraisal of the fair value of their shares, the notice of such meeting shall contain a statement of that purpose and to that effect and shall be accompanied by a copy of that statutory section. (c) When a meeting is adjourned to another time or place, notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken unless the adjournment is for more than thirty days, or unless after the adjournment a new record date is fixed for the adjourned meeting, in which event a notice of the adjourned meeting shall be given to each stockholder of record entitled to vote at the meeting. (d) Notice of the time, place and purpose of any meeting of stockholders may be waived in writing, either before or after such meeting, and to the extent permitted by law, will be waived by any stockholder by his attendance thereat, in person or by proxy. Any stockholder so waiving notice of such meeting shall be bound by the proceedings of any such meeting in all respects as if due notice thereof had been given. (e) Unless and until voted, every proxy shall be revocable at the pleasure of the person who executed it or of his legal representatives or assigns, except in those cases where an irrevocable proxy permitted by statute has been given. Section 2.5 Quorum and Voting. (a) At all meetings of stockholders, except where otherwise provided by law, the Certificate of Incorporation, or these Bylaws, the presence, in person or by proxy duly authorized, of the holders of a majority of the outstanding shares of stock entitled to vote shall constitute a quorum for the transaction of business. Shares, the voting of which at said meeting have been enjoined, or which for any reason cannot be lawfully voted at such meeting, shall not be counted to determine a quorum at said meeting. In the absence of a quorum, any meeting of stockholders may be adjourned, from time to time, by vote of the holders of a majority of the shares represented thereat, but no other business shall be transacted at such meeting. At such adjourned meeting at which a quorum is present or represented any business may be transacted which might have been transacted at the original meeting. The stockholders present at a duly called or convened meeting, at which a quorum is present, may continue to transact business 2 until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum. (b) Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, all action taken by the holders of a majority of the voting power represented at any meeting at which a quorum is present shall be valid and binding upon the corporation. (c) Where a separate vote by a class or classes is required, a majority of the outstanding shares of such class or classes, present in person or represented by proxy, shall constitute a quorum entitled to take action with respect to that vote on that matter and the affirmative vote of the majority of shares of such class or classes present in person or represented by proxy at the meeting shall be the act of such class. Section 2.6 Voting Rights. (a) Except as otherwise provided by law, only persons in whose names shares entitled to vote stand on the stock records of the corporation on the record date for determining the stockholders entitled to vote at said meeting shall be entitled to vote at such meeting. Shares standing in the names of two or more persons shall be voted or represented in accordance with the determination of the majority of such persons, or, if only one of such persons is present in person or represented by proxy, such person shall have the right to vote such shares and such shares shall be deemed to be represented for the purpose of determining a quorum. (b) Every person entitled to vote or execute consents shall have the right to do so either in person or by an agent or agents authorized by a written proxy executed by such person or his duly authorized agent, which proxy shall be filed with the Secretary of the corporation at or before the meeting at which it is to be used. Said proxy so appointed need not be a stockholder. No proxy shall be voted on after three years from its date unless the proxy provides for a longer period. (c) Without limiting the manner in which a stockholder may authorize another person or persons to act for him as proxy pursuant to subsection (b) of this section, the following shall constitute a valid means by which a stockholder may grant such authority: (1) A stockholder may execute a writing authorizing another person or persons to act for him as proxy. Execution may be accomplished by the stockholder or his authorized officer, director, employee or agent signing such writing or causing his or her signature to be affixed to such writing by any reasonable means including, but not limited to, by facsimile signature. (2) A stockholder may authorize another person or persons to act for him as proxy by transmitting or authorizing the transmission of a telegram, cablegram, or other means of electronic transmission to the person who will be the holder of the proxy or to a proxy solicitation firm, proxy support service organization or like agent duly authorized by the person who will be the holder of the proxy to receive such transmission, provided that any such telegram, cablegram or other means of electronic transmission must either set forth or be submitted with information from which it can be determined that the telegram, cablegram or other electronic transmission was authorized by the stockholder. Such authorization can be 3 established by the signature of the stockholder on the proxy, either in writing or by a signature stamp or facsimile signature, or by a number or symbol from which the identity of the stockholder can be determined, or by any other procedure deemed appropriate by the inspectors or other persons making the determination as to due authorization. (3) If it is determined that such telegrams, cablegrams or other electronic transmissions are valid, the inspectors or, if there are no inspectors, such other persons making that determination shall specify the information upon which they relied. (d) Any copy, facsimile telecommunication or other reliable reproduction of the writing or transmission created pursuant to subsection (c) of this section may be substituted or used in lieu of the original writing or transmission for any and all purposes for which the original writing or transmission could be used, provided that such copy, facsimile telecommunication or other reproduction shall be a complete reproduction of the entire original writing or transmission. Section 2.7 Voting Procedures and Inspectors of Elections. (a) The corporation shall, in advance of any meeting of stockholders, appoint one or more inspectors to act at the meeting and make a written report thereof. The corporation may designate one or more persons as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate is able to act at a meeting of stockholders, the person presiding at the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before entering upon the discharge of his duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his ability. (b) The inspectors shall (i) ascertain the number of shares outstanding and the voting power of each, (ii) determine the shares represented at a meeting and the validity of proxies and ballots, (iii) count all votes and ballots, (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and (v) certify their determination of the number of shares represented at the meeting, and their count of all votes and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors. (c) The date and time of the opening and the closing of the polls for each matter upon which the stockholders will vote at a meeting shall be announced at the meeting. No ballot, proxies or votes, nor any revocations thereof or changes thereto, shall be accepted by the Inspectors after the closing of the polls unless the Court of Chancery upon application by a stockholder shall determine otherwise. (d) In determining the validity and counting of proxies and ballots, the inspectors shall be limited to an examination of the proxies, any envelopes submitted with those proxies, any information provided in accordance with Section 212(c)(2) of the Delaware General Corporation Law, ballots and the regular books and records of the corporation, except that the inspectors may consider other reliable information for the limited purpose of reconciling proxies and ballots submitted by or on behalf of banks, brokers, their nominees or similar persons which represent more votes than the holder of a proxy is authorized by the record owner to cast or more votes than the stockholder holds of record. If the inspectors consider other reliable information for the 4 limited purpose permitted herein, the inspectors at the time they make their certification pursuant to subsection (b)(v) of this section shall specify the precise information considered by them including the person or persons from whom they obtained the information, when the information was obtained, the means by which the information was obtained and the basis for the inspectors' belief that such information is accurate and reliable. Section 2.8 List of Stockholders. The officer who has charge of the stock ledger of the corporation shall prepare and make, at least ten days before every meeting of stockholders, a complete list of the stockholders entitled to vote at said meeting, arranged in alphabetical order, showing the address of and the number of shares registered in the name of each stockholder. Such list shall be open to the examination of any stockholder, for any purpose germane to the meeting, during ordinary business hours, for a period of at least ten days prior to the meeting, either at a place within the city where the meeting is to be held and which place shall be specified in the notice of the meeting, or, if not specified, at the place where said meeting is to be held, and the list shall be produced and kept at the time and place of meeting during the whole time thereof, and may be inspected by any stockholder who is present. Section 2.9 Stockholder Proposals at Annual Meetings. At an annual meeting of the stockholders, only such business shall be conducted as shall have been properly brought before the meeting. To be properly brought before an annual meeting, business must be specified in the notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, otherwise properly brought before the meeting by or at the direction of the Board of Directors or otherwise properly brought before the meeting by a stockholder. In addition to any other applicable requirements, for business to be properly brought before an annual meeting by a stockholder, the stockholder must have given timely notice thereof in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation, not less than 45 days nor more than 75 days prior to the date on which the corporation first mailed its proxy materials for the previous year's annual meeting of shareholders (or the date on which the corporation mails its proxy materials for the current year if during the prior year the corporation did not hold an annual meeting or if the date of the annual meeting was changed more than 30 days from the prior year). A stockholder's notice to the Secretary shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before the annual meeting and the reasons for conducting such business at the annual meeting, (ii) the name and record address of the stockholder proposing such business, (iii) the class and number of shares of the corporation which are beneficially owned by the stockholder, and (iv) any material interest of the stockholder in such business. Notwithstanding anything in the By-Laws to the contrary, no business shall be conducted at the annual meeting except in accordance with the procedures set forth in this Section 2.9, provided, however, that nothing in this Section 2.9 shall be deemed to preclude discussion by any stockholder of any business properly brought before the annual meeting in accordance with said procedure. 5 The Chairman of an annual meeting shall, if the facts warrant, determine and declare to the meeting that business was not properly brought before the meeting in accordance with the provisions of this Section 2.9, and if he should so determine he shall so declare to the meeting, and any such business not properly brought before the meeting shall not be transacted. Nothing in this Section 2.9 shall affect the right of a stockholder to request inclusion of a proposal in the corporation's proxy statement to the extent that such right is provided by an applicable rule of the Securities and Exchange Commission. Section 2.10 Nominations of Persons for Election to the Board of Directors. In addition to any other applicable requirements, only persons who are nominated in accordance with the following procedures shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the corporation may be made at a meeting of stockholders by or at the direction of the Board of Directors, by any nominating committee or person appointed by the Board of Directors or by any stockholder of the corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this Section 2.10. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the corporation. To be timely, a stockholder's notice must be delivered to or mailed and received at the principal executive offices of the corporation, not less than 45 days nor more than 75 days prior to the date on which the corporation first mailed its proxy materials for the previous year's annual meeting of shareholders (or the date on which the corporation mails its proxy materials for the current year if during the prior year the corporation did not hold an annual meeting or if the date of the annual meeting was changed more than 30 days from the prior year). Such stockholder's notice shall set forth (a) as to each person whom the stockholder proposes to nominate for election or re-election as a director, (i) the name, age, business address and residence address of the person, (ii) the principal occupation or employment of the person, (iii) the class and number of shares of the corporation which are beneficially owned by the person, and (iv) any other information relating to the person that is required to be disclosed in solicitations for proxies for election of directors pursuant to Rule 14a under the Securities Exchange Act of 1934; and (b) as to the stockholder giving the notice, (i) the name and record address of the stockholder, and (ii) the class and number of shares of the corporation which are beneficially owned by the stockholder. The corporation may require any proposed nominee to furnish such other information as may reasonably be required by the corporation to determine the eligibility of such proposed nominee to serve as a director of the corporation. No person shall be eligible for election as a director of the corporation unless nominated in accordance with the procedures set forth herein. These provisions shall not apply to nomination of any persons entitled to be separately elected by holders of preferred stock. The Chairman of the meeting shall, if the facts warrant, determine and declare to the meeting that a nomination was not made in accordance with the foregoing procedure, and if he should so determine, he shall so declare to the meeting and the defective nomination shall be disregarded. 6 Section 2.11 Action Without Meeting. Unless otherwise provided in the Certificate of Incorporation, any action required by statute to be taken at any annual or special meeting of stockholders of the corporation, or any action which may be taken at any annual or special meeting of such stockholders, may be taken without a meeting, without prior notice and without a vote, if a consent or consents in writing, setting forth the action so taken, are signed by the holders of outstanding stock having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. To be effective, a written consent must be delivered to the corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. Every written consent shall bear the date of signature of each stockholder who signs the consent and no written consent shall be effective to take the corporate action referred to therein unless, within sixty days of the earliest dated consent delivered in the manner required by this Section to the corporation, written consents signed by a sufficient number of holders to take action are delivered to the corporation in accordance with this Section. Prompt notice of the taking of the corporate action without a meeting by less than unanimous written consent shall be given to those stockholders who have not consented in writing. ARTICLE III Directors Section 3.1 Number and Term of Office. The number of directors of the corporation shall not be less than seven (7) nor more than eleven (11) until changed by amendment of the Certificate of Incorporation or by a Bylaw amending this Section 3.1 duly adopted by the Board of Directors. For so long as there is Series B Preferred Stock outstanding, one of the directors shall be the Series B Preferred Stock Director, elected as specified the Certificate of Incorporation. For so long as there is Series C Preferred Stock, Series D Preferred Stock, or Series D-X Preferred Stock outstanding, one of the directors shall be the Series C Preferred Stock Director, elected as specified the Certificate of Incorporation. The exact number of directors shall be fixed from time to time, within the limits specified in the Certificate of Incorporation or in this Section 3.1, by a bylaw or amendment thereof duly adopted by the vote of a majority of the shares entitled to vote represented at a duly held meeting at which a quorum is present, or by the written consent of the holders of a majority of the outstanding shares entitled to vote, or by the Board of Directors, provided that if there is then required to be a Series B Preferred Stock Director or a Series C Preferred Stock Director, the vote of the required Preferred Stock directors shall be required to change the size of the Board. Subject to the foregoing provisions for changing the number of directors, the number of directors of the corporation has been fixed at seven (7). The directors shall be divided into three classes, designated Class I, Class II, and Class III, as nearly equal in number as the then total number of directors permits. Class I directors shall serve until the 2000 annual meeting, Class II directors shall serve until the 2001 7 annual meeting and Class III directors shall serve until the 2002 annual meeting. At each succeeding annual meeting of stockholders beginning in 2000, successors to the class of directors whose terms expires at that annual meeting shall be elected for a three-year term. If the number of directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any additional directors of any class elected to fill a vacancy resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case will a decrease in the number of directors shorten the term of any incumbent director. Notwithstanding the foregoing, whenever the holders of any one or more classes or series of Preferred Stock issued by the Corporation shall have the right, voting separately by class or series, to elect directors at an annual or special meeting of stockholders, the election, term of office, filling of vacancies and other features of such directorships shall be governed by the terms of these Bylaws applicable thereto, and such directors so elected shall not be divided into classes pursuant to this Section 3.1 unless expressly provided by such terms. Any amendment, change or repeal of this Section 3.1, or any other amendment to these Bylaws that will have the effect of permitting circumvention of or modifying this Section 3.1, shall require the favorable vote, at a stockholders' meeting, of the holders of at least 80% of the then-outstanding shares of stock of the Corporation entitled to vote. With the exception of the first Board of Directors, which shall be elected by the incorporators, and except as provided in Section 3.3 of this Article III, the directors shall be elected by a plurality vote of the shares represented in person or by proxy, at the stockholders annual meeting in each year and entitled to vote on the election of directors. Elected directors shall hold office until the next annual meeting for the years in which their terms expire and until their successors shall be duly elected and qualified. Directors need not be stockholders. If, for any cause, the Board of Directors shall not have been elected at an annual meeting, they may be elected as soon thereafter as convenient at a special meeting of the stockholders called for that purpose in the manner provided in these Bylaws. Section 3.2 Powers. The powers of the corporation shall be exercised, its business conducted and its property controlled by or under the direction of the Board of Directors. Section 3.3 Vacancies. Vacancies and newly created directorships resulting from any increase in the authorized number of directors may be filled by a majority of the directors then in office, although less than a quorum, or by a sole remaining director, and each director so elected shall hold office for the unexpired portion of the term of the director whose place shall be vacant, and until his successor shall have been duly elected and qualified. A vacancy in the Board of Directors shall be deemed to exist under this section in the case of the death, removal or resignation of any director, or if the stockholders fail at any meeting of stockholders at which directors are to be elected (including any meeting referred to in Section 3.4 below) to elect the number of directors then constituting the whole Board. 8 Section 3.4 Resignations and Removals. (a) Any director may resign at any time by delivering his written resignation to the Secretary, such resignation to specify whether it will be effective at a particular time, upon receipt by the Secretary or at the pleasure of the Board of Directors. If no such specification is made it shall be deemed effective at the pleasure of the Board of Directors. When one or more directors shall resign from the Board, effective at a future date, a majority of the directors then in office, including those who have so resigned, shall have power to fill such vacancy or vacancies, the vote thereon to take effect when such resignation or resignations shall become effective, and each director so chosen shall hold office for the unexpired portion of the term of the director whose place shall be vacated and until his successor shall have been duly elected and qualified. (b) At a special meeting of stockholders called for the purpose in the manner herein above provided, the Board of Directors, or any individual director, may be removed from office, with or without cause, and a new director or directors elected by a vote of stockholders holding a majority of the outstanding shares entitled to vote at an election of directors. Unless the certificate of incorporation otherwise provides, if the board of directors is classified, shareholders may effect removal only for cause. Section 3.5 Meetings. (a) The annual meeting of the Board of Directors shall be held immediately after the annual stockholders' meeting and at the place where such meeting is held or at the place announced by the Chairman at such meeting. No notice of an annual meeting of the Board of Directors shall be necessary and such meeting shall be held for the purpose of electing officers and transacting such other business as may lawfully come before it. (b) Except as hereinafter otherwise provided, regular meetings of the Board of Directors shall be held in the office of the corporation required to be maintained pursuant to Section 1.2 of Article I hereof. Regular meetings of the Board of Directors may also be held at any place within or without the State of Delaware which has been designated by resolutions of the Board of Directors or the written consent of all directors. (c) Special meetings of the Board of Directors may be held at any time and place within or without the State of Delaware whenever called by the Chairman of the Board or, if there is no Chairman of the Board, by the President, or by a majority of the directors. (d) Written notice of the time and place of all regular and special meetings of the Board of Directors shall be delivered personally to each director or sent by telegram or facsimile transmission at least 48 hours before the start of the meeting, or sent by first class mail at least 120 hours before the start of the meeting. Notice of any meeting may be waived in writing at any time before or after the meeting and will be waived by any director by attendance thereat. Section 3.6 Quorum and Voting. (a) A quorum of the Board of Directors shall consist of a majority of the exact number of directors fixed from time to time in accordance with Section 3.1 of Article III of these Bylaws, but not less than one; provided, however, at any meeting whether a quorum be present or 9 otherwise, a majority of the directors present may adjourn from time to time until the time fixed for the next regular meeting of the Board of Directors, without notice other than by announcement at the meeting. (b) At each meeting of the Board at which a quorum is present all questions and business shall be determined by a vote of a majority of the directors present, unless a different vote be required by law, the Certificate of Incorporation, or these Bylaws. (c) Any member of the Board of Directors, or of any committee thereof, may participate in a meeting by means of conference telephone or similar communication equipment by means of which all persons participating in the meeting can hear each other, and participation in a meeting by such means shall constitute presence in person at such meeting. (d) The transactions of any meeting of the Board of Directors, or any committee thereof, however called or noticed, or wherever held, shall be as valid as though had at a meeting duly held after regular call and notice, if a quorum be present and if, either before or after the meeting, each of the directors not present shall sign a written waiver of notice, or a consent to holding such meeting, or an approval of the minutes thereof. All such waivers, consents or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 3.7 Action Without Meeting. Unless otherwise restricted by the Certificate of Incorporation or these Bylaws, any action required or permitted to be taken at any meeting of the Board of Directors or of any committee thereof may be taken without a meeting, if all members of the Board or of such committee, as the case may be, consent thereto in writing, and such writing or writings are filed with the minutes of proceedings of the Board or committee. Section 3.8 Fees and Compensation. Directors and members of committees may receive such compensation, if any, for their services, and such reimbursement for expenses, as may be fixed or determined by resolution of the Board of Directors. Section 3.9 Committees. (a) Executive Committee: The Board of Directors may appoint an Executive Committee of not less than one member, each of whom shall be a director. The Executive Committee, to the extent permitted by law, shall have and may exercise when the Board of Directors is not in session all powers of the Board in the management of the business and affairs of the Corporation, except such committee shall not have the power or authority to amend these Bylaws or to approve or recommend to the stockholders any action which must be submitted to stockholders for approval under the General Corporation Law. (b) Other Committees: The Board of Directors may, by resolution passed by a majority of the whole Board, from time to time appoint such other committees as may be permitted by law. Such other committees appointed by the Board of Directors shall have such powers and perform such duties as may be prescribed by the resolution or resolutions creating such 10 committee, but in no event shall any such committee have the powers denied to the Executive Committee in these Bylaws. (c) Term: The members of all committees of the Board of Directors shall serve a term coexistent with that of the Board of Directors which shall have appointed such committee. The Board, subject to the provisions of subsections (a) or (b) of this Section 3.9, may at any time increase or decrease the number of members of a committee or terminate the existence of a committee; provided, that no committee shall consist of less than one member. The membership of a committee member shall terminate on the date of his death or voluntary resignation, but the Board may at any time for any reason remove any individual committee member and the Board may fill any committee vacancy created by death, resignation, removal or increase in the number of members of the committee. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee, and, in addition, in the absence or disqualification of any member of a committee, the member or members thereof present at any meeting and not disqualified from voting, whether or not he or they constitute a quorum, may unanimously appoint another member of the Board of Directors to act at the meeting in the place of any such absent or disqualified member. (d) Meetings: Unless the Board of Directors shall otherwise provide, regular meetings of the Executive Committee or any other committee appointed pursuant to this Section 3.9 shall be held at such times and places as are determined by the Board of Directors, or by any such committee, and when notice thereof has been given to each member of such committee, no further notice of such regular meetings need be given thereafter; special meetings of any such committee may be held at the principal office of the corporation required to be maintained pursuant to Section 1.2 of Article I hereof; or at any place which has been designated from time to time by resolution of such committee or by written consent of all members thereof, and may be called by any director who is a member of such committee, upon written notice to the members of such committee of the time and place of such special meeting given in the manner provided for the giving of written notice to members of the Board of Directors of the time and place of special meetings of the Board of Directors. Notice of any special meeting of any committee may be waived in writing at any time after the meeting and will be waived by any director by attendance thereat. A majority of the authorized number of members of any such committee shall constitute a quorum for the transaction of business, and the act of a majority of those present at any meeting at which a quorum is present shall be the act of such committee. ARTICLE IV Officers Section 4.1 Officers Designated. The officers of the corporation shall be a President, a Secretary, and a Treasurer. The Board of Directors or the President may also appoint a Chairman of the Board, one or more Vice-Presidents, assistant secretaries, assistant treasurers, and such other officers and agents with such powers and duties as it or he shall deem necessary. The order of the seniority of the Vice- Presidents shall be in the order of their nomination, unless otherwise determined by the Board of 11 Directors. The Board of Directors may assign such additional titles to one or more of the officers as they shall deem appropriate. Any one person may hold any number of offices of the corporation at any one time unless specifically prohibited therefrom by law. The salaries and other compensation of the officers of the corporation shall be fixed by or in the manner designated by the Board of Directors. Section 4.2 Tenure and Duties of Officers. (a) General: All officers shall hold office at the pleasure of the Board of Directors and until their successors shall have been duly elected and qualified, unless sooner removed. Any officer elected or appointed by the Board of Directors may be removed at any time by the Board of Directors. If the office of any officer becomes vacant for any reason, the vacancy may be filled by the Board of Directors. Nothing in these Bylaws shall be construed as creating any kind of contractual right to employment with the corporation. (b) Duties of the Chairman of the Board of Directors: The Chairman of the Board of Directors (if there be such an officer appointed) shall, when present, preside at all meetings of the shareholders and the Board of Directors. The Chairman of the Board of Directors shall perform such other duties and have such other powers as the Board of Directors shall designate from time to time. (c) Duties of President: The President shall be the chief executive officer of the corporation and shall preside at all meetings of the shareholders and at all meetings of the Board of Directors, unless the Chairman of the Board of Directors has been appointed and is present. The President shall perform such other duties and have such other powers as the Board of Directors shall designate from time to time. (d) Duties of Vice-Presidents: The Vice-Presidents, in the order of their seniority, may assume and perform the duties of the President in the absence or disability of the President or whenever the office of the President is vacant. The Vice-President shall perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (e) Duties of Secretary: The Secretary shall attend all meetings of the shareholders and of the Board of Directors and any committee thereof, and shall record all acts and proceedings thereof in the minute book of the corporation. The Secretary shall give notice, in conformity with these Bylaws, of all meetings of the shareholders, and of all meetings of the Board of Directors and any Committee thereof requiring notice. The Secretary shall perform such other duties and have such other powers as the Board of Directors shall designate from time to time. The President may direct any Assistant Secretary to assume and perform the duties of the Secretary in the absence or disability of the Secretary, and each Assistant Secretary shall perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. (f) Duties of Treasurer: The Treasurer shall keep or cause to be kept the books of account of the corporation in a thorough and proper manner, and shall render statements of the financial affairs of the corporation in such form and as often as required by the Board of 12 Directors or the President. The Treasurer, subject to the order of the Board of Directors, shall have the custody of all funds and securities of the corporation. The Treasurer shall perform all other duties commonly incident to his office and shall perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. The President may direct any Assistant Treasurer to assume and perform the duties of the Treasurer in the absence or disability of the Treasurer, and each Assistant Treasurer shall perform such other duties and have such other powers as the Board of Directors or the President shall designate from time to time. ARTICLE V Execution of Corporate Instruments, and Voting of Securities Owned by the Corporation Section 5.1 Execution of Corporate Instruments. (a) The Board of Directors may, in its discretion, determine the method and designate the signatory officer or officers, or other person or persons, to execute any corporate instrument or document, or to sign the corporate name without limitation, except where otherwise provided by law, and such execution or signature shall be binding upon the corporation. (b) Unless otherwise specifically determined by the Board of Directors or otherwise required by law, formal contracts of the corporation, promissory notes, deeds of trust, mortgages and other evidences of indebtedness of the corporation, and other corporate instruments or documents requiring the corporate seal, and certificates of shares of stock owned by the corporation, shall be executed, signed or endorsed by the Chairman of the Board (if there be such an officer appointed) or by the President; such documents may also be executed by any Vice-President and by the Secretary or Treasurer or any Assistant Secretary or Assistant Treasurer. All other instruments and documents requiring the corporate signature, but not requiring the corporate seal, may be executed as aforesaid or in such other manner as may be directed by the Board of Directors. (c) All checks and drafts drawn on banks or other depositaries on funds to the credit of the corporation, or in special accounts of the corporation, shall be signed by such person or persons as the Board of Directors shall authorize so to do. Section 5.2 Voting of Securities Owned by Corporation. All stock and other securities of other corporations owned or held by the corporation for itself, or for other parties in any capacity, shall be voted, and all proxies with respect thereto shall be executed, by the person authorized so to do by resolution of the Board of Directors or, in the absence of such authorization, by the Chairman of the Board (if there be such an officer appointed), or by the President, or by any Vice-President. 13 ARTICLE VI Shares of Stock Section 6.1 Form and Execution of Certificates. Certificates for the shares of stock of the corporation shall be in such form as is consistent with the Certificate of Incorporation and applicable law. Every holder of stock in the corporation shall be entitled to have a certificate signed by, or in the name of the corporation by, the Chairman of the Board (if there be such an officer appointed), or by the President or any Vice-President and by the Treasurer or Assistant Treasurer or the Secretary or Assistant Secretary, certifying the number of shares owned by him in the corporation. Any or all of the signatures on the certificate may be a facsimile. In case any officer, transfer agent, or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer, transfer agent, or registrar before such certificate is issued, it may be issued with the same effect as if he were such officer, transfer agent, or registrar at the date of issue. If the corporation shall be authorized to issue more than one class of stock or more than one series of any class, the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights shall be set forth in full or summarized on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, provided that, except as otherwise provided in section 202 of the Delaware General Corporation Law, in lieu of the foregoing requirements, there may be set forth on the face or back of the certificate which the corporation shall issue to represent such class or series of stock, a statement that the corporation will furnish without charge to each stockholder who so requests the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights. Section 6.2 Lost Certificates. The Board of Directors may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the corporation alleged to have been lost or destroyed, upon the making of an affidavit of that fact by the person claiming the certificate of stock to be lost or destroyed. When authorizing such issue of a new certificate or certificates, the Board of Directors may, in its discretion and as a condition precedent to the issuance thereof, require the owner of such lost or destroyed certificate or certificates, or his legal representative, to indemnify the corporation in such manner as it shall require and/or to give the corporation a surety bond in such form and amount as it may direct as indemnity against any claim that may be made against the corporation with respect to the certificate alleged to have been lost or destroyed. Section 6.3 Transfers. Transfers of record of shares of stock of the corporation shall be made only upon its books by the holders thereof, in person or by attorney duly authorized, and upon the surrender of a certificate or certificates for a like number of shares, properly endorsed. 14 Section 6.4 Fixing Record Dates. (a) In order that the corporation may determine the stockholders entitled to notice of or to vote at any meeting of stockholders or any adjournment thereof, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which record date shall not be more than sixty nor less than ten days before the date of such meeting. If no record date is fixed by the Board of Directors, the record date for determining stockholders entitled to notice of or to vote at a meeting of stockholders shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the date on which the meeting is held. A determination of stockholders of record entitled notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board of Directors may fix a new record date for the adjourned meeting. (b) In order that the corporation may determine the stockholders entitled to consent to corporate action in writing without a meeting, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Directors, and which date shall not be more than ten days after the date upon which the resolution fixing the record date is adopted by the Board of Directors. If no record date has been fixed by the Board of Directors, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting, when no prior action by the Board of Directors is required by the Delaware General Corporation Law, shall be the first date on which a signed written consent setting forth the action taken or proposed to be taken is delivered to the corporation by delivery to its registered office in Delaware, its principal place of business, or an officer or agent of the corporation having custody of the book in which proceedings of meetings of stockholders are recorded. Delivery made to a corporation's registered office shall be by hand or by certified or registered mail, return receipt requested. If no record date has been fixed by the Board of Directors and prior action by the Board of Directors is required by law, the record date for determining stockholders entitled to consent to corporate action in writing without a meeting shall be at the close of business on the day on which the Board of Directors adopts the resolution taking such prior action. (c) In order that the corporation may determine the stockholders entitled to receive payment of any dividend or other distribution or allotment of any rights or the stockholders entitled to exercise any rights in respect of any change, conversion or exchange of stock, or for the purpose of any other lawful action, the Board of Directors may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall be not more than sixty days prior to such action. If no record date is fixed, the record date for determining stockholders for any such purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto. Section 6.5 Registered Stockholders. The corporation shall be entitled to recognize the exclusive right of a person registered on its books as the owner of shares to receive dividends, and to vote as such owner, and shall not be bound to recognize any equitable or other claim to or interest in such share or shares on the part 15 of any other person, whether or not it shall have express or other notice thereof, except as otherwise provided by the laws of Delaware. ARTICLE VII Other Securities of the Corporation All bonds, debentures and other corporate securities of the corporation, other than stock certificates, may be signed by the Chairman of the Board (if there be such an officer appointed), or the President or any Vice-President or such other person as may be authorized by the Board of Directors and the corporate seal impressed thereon or a facsimile of such seal imprinted thereon and attested by the signature of the Secretary or an Assistant Secretary, or the Treasurer or an Assistant Treasurer; provided, however, that where any such bond, debenture or other corporate security shall be authenticated by the manual signature of a trustee under an indenture pursuant to which such bond, debenture or other corporate security shall be issued, the signature of the persons signing and attesting the corporate seal on such bond, debenture or other corporate security may be the imprinted facsimile of the signatures of such persons. Interest coupons appertaining to any such bond, debenture or other corporate security, authenticated by a trustee as aforesaid, shall be signed by the Treasurer or an Assistant Treasurer of the corporation, or such other person as may be authorized by the Board of Directors, or bear imprinted thereon the facsimile signature of such person. In case any officer who shall have signed or attested any bond, debenture or other corporate security, or whose facsimile signature shall appear thereon or before the bond, debenture or other corporate security so signed or attested shall have been delivered, such bond, debenture or other corporate security nevertheless may be adopted by the corporation and issued and delivered as though the person who signed the same or whose facsimile signature shall have been used thereon had not ceased to be such officer of the corporation. ARTICLE VIII Corporate Seal The corporate seal shall consist of a die bearing the name of the corporation and the state and date of its incorporation. Said seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. ARTICLE IX Indemnification of Officers, Directors, Employees and Agents Section 9.1 Right to Indemnification. Each person who was or is a party or is threatened to be made a party to or is involved (as a party, witness, or otherwise), in any threatened, pending, or completed action, suit, or proceeding, whether civil, criminal, administrative, or investigative (hereinafter a "Proceeding"), by reason of the fact that he, or a person of whom he is the legal representative, is or was a director, officer, employee, or agent of the corporation or is or was serving at the request of the 16 corporation as a director, officer, employee, or agent of another corporation or of a partnership, joint venture, trust, or other enterprise, including service with respect to employee benefit plans, whether the basis of the Proceeding is alleged action in an official capacity as a director, officer, employee, or agent or in any other capacity while serving as a director, officer, employee, or agent (hereafter an "Agent"), shall be indemnified and held harmless by the corporation to the fullest extent authorized by the Delaware General Corporation Law, as the same exists or may hereafter be amended or interpreted (but, in the case of any such amendment or interpretation, only to the extent that such amendment or interpretation permits the corporation to provide broader indemnification rights than were permitted prior thereto) against all expenses, liability, and loss (including attorneys' fees, judgments, fines, ERISA excise taxes or penalties, and amounts paid or to be paid in settlement, and any interest, assessments, or other charges imposed thereon, and any federal, state, local, or foreign taxes imposed on any Agent as a result of the actual or deemed receipt of any payments under this Article) reasonably incurred or suffered by such person in connection with investigating, defending, being a witness in, or participating in (including on appeal), or preparing for any of the foregoing in, any Proceeding (hereinafter "Expenses"); provided, however, that except as to actions to enforce indemnification rights pursuant to Section 9.3 of this Article, the corporation shall indemnify any Agent seeking indemnification in connection with a Proceeding (or part thereof) initiated by such person only if the Proceeding (or part thereof) was authorized by the Board of Directors of the corporation. The right to indemnification conferred in this Article shall be a contract right. Section 9.2 Authority to Advance Expenses. Expenses incurred by an officer or director (acting in his capacity as such) in defending a Proceeding shall be paid by the corporation in advance of the final disposition of such Proceeding, provided, however, that if required by the Delaware General Corporation Law, as amended, such Expenses shall be advanced only upon delivery to the corporation of an undertaking by or on behalf of such director or officer to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the corporation as authorized in this Article or otherwise. Expenses incurred by other Agents of the corporation (or by the directors or officers not acting in their capacity as such, including service with respect to employee benefit plans) may be advanced upon such terms and conditions as the Board of Directors deems appropriate. Any obligation to reimburse the corporation for Expense advances shall be unsecured and no interest shall be charged thereon. Section 9.3 Right of Claimant to Bring Suit. If a claim under Section 9.1 or 9.2 of this Article is not paid in full by the corporation within 180 days after a written claim has been received by the corporation, the claimant may at any time thereafter bring suit against the corporation to recover the unpaid amount of the claim and, if successful in whole or in part, the claimant shall be entitled to be paid also the expense (including attorneys' fees) of prosecuting such claim. It shall be a defense to any such action (other than an action brought to enforce a claim for expenses incurred in defending a Proceeding in advance of its final disposition where the required undertaking has been tendered to the corporation) that the claimant has not met the standards of conduct that make it permissible under the Delaware General Corporation Law for the corporation to indemnify the claimant for the amount claimed. The burden of proving such a defense shall be on the corporation. Neither 17 the failure of the corporation (including its Board of Directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action that indemnification of the claimant is proper under the circumstances because he has met the applicable standard of conduct set forth in the Delaware General Corporation Law, nor an actual determination by the corporation (including its Board of Directors, independent legal counsel, or its stockholders) that the claimant had not met such applicable standard of conduct, shall be a defense to the action or create a presumption that claimant has not met the applicable standard of conduct. Section 9.4 Provisions Nonexclusive. The rights conferred on any person by this Article shall not be exclusive of any other rights that such person may have or hereafter acquire under any statute, provision of the Certificate of Incorporation, agreement, vote of stockholders or disinterested directors, or otherwise, both as to action in an official capacity and as to action in another capacity while holding such office. To the extent that any provision of the Certificate, agreement, or vote of the stockholders or disinterested directors is inconsistent with these bylaws, the provision, agreement, or vote shall take precedence. Section 9.5 Authority to Insure. The corporation may purchase and maintain insurance to protect itself and any Agent against any Expense, whether or not the corporation would have the power to indemnify the Agent against such Expense under applicable law or the provisions of this Article. Section 9.6 Survival of Rights. The rights provided by this Article shall continue as to a person who has ceased to be an Agent and shall inure to the benefit of the heirs, executors, and administrators of such a person. Section 9.7 Settlement of Claims. The corporation shall not be liable to indemnify any Agent under this Article (a) for any amounts paid in settlement of any action or claim effected without the corporation's written consent, which consent shall not be unreasonably withheld; or (b) for any judicial award if the corporation was not given a reasonable and timely opportunity, at its expense, to participate in the defense of such action. Section 9.8 Effect of Amendment. Any amendment, repeal, or modification of this Article shall not adversely affect any right or protection of any Agent existing at the time of such amendment, repeal, or modification. Section 9.9 Subrogation. In the event of payment under this Article, the corporation shall be subrogated to the extent of such payment to all of the rights of recovery of the Agent, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the 18 execution of such documents necessary to enable the corporation effectively to bring suit to enforce such rights. Section 9.10 No Duplication of Payments. The corporation shall not be liable under this Article to make any payment in connection with any claim made against the Agent to the extent the Agent has otherwise actually received payment (under any insurance policy, agreement, vote, or otherwise) of the amounts otherwise indemnifiable hereunder. ARTICLE X Notices Whenever, under any provisions of these Bylaws, notice is required to be given to any stockholder, the same shall be given in writing, timely and duly deposited in the United States Mail, postage prepaid, and addressed to his last known post office address as shown by the stock record of the corporation or its transfer agent. Any notice required to be given to any director may be given by the method herein above stated, or by telegram or other means of electronic transmission, except that such notice other than one which is delivered personally, shall be sent to such address or (in the case of facsimile telecommunication) facsimile telephone number as such director shall have filed in writing with the Secretary of the corporation, or, in the absence of such filing, to the last known post office address of such director. If no address of a stockholder or director be known, such notice may be sent to the office of the corporation required to be maintained pursuant to Section 1.2 of Article I hereof. An affidavit of mailing, executed by a duly authorized and competent employee of the corporation or its transfer agent appointed with respect to the class of stock affected, specifying the name and address or the names and addresses of the stockholder or stockholders, director or directors, to whom any such notice or notices was or were given, and the time and method of giving the same, shall be conclusive evidence of the statements therein contained. All notices given by mail, as above provided, shall be deemed to have been given as at the time of mailing and all notices given by telegram or other means of electronic transmission shall be deemed to have been given as at the sending time recorded by the telegraph company or other electronic transmission equipment operator transmitting the same. It shall not be necessary that the same method of giving be employed in respect of all directors, but one permissible method may be employed in respect of any one or more, and any other permissible method or methods may be employed in respect of any other or others. The period or limitation of time within which any stockholder may exercise any option or right, or enjoy any privilege or benefit, or be required to act, or within which any director may exercise any power or right, or enjoy any privilege, pursuant to any notice sent him in the manner above provided, shall not be affected or extended in any manner by the failure of such a stockholder or such director to receive such notice. Whenever any notice is required to be given under the provisions of the statutes or of the Certificate of Incorporation, or of these Bylaws, a waiver thereof in writing signed by the person or persons entitled to said notice, whether before or after the time stated therein, shall be deemed equivalent thereto. Whenever notice is required to be given, under any provision of law or of the Certificate of Incorporation or Bylaws of the corporation, to any person with whom communication is unlawful, the giving of such notice to such person shall not be required and there shall be no duty to apply to any 19 governmental authority or agency for a license or permit to give such notice to such person. Any action or meeting which shall be taken or held without notice to any such person with whom communication is unlawful shall have the same force and effect as if such notice had been duly given. In the event that the action taken by the corporation is such as to require the filing of a certificate under any provision of the Delaware General Corporation Law, the certificate shall state, if such is the fact and if notice is required, that notice was given to all persons entitled to receive notice except such persons with whom communication is unlawful. ARTICLE XI Amendments These Bylaws may be repealed, altered or amended or new Bylaws adopted by written consent of stockholders in the manner authorized by Section 2.11 of Article II, or at any meeting of the stockholders, either annual or special, by the affirmative vote of a majority of the stock entitled to vote at such meeting, unless a larger vote is required by these Bylaws or the Certificate of Incorporation. The Board of Directors shall also have the authority to repeal, alter or amend these Bylaws or adopt new Bylaws (including, without limitation, the amendment of any Bylaws setting forth the number of directors who shall constitute the whole Board of Directors) by unanimous written consent or at any annual, regular, or special meeting by the affirmative vote of a majority of the whole number of directors, subject to the power of the stockholders to change or repeal such Bylaws and provided that the Board of Directors shall not make or alter any Bylaws fixing the qualifications, classifications, or term of office of directors. 20 CERTIFICATE OF SECRETARY The undersigned, Secretary of Digimarc Corporation, a Delaware corporation, hereby certifies that the foregoing is a full, true and correct copy of the Bylaws of said corporation, with all amendments to date of this Certificate. WITNESS the signature of the undersigned this 4th day of October, 1999. /s/ E.K. Ranjit ----------------------------- E.K. Ranjit, Secretary EX-4.2 5 SECOND AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT EXHIBIT 4.2 DIGIMARC CORPORATION SECOND AMENDED AND RESTATED INVESTOR RIGHTS AGREEMENT This Second Amended and Restated Investor Rights Agreement (the "Agreement") is entered into as of the 2 day of November, 1999, by and among DIGIMARC CORPORATION, an Oregon corporation (the "Company") and the holders of the Company's Series A Preferred Stock (the "Series A Holders"), Series B Preferred Stock (the "Series B Holders"), Series C Preferred Stock (the "Series C Holders"), Series D Preferred Stock (the "Series D Holders") and Series D-X Preferred Stock (the "Series D-X Holders"), (collectively, the Series A Holders, the Series B Holders, the Series C Holders, the Series D Holders and the Series D-X Holders are referred to herein as "Preferred Holders"). Recitals WHEREAS, the Company, the Series A Holders, the Series B Holders and the Series C Holders have entered into a First Amended and Restated Investor Rights Agreement dated December 31, 1997, as amended by that First Amendment to the First Amended and Restated Investor Rights Agreement dated June 8, 1999 by and among the Company and the Series A Holders, the Series B Holders, the Series C Holders and the Series D Holders, as further amended by that Second Amendment to the First Amended and Restated Investor Rights Agreement dated August 26, 1999 by and among the Company and the Preferred Holders (collectively, the "First Amended and Restated Agreement"); and WHEREAS, the Company and the Preferred Holders desire to provide for certain arrangements with respect to the registration of shares of capital stock of the Company under the Securities Act; NOW, THEREFORE, in consideration of the mutual promises and covenants contained in this Agreement and pursuant to Sections 3.10, 3.11 and 6.5 of the First Amended and Restated Agreement, the Company and the undersigned Preferred Holders holding at least 60% of the Registrable Securities then outstanding (as defined in the First Amended and Restated Agreement) hereby amend the First Amended and Restated Agreement so that it is restated in its entirety to read as follows: 1. General. Page 1 1.1 Definitions. As used in this Agreement, the following terms shall have the following respective meanings: "Designated IPO" means the same thing as that term is defined to mean in Section 4.2.3(a)(3) of the Company's Third Restated Articles of Incorporation, as amended ("Third Restated Articles"). "Holder" means any Preferred Holder or other holder owning of record Registrable Securities that have not been sold to the public or any assignee of record of such Registrable Securities in accordance with Section 3.9 hereof. "Initial Offering" means the Company's first firm commitment underwritten public offering of its Common Stock pursuant to a registration statement filed under the Securities Act. "Register," "registered," and "registration" refer to a registration effected by preparing and filing a registration statement in compliance with the Securities Act, and the declaration or ordering of effectiveness of such registration statement or document. "Registrable Securities" means (i) Common Stock of the Company issued or issuable upon conversion of the Shares; and (ii) any Common Stock of the Company issued as (or issuable upon the conversion or exercise of any warrant, right or other security which is issued as) a dividend or other distribution with respect to, or in exchange for or in replacement of, such above-described securities. Notwithstanding the foregoing, Registrable Securities shall not include any securities (i) sold by a person to the public either pursuant to a registration statement or Rule 144 or (ii) sold in a private transaction in which the transferor's rights under Section 3 of this Agreement are not assigned. "Registrable Securities then outstanding" shall be the number of shares determined by calculating the total number of shares of the Company's Common Stock that are Registrable Securities and either (1) are then issued and outstanding or (2) are issuable pursuant to then exercisable or convertible securities. "Registration Expenses" shall mean all expenses incurred by the Company in complying with Sections 3.1, 3.2 and 3.3 hereof, including, without limitation, all registration and filing fees, printing expenses, fees and disbursements of counsel for the Company and the underwriters, blue sky fees and expenses and the expense of any special audits incident to or required by any such registration (but excluding the compensation of regular employees of the Company which shall be paid in any event by the Company). "Securities Act" shall mean the Securities Act of 1933, as amended. "Selling Expenses" shall mean all underwriting discounts, selling commissions and stock transfer taxes, if any, applicable to the sale. Page 2 "Shares" shall mean shares of the Company's Series A Preferred Stock, Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock and Series D-X Preferred Stock. "Form S-3" means such form under the Securities Act as in effect on the date hereof or any successor registration form under the Securities Act subsequently adopted by the SEC which permits inclusion or incorporation of substantial information by reference to other documents filed by the Company with the SEC. "SEC" or "Commission" means the Securities and Exchange Commission. 2. Restrictions on Transfer. 2.1 Transfer Only Under These Conditions. Each Holder agrees not to make any disposition of all or any portion of such Holder's Registrable Securities unless and until the transferee has agreed in writing for the benefit of the Company to be bound by this Section 2, provided and to the extent such Section is then applicable and: 2.1.1 Unless Registration Statement Then Effective. There is then in effect a registration statement under the Securities Act covering such proposed disposition and such disposition is made in accordance with such registration statement; or 2.1.2 Unless Exemption Exists. (i) Such Holder shall have notified the Company of the proposed disposition and shall have furnished the Company with a detailed statement of the circumstances surrounding the proposed disposition, and (ii) if reasonably requested by the Company, such Holder shall have furnished the Company with an opinion of counsel, reasonably satisfactory to the Company, that such disposition will not require Registration of such shares under the Securities Act. It is agreed that the Company will not require opinions of counsel for transactions made pursuant to Rule 144 except in unusual circumstances. 2.1.3 Unless Affiliated Transaction. Notwithstanding the provisions of paragraphs 2.1.1 and 2.1.2 above, no such registration statement or opinion of counsel shall be necessary for a transfer by a Holder which is (i) a partnership to its partners or former partners in accordance with partnership interests, (ii) a corporation to its shareholders in accordance with their interest in the corporation or to an entity directly or indirectly controlling, controlled by or under common control with such corporation, (iii) a limited liability company to its members in accordance with their membership interests, (iv) an individual Holder to a family member of such Holder or to a trust for the benefit of such Holder or (v) a partnership or limited liability company affiliated with and/or managed by the transferee or the same manager who manages the transferee, provided the transferee will be subject to the terms of this Section 2.1 to the same extent as if such transferee were an original Holder hereunder. Page 3 2.1.4 Legend. Each certificate representing Shares or Registrable Securities shall (unless otherwise permitted by the provisions of this Agreement) be stamped or otherwise imprinted with a legend substantially similar to the following (in addition to any legend required under applicable state securities laws or as provided elsewhere in this Agreement): THE SECURITIES REPRESENTED HEREBY HAVE NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 (THE "ACT") AND MAY NOT BE OFFERED, SOLD OR OTHERWISE TRANSFERRED, PLEDGED OR HYPOTHECATED UNLESS AND UNTIL REGISTERED UNDER THE ACT OR, IN THE OPINION OF COUNSEL OR BASED ON OTHER WRITTEN EVIDENCE IN FORM AND SUBSTANCE SATISFACTORY TO THE ISSUER OF THESE SECURITIES, SUCH OFFER, SALE OR TRANSFER, PLEDGE OR HYPOTHECATION IS IN COMPLIANCE THEREWITH. 2.2 Removal of '33 Act Legend. The Company shall be obligated to reissue promptly unlegended certificates at the request of any holder thereof if the holder shall have obtained an opinion of counsel reasonably acceptable to the Company to the effect that the securities proposed to be disposed of may lawfully be so disposed of without registration, qualification or legend. 2.3 Removal of Blue Sky Legends. Any legend endorsed on an instrument pursuant to applicable state securities laws and the stop-transfer instructions with respect to such securities shall be removed upon receipt by the Company of an order of the appropriate blue sky authority authorizing such removal. 3. Registration Rights. 3.1 Demand Registration. 3.1.1 Obligation to Register. Subject to the conditions of this Section 3.1, if the Company shall receive at any time a written request from the Holders of more than fifty percent (50%) of the Registrable Securities then outstanding (the "Initiating Holders") that the Company file a registration statement under the Securities Act having an aggregate offering price to the public in excess of $10,000,000 (excluding underwriting discounts and commissions), then the Company shall, within thirty (30) days of the receipt thereof, give written notice of such request to all Holders and subject to the limitations of this Section 3.1, shall use its best efforts to effect, as soon as practicable, the registration under the Securities Act of all Registrable Securities that the Holders request to be registered. 3.1.2 Underwritten Demand Offerings. If the Initiating Holders intend to distribute the Registrable Securities covered by their request by means of an underwriting, they shall so advise the Company as a part of their request made pursuant to this Section 3.1 and the Company shall include such information in the written notice referred to in Section 3.1.1. In such event, the right of any Holder to include his Registrable Securities in Page 4 such registration shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting (unless otherwise mutually agreed by a majority in interest of the Initiating Holders and such Holder) to the extent provided herein. All Holders proposing to distribute their securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting by a majority in interest of the Initiating Holders (which underwriter or underwriters shall be reasonably acceptable to the Company). Notwithstanding any other provision of this Section 3.1, if the underwriter advises the Company in writing that marketing factors require a limitation of the number of securities to be underwritten (including Registrable Securities) then the Company shall so advise all Holders which would otherwise be underwritten pursuant hereto, and the number of shares that may be included in the underwriting shall be allocated to the Holders on a pro rata basis based on the number of Registrable Securities held by all such Holders (including the Initiating Holders). Any Registrable Securities excluded or withdrawn from such underwriting shall be withdrawn from the registration. 3.1.3 Limits on Obligation. The Company shall not be required to effect a registration pursuant to this Section 3.1: (a) Earliest Allowed Demand. prior to the earlier of (i) January 1, 2002; or (ii) the date one hundred eighty (180) days following the Initial Offering of the Company's Common Stock; or (b) Maximum Limits. after the Company has effected two (2) registrations pursuant to this Section 3. 1 and such registrations have been declared or ordered effective; or (c) Upcoming Company Registration. during the period starting with the date 30 days prior to the Company's good faith estimated date of filing of, and ending on the date 120 days following the effective date of, a registration statement pertaining to an offering of securities for the account of the Company, provided the Company is at all times during such period diligently pursuing such registration provided, however, that this right to delay any requested registration shall not be utilized more than once in any 12 month period; or (d) Company Deferral. if the Company shall furnish to Holders requesting a registration statement pursuant to this Section 3.1, a certificate signed by the President or Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such registration statement to be filed and it is therefore essential to defer the filing of such registration statement, in which event the Company shall have the right to defer initiation of the offering process for a single period of not more than ninety (90) days after receipt of the Page 5 request of the Initiating Holders, provided that such right to delay a request shall be exercised by the Company no more than twice in any one-year period. 3.2 Piggyback Registrations. The Company shall notify all Holders in writing at least thirty (30) days prior to the filing of any registration statement under the Securities Act for purposes of a public offering of securities of the Company (including, but not limited to, registration statements relating to secondary offerings of securities of the Company, but excluding registration statements relating to employee benefit plans and corporate reorganizations) and will use its best efforts to afford each such Holder an opportunity to include in such registration statement all or part of such Registrable Securities held by such Holder. Each Holder desiring to include in any such registration statement all or any part of the Registrable Securities held by it shall, within fifteen (15) days after delivery of the above-described notice from the Company, so notify the Company in writing. Such notice shall state the intended method of disposition of the Registrable Securities by such Holder. If a Holder decides not to include all of its Registrable Securities in any registration statement thereafter filed by the Company, such Holder shall nevertheless continue to have the right to include any Registrable Securities in any subsequent registration statement or registration statements as may be filed by the Company with respect to offerings of its securities, all upon the terms and conditions set forth herein. 3.2.1 Underwritten Offerings, Cutback. If the registration statement under which the Company gives notice under this Section 3.2 is for an underwritten offering, the Company shall so advise the Holders. In such event, the right of any Holder to be included in a registration pursuant to this Section 3.2 shall be conditioned upon such Holder's participation in such underwriting and the inclusion of such Holder's Registrable Securities in the underwriting to the extent provided herein. All Holders proposing to distribute their Registrable Securities through such underwriting shall enter into an underwriting agreement in customary form with the underwriter or underwriters selected for such underwriting. Notwithstanding any other provision of the Agreement, if the underwriter determines in good faith that marketing factors require a limitation of the number of Registrable Securities to be underwritten, the number of Registrable Securities that may be included in the underwriting shall be reduced among the Holders on a pro rata basis based on the total number of Registrable Securities held by the Holders, provided no such reduction shall reduce to less than 25% of any offering the number of shares of the Holders requested to be registered. In no event will shares of any other selling shareholder be included in such registration which would reduce the number of Registrable Securities which may be included by Holders without the written consent of Holders of not less than a majority of the Registrable Securities proposed to be sold in the offering. 3.2.2 Company's Right to Terminate. The Company shall have the right to terminate or withdraw any registration initiated by it under this Section 3.2 prior to the effectiveness of such registration whether or not any Holder has elected to include securities in such registration. The Registration Expenses of such withdrawn registration shall be borne by the Company in accordance with Section 3.4 hereof. Page 6 3.3 Form S-3 Registration. In case the Company shall receive from any Holder or Holders a written request or requests that the Company effect a registration on Form S-3 (or any successor to Form S-3) or any similar short- form registration statement and any related qualification or compliance with respect to all or a part of the Registrable Securities owned by such Holder or Holders the Company will: 3.3.1 Notice. promptly give written notice of the proposed registration, and any related qualification or compliance, to all other Holders; and 3.3.2 Inclusion of Offered Shares. as soon as practicable, effect such registration and all such qualifications and compliances as may be so requested and as would permit or facilitate the sale and distribution of all or such portion of such Holder's or Holders' Registrable Securities as are specified in such request, together with all or such portion of the Registrable Securities of any other Holder or Holders joining in such request as are specified in a written request given within fifteen (15) days after receipt of such written notice from the Company; provided, however, that the Company shall not be obligated to effect any such registration, qualification or compliance pursuant to this Section 3.3: (a) Unless S-3 not available. if Form S-3 (or such successor or similar form) is not available for such offering by the Holders; or (b) Unless total offered stock less than threshold. if the Holders, together with the holders of any other securities of the Company entitled to inclusion in such registration, propose to sell Registrable Securities and such other securities (if any) at an aggregate offering price to the public of less than $1,000,000; or (c) Unless for Company Deferral. if the Company shall furnish to the Holders a certificate signed by the President or Chief Executive Officer of the Company stating that in the good faith judgment of the Board of Directors of the Company, it would be seriously detrimental to the Company and its shareholders for such Form S-3 Registration to be effected at such time, in which event the Company shall have the right to defer the filing of the Form S-3 registration statement for a single period of not more than ninety (90) days after receipt of the request of the Holder or Holders under this Section 3.3 and provided that such right to delay a request shall be exercised by the Company no more than twice in any one-year period; or (d) Unless within 180 Days of Offering. during the period starting with the date of filing of, and ending on the date one hundred eighty (180) days following the effective date of any registration statement filed by the Company under the Securities Act; or Page 7 (e) One per 12 Months Limit. if the Company has already effected one (1) registration on Form S-3 for the Holders pursuant to this Section 3.3 within the previous 12 months. 3.3.3 Prompt filing. Subject to the foregoing, the Company shall file a Form S-3 registration statement covering the Registrable Securities and other securities so requested to be registered as soon as practicable after receipt of the request or requests of the Holders. 3.4 Expenses of Registration. All Registration Expenses incurred in connection with any registration, qualification or compliance pursuant to Section 3.1 or any registration under Section 3.2 or 3.3 herein shall be borne by the Company. All Selling Expenses incurred in connection with any registrations hereunder, shall be borne by the holders of the securities so registered pro rata on the basis of the number of shares so registered. The Company shall not, however, be required to pay for expenses of any registration proceeding begun pursuant to Section 3.1 or 3.3, the request of which has been subsequently withdrawn by the Initiating Holders unless (a) the withdrawal is based upon material adverse information concerning the Company of which the Initiating Holders were not aware at the time of such request or (b) the Holders of a majority of Registrable Securities agree to forfeit their right to one requested registration pursuant to Section 3.1 or 3.3 (in which event such right shall be forfeited by all Holders). If the Holders are required to pay the Registration Expenses, such expenses shall be borne by the holders of securities (including Registrable Securities) requesting such registration in proportion to the number of shares for which registration was requested. 3.5 Obligations of the Company. Whenever required to effect the registration of any Registrable Securities, the Company shall use its best efforts, as expeditiously and as reasonably possible, to: 3.5.1 File And Keep Registration Statement Effective. Prepare and file with the SEC a registration statement with respect to such Registrable Securities and use its best efforts to cause such registration statement to become effective, and, upon the request of the Holders of a majority of the Registrable Securities registered thereunder, keep such registration statement effective for up to one hundred eighty (180) days or, if earlier, until the Holders have completed the distribution related thereto. 3.5.2 Update as Law Requires. Prepare and file with the SEC such amendments and supplements to such registration statement and the prospectus used in connection with such registration statement as may be necessary to comply with the provisions of the Securities Act with respect to the disposition of all securities covered by such registration statement. 3.5.3 Supply Prospectus. Furnish to the Holders such number of copies of a prospectus, including a preliminary prospectus, in conformity with the requirements of the Page 8 Securities Act, and such other documents as they may reasonably request in order to facilitate the disposition of Registrable Securities owned by them. 3.5.4 Blue Sky, within limits. Use its best efforts to register and qualify the securities covered by such registration statement under such other securities or Blue Sky laws of such jurisdictions as shall be reasonably requested by the Holders, provided that the Company shall not be required in connection therewith or as a condition thereto to qualify to do business or to file a general consent to service of process in any such states or jurisdictions. 3.5.5 Enter Underwriting Agreement. In the event of any underwritten public offering, enter into and perform its obligations under an underwriting agreement, in usual and customary form, with the managing underwriter(s) of such offering. Each Holder participating in such underwriting shall also enter into and perform its obligations under such an agreement. 3.5.6 Keep Holders Updated for Compliance. Notify each Holder of securities covered by such registration statement at any time when a prospectus relating thereto is required to be delivered under the Securities Act of the happening of any event as a result of which the prospectus included in such registration statement, as then in effect, includes an untrue statement of a material fact or omits to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances then existing. 3.5.7 Opinion and Comfort Letters. Furnish, at the request of a majority of the Holders participating in the registration, on the date that such Registrable Securities are delivered to the underwriters for sale, if such securities are being sold through underwriters, or, if such securities are not being sold through underwriters, on the date that the registration statement with respect to such securities becomes effective, (i) an opinion, dated as of such date, of counsel representing the Company for the purposes of such registration, in form and substance as is customarily given to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters, if any, and to the Holders requesting registration of Registrable Securities and (ii) a letter dated as of such date, from the independent certified public accountants of the Company, in form and substance as is customarily given by independent certified public accountants to underwriters in an underwritten public offering and reasonably satisfactory to a majority in interest of the Holders requesting registration, addressed to the underwriters, if any, and if permitted by applicable accounting standards, to the Holders requesting registration of Registrable Securities. 3.6 Termination of Registration Rights. All registration rights granted under this Section 3 shall terminate and be of no Page 9 further force and effect ten (10) years after the Initial Offering, provided, however, that registration rights granted under this Section 3 shall terminate and be of no further force and effect as to each individual Holder (or transferee holding registration rights hereunder) prior to ten (10) years after the closing of the Initial Offering if such Holder and its affiliates or transferee and its affiliates can either (i) sell all of its Registrable Securities pursuant to Rule 144 of the Securities Act within any calendar quarter or (ii) sell its Registrable Securities pursuant to Rule 144K of the Securities Act. 3.7 Delay of Registration; Furnishing Information. 3.7.1 No Injunctions. No Holder shall have any right to obtain or seek an injunction restraining or otherwise delaying any such registration as the result of any controversy that might arise with respect to the interpretation or implementation of this Section 3. 3.7.2 Holders' Data Conditions Precedent. It shall be a condition precedent to the obligations of the Company to take any action pursuant to Sections 3.1, 3.2 or 3.3 that the selling Holders shall furnish to the Company such information regarding themselves, the Registrable Securities held by them, and the intended method of disposition of such securities as shall be required to effect the registration of their Registrable Securities. 3.8 Indemnification. In the event any Registrable Securities are included in a registration statement under Sections 3.1, 3.2 or 3.3: 3.8.1 Company Indemnification. To the extent permitted by law, the Company will indemnify and hold harmless each Holder, the partners, officers and directors of each Holder, any underwriter (as defined in the Securities Act) for such Holder and each person, if any, who controls such Holder or underwriter within the meaning of the Securities Act or the Securities Exchange Act of 1934, as amended, (the "1934 Act"), against any losses, claims, damages, or liabilities (joint or several) to which they may become subject under the Securities Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereof) arise out of or are based upon any of the following statements, omissions or violations (collectively a "Violation") by the Company: (i) any untrue statement or alleged untrue statement of a material fact contained in such registration statement, including any preliminary prospectus or final prospectus contained therein or any amendments or supplements thereto, (ii) the omission or alleged omission to state therein a material fact required to be stated therein, or necessary to make the statements therein not misleading, or (iii) any violation or alleged violation by the Company of the Securities Act, the 1934 Act, any state securities law or any rule or regulation promulgated under the Securities Act, the 1934 Act or any state securities law in connection with the offering covered by such registration statement; and the Company will reimburse each such Holder, partner, officer or director, underwriter or controlling person for any legal or other expenses as reasonably incurred by them in connection with investigating or defending any such loss, claim, damage, liability or action; provided however, that the indemnity agreement contained in this Section 3.8.1 shall not apply to amounts paid in settlement of any such loss, Page 10 claim, damage, liability or action if such settlement is effected without the consent of the Company (which consent shall not be unreasonably withheld), nor shall the Company be liable in any such case for any such loss, claim, damage, liability or action to the extent that it arises out of or is based upon a Violation which occurs in reliance upon and in conformity with written information furnished expressly for use in connection with such registration by such Holder, partner, officer, director, underwriter or controlling person of such Holder. 3.8.2 Holder Indemnification. To the extent permitted by law, each selling Holder will indemnify and hold harmless the Company, each of its directors, each of its officers, each person, if any, who controls the Company within the meaning of the Securities Act, any underwriter and any other Holder selling securities under such registration statement or any of such other Holder's partners, directors or officers or any person who controls such Holder, against any losses, claims, damages or liabilities joint or several) to which the Company or any such director, officer, controlling person, underwriter or other such Holder, or partner, director, officer or controlling person of such other Holder may become subject under the Securities Act, the 1934 Act or other federal or state law, insofar as such losses, claims, damages or liabilities (or actions in respect thereto) arise out of or are based upon any Violation, in each case to the extent (and only to the extent) that such Violation occurs in reliance upon and in conformity with written information furnished by such Holder under an instrument duly executed by such Holder and stated to be specifically for use in connection with such registration; and each such Holder will reimburse any legal or other expenses reasonably incurred by the Company or any such director, officer, controlling person, underwriter or other Holder, or partner, officer, director or controlling person of such other Holder in connection with investigating or defending any such loss, claim, damage, liability or action; provided, however, that the indemnity agreement contained in this Section 3.8.2 shall not apply to amounts paid in settlement of any such loss, claim, damage, liability or action if such settlement is effected without the consent of such Holder, which consent shall not be unreasonably withheld; provided further, that in no event shall any indemnity under this Section 3.8 exceed the net proceeds from the offering received by such Holder. 3.8.3 Procedure on Indemnification Claims. Promptly after receipt by an indemnified party under this Section 3.8 of notice of the commencement of any action (including any governmental action), such indemnified party will, if a claim in respect thereof is to be made against any indemnifying party under this Section 3.8, deliver to the indemnifying party a written notice of the commencement thereof and the indemnifying party shall have the right to participate in, and, to the extent the indemnifying party so desires, jointly with any other indemnifying party similarly noticed, to assume the defense thereof with counsel mutually satisfactory to the indemnifying and indemnified parties; provided, however, that an indemnified party shall have the right to retain its own counsel, with the fees and expenses to be paid by the indemnifying party, if representation of such indemnified party by the counsel retained by the indemnifying party would be inappropriate due to actual or potential differing interests between such indemnified party and any other Page 11 party represented by such counsel in such proceeding. The failure to deliver written notice to the indemnifying party within a reasonable time of the commencement of any such action, if materially prejudicial to its ability to defend such action, shall relieve such indemnifying party of any liability to the indemnified party under this Section 3.8, but the omission so to deliver written notice to the indemnifying party will not relieve it of any liability that it may have to any indemnified party otherwise than under this Section 3.8. 3.8.4 Alternate Remedies. If the indemnification provided for in this Section 3.8 is held by a court of competent jurisdiction to be unavailable to an indemnified party with respect to any losses, claims, damages or liabilities referred to herein, the indemnifying party, in lieu of indemnifying such indemnified party hereunder, shall to the extent permitted by applicable law contribute to the amount paid or payable by such indemnified party as a result of such loss, claim, damage or liability in such proportion as is appropriate to reflect the relative fault of the indemnifying party on the one hand and of the indemnified party on the other in connection with the Violation(s) that resulted in such loss, claim, damage or liability, as well as any other relevant equitable considerations. The relative fault of the indemnifying party and of the indemnified party shall be determined by a court of law by reference to, among other things, whether the untrue or alleged untrue statement of a material fact or the omission to state a material fact relates to information supplied by the indemnifying party or by the indemnified party and the parties' relative intent, knowledge, access to information and opportunity to correct or prevent such statement or omission. 3.8.5 Indemnification Obligations Survive. The obligations of the Company and Holders under this Section 3.8 shall survive the completion of any offering of Registrable Securities in a registration statement, and otherwise. 3.8.6 Limits on Settlement Obligation. No Holder shall be obligated to consent to any settlement of any claim entered into by the Company in satisfaction of its indemnification obligations hereunder unless the settlement includes a full and complete release of the Holder. 3.9 Assignment of Registration Rights. The rights to cause the Company to register Registrable Securities pursuant to this Section 3 may be assigned by a Holder to a transferee or assignee of Registrable Securities who (i) is a subsidiary, affiliate, parent, general partner, limited partner or retired partner of a Holder or affiliated partnership managed by the Holder, (ii) is a Holder's family member or trust for the benefit of an individual Holder, (iii) is a Holder prior to the transfer, or (iv) acquires either (x) at least five hundred thousand (500,000) shares of Series A Preferred Stock or Series B Preferred Stock (or Common Stock issued upon conversion thereof) subject to Registration Rights pursuant to this Section 3; or (y) at least one hundred twenty-five thousand (125,000) shares of Series C Preferred Stock, Series D Preferred Stock or Series D-X Preferred Stock (or Common Stock issued upon conversion thereof) subject to Registration Rights pursuant to this Section 3 (as adjusted for stock splits and combinations); provided, however, (a) the transferor shall, within ten (10) days after such transfer, furnish to the Company written notice of Page 12 the name and address of such transferee or assignee and the securities with respect to which such registration rights are being assigned and (b) such transferee shall agree in writing to be subject to all restrictions set forth in this Agreement. 3.10 Amendment of Registration Rights. Any provision of this Section 3 may be amended and the observance thereof may be waived (either generally or in a particular instance and either retroactively or prospectively), only with the written consent of the Company and the Holders of not less than sixty percent (60%) of the Registrable Securities then outstanding. Any amendment or waiver effected in accordance with this Section 3.10 shall be binding upon each Holder and the Company. By acceptance of any benefits under this Section 3, Holders hereby agree to be bound by the provisions hereunder. 3.11 Limitation on Subsequent Registration Rights. The Company shall grant no additional parties registration rights on parity with or superior to those granted the Holders hereunder, without the written consent of the Company and the Holders of not less than sixty percent (60%) of the Registrable Securities then outstanding. 3.12 "Market Stand-Off" Agreement. If requested by the Company or a representative of the underwriters of Common Stock (or other securities) of the Company acting reasonably, each Holder shall not sell or otherwise transfer or dispose of any Common Stock (or other securities) of the Company held by such Holder (other than those included in the registration) for a period specified by the representative of the underwriters, not to exceed one hundred eighty (180) days following the effective date of a registration statement of the Company filed under the Securities Act (the "Effective Date"). The foregoing commitment has two limitations: (i) no Holder shall be required to refrain from selling under this paragraph, unless all officers and key employees of the Company enter into similar agreements; and (ii) no Holder (including for this purpose affiliates of any Holder) shall be required to refrain from selling under this paragraph unless all other holders of the Company's Common Stock owning an equal or a larger percentage of the Company's Common Stock (on an as-converted basis) as the Holder and its affiliates are also required by a representative of the underwriter to enter into market standoff agreements on the same terms. The obligations described in this Section 3.12 shall not apply to a registration relating solely to employee benefit plans on Form S-1 or Form S-8 or similar forms that may be promulgated in the future, or a registration relating solely to a Commission Rule 145 transaction on Form S-4 or similar forms that may be promulgated in the future. The Company may impose stop- transfer instructions with respect to the shares of Common Stock (or other securities) subject to the foregoing restriction until the end of said one hundred eighty (180) day period. 3.13 Rule 144 Reporting. With a view to making available to the Holders the benefits of certain rules and regulations of the SEC which may permit the sale of the Registrable Securities to the public without registration, the Company agrees to use its good faith efforts to: Page 13 3.13.1 Do things that Make Rule 144 Available. Make and keep public information available, as those terms are understood and defined in Rule 144 or any similar or analogous rule promulgated under the Securities Act, at all times after the effective date of the first registration filed by the Company for an offering of its securities to the general public; 3.13.2 File '33 and '34 Act Reports Timely. File with the SEC, in a timely manner, all reports and other documents required of the Company under the Securities Act and the 1934 Act; 3.13.3 Data to Holders. So long as a Holder owns any Registrable Securities, furnish to such Holder forthwith upon written request: a written statement by the Company as to its compliance with the reporting requirements of said Rule 144 of the Securities Act, and of the 1934 Act (at any time after it has become subject to such reporting requirements); a copy of the most recent annual or quarterly report of the Company; and such other reports and documents as a Holder may reasonably request in availing itself of any rule or regulation of the SEC allowing it to sell any such securities without registration. 4. Covenants of the Company. 4.1 Basic Financial Information and Reporting. The Company will maintain true books and records of account in which full and correct entries will be made of all its business transactions pursuant to a system of accounting established and administered in accordance with generally accepted accounting principles consistently applied, and will set aside on its books all such proper accruals and reserves as shall be required under generally accepted accounting principles consistently applied. In addition, so long as a Series B Holder, Series C Holder, Series D Holder or Series D-X Holders (or Series B Holders, Series C Holders, Series D Holders or Series D-X Holders under common management) shall own on an as-converted basis not less than three percent (3%) of the outstanding shares of the Company's Common Stock (including such Common Stock issuable upon conversion of the Company's outstanding shares of preferred stock), the Company will furnish such Series B Holder, Series C Holder, Series D Holder or Series D- X Holder (or Series B Holders, Series C Holders, Series D Holders or Series D-X Holders under common management, by furnishing to the common manager): 4.1.1 Annual Data. As soon as practicable after the end of each fiscal year of the Company, and in any event within ninety (90) days thereafter, a consolidated balance sheet of the Company, as at the end of such fiscal year, and a consolidated statement of income and a consolidated statement of cash flows of the Company, for such year, all prepared in accordance with generally accepted accounting principles and setting forth in each case in comparative form the figures for the previous fiscal year, and for the operating plan for the year as to which the financial statements pertain, all in reasonable detail. Such financial statements shall be audited by an independent public accounting firm selected by the Company's Board of Directors. Page 14 4.1.2 Monthly Data. As soon as practicable after each monthly accounting period in each fiscal year of the Company, and in any event within twenty-five (25) days thereafter, a consolidated balance sheet of the Company as of the end of each such monthly period, a consolidated statement of income and a consolidated statement of cash flows of the Company for such period and for the current fiscal year to date, with comparisons to year earlier results and to results projected in that year's operating plan, prepared in accordance with generally accepted accounting principles, with the exception that no notes need be attached to such statements and year-end audit adjustments need not have been made. 4.1.3 Quarterly Data. As soon as practicable after each quarterly accounting period in each fiscal year of the Company, and in any event within thirty (30) days after such quarterly period, a report setting forth the Company's financial and operational highlights corresponding to each such period. 4.2 Qualified Small Business and SBA Covenants. 4.2.1 Use of Proceeds. The proceeds from the issuance and sale of the Series C Preferred Stock, the Series D Preferred Stock and the Series D-X Preferred Stock (the "Proceeds") that have been provided by Series C Holders, Series D Holders or Series D-X Holders who are licensed Small Business Investment Companies ("SBIC Investors") shall be used by the Company for its growth, modernization, or expansion. The Company shall provide each SBIC Investor and the Small Business Administration (the "SBA") reasonable access to the Company's books and records for the purpose of confirming use of Proceeds from SBIC Investors. 4.2.2 Business Activity. For a period of one year following the initial Closing under the Series C Purchase Agreement, the Company shall not change its business activity if the change would render the Company ineligible as provided in 13 CFR Section 107.720. 4.2.3 Compliance. So long as any SBIC Investor holds any securities of the Company, the Company will at all times comply with the non- discrimination requirements of 13 CFR Parts 112, 113, and 117. 4.2.4 Information for SBIC Investor. Within 45 days after the end of each fiscal year and at such other times as an SBIC Investor may reasonably request, the Company shall deliver to such SBIC Investor a written assessment, in form and substance satisfactory to such SBIC Investor, of the economic impact of such SBIC Investor's financing specifying the full time equivalent jobs created or retained in connection with such investment, and the impact of the financing on the Company's business in terms of profits and on taxes paid by the Company and its employees. Upon request, the Company agrees to promptly provide each SBIC Investor with sufficient information to permit such Investor to comply with its obligations under the Small Business Investment Act of 1958, as amended, and the Page 15 regulations promulgated thereunder and related thereto. Any submission of any financial information under this Section shall include a certificate of the Company's President, Chief Executive Officer, Treasurer, or Chief Financial Officer. 4.2.5 Compliance with 1202. The Company will use reasonable efforts to comply with the reporting and recordkeeping requirements of Section 1202(c) f of the Internal Revenue Code of 1986, as amended (the "Code") and any regulations promulgated thereunder, and unless by vote of the Board of Directors including the Series B Preferred Stock Director (as defined in the Third Restated Articles of Incorporation of the Company) will not repurchase any stock of the Company if such purchase would cause the Registrable Securities not to qualify as "Qualified Small Business Stock" as defined in Section 1202(c) of the Code. 4.2.6 Number of Holders of Voting Securities. So long as any SBIC Investor holds any shares of Series B Preferred Stock, Series C Preferred Stock, Series D Preferred Stock or Series D-X Preferred Stock or securities issued by the Company with respect thereto, the Company shall use good faith efforts to notify each SBIC Investor (i) at least 15 days prior to taking any action after which the number of record holders of the Company's voting securities would be increased from fewer than 50 to 50 or more, and (ii) of any other action or occurrence after which the number of record holders of the Company's voting securities was increased (or would increase) from fewer than 50 to 50 or more, as soon as practicable after the Company becomes aware that such other action or occurrence has occurred or is proposed to occur. 4.3 Stock Options. Unless otherwise determined by the Board of Directors for particular individuals, shares and options issued under the Company's Stock Incentive Plan shall vest 25 percent after 12 months from issuance, and monthly at the rate of 1/48th of the total grant per month thereafter over the remaining 36-month period. Such shares will have restrictions on transfer prior to vesting, and thereafter the Company shall have the right of first refusal to purchase, such right to terminate on the Initial Offering or on such other terms as the Board may determine. 4.4 Termination of Covenants. All covenants of the Company contained in Section 4 of this Agreement shall expire and terminate as to each Preferred Holder on the closing of a Designated IPO. 4.5 Reserve for Conversion Shares. The Company shall at all times reserve and keep available out of its authorized but unissued shares of common stock, for the purpose of effecting the conversion of the Shares and otherwise complying with the terms of this Agreement, such number of its duly authorized shares of common stock as shall be sufficient to effect the conversion of the Shares from time to time outstanding or otherwise to comply with the terms of this Agreement. If at any time the number of authorized but unissued shares of common stock shall not be sufficient to effect the conversion of the Shares or otherwise to comply with the terms of this Agreement, the Company will forthwith take such corporate action as may be necessary to increase its authorized Page 16 but unissued shares of common stock to such number of shares as shall be sufficient for such purposes. The Company will obtain any authorization, consent, approval or other action by or make any filing with any court or administrative body that may be required under applicable state securities laws in connection with the issuance of shares of common stock upon conversion of the Shares. 4.6 Corporate Existence. The Company shall maintain and cause each of its subsidiaries (if any) to maintain, their respective corporate existence, rights and franchises in full force and effect. 4.7 Inspection, Consultation and Advice. The Company shall permit and cause each of its subsidiaries (if any) to permit each Holder and such persons as it may designate, at such Holder's expense, to visit and inspect any of the properties of the Company and its subsidiaries, examine their books and take copies and extracts therefrom, discuss the affairs, finances and accounts of the Company and its subsidiaries with their officers, employees and public accountants (and the Company hereby authorizes said accountants to discuss with such Holder and such designees such affairs, finances and accounts), and consult with and advise the management of the Company and its subsidiaries as to their affairs, finances and accounts, all at reasonable times and upon reasonable notice. 4.8 Restrictive Agreements Prohibited. Neither the Company nor any of its subsidiaries shall become a party to any agreement which by its terms restricts the Company's performance of this Agreement, the Series C Purchase Agreement, the Series D Purchase Agreement or the Series D-X Purchase Agreement or any of the Related Agreements (as defined in the Series D-X Purchase Agreement) except for standard commercial lending agreements as approved by the Board of Directors including the Series B Preferred Stock Director and the Series C Preferred Stock Director (as those terms are defined in the Third Restated Articles). 4.9 Expenses of Directors; Outside Directors. The Company shall promptly reimburse in full in accordance with payment policies consistent with this Section 4.9 established by the Board of Directors, each director of the Company who is not an employee of the Company for all of his reasonable out-of-pocket expenses incurred in attending each meeting of the Board of Directors of the Company or any Committee thereof. The Company shall use its best efforts promptly to increase the size of the Board of Directors to include two outside directors (as such term is reasonably construed by the Board of Directors). Page 17 5. Confidentiality. 5.1 Commitments Regarding Use. Each Series B Holder, Series C Holder, Series D Holder and Series D-X Holder agrees not to use Confidential Information (as hereinafter defined) of the Company for its own use or for any purpose except to evaluate and enforce its equity investment in the Company. Except as permitted under subsection (B) below, each Series B Holder, Series C Holder, Series D Holder and Series D-X Holder agrees to use its respective best efforts not to disclose such Confidential Information to any third parties. Each Series B Holder, Series C Holder, Series D Holder and Series D-X Holder shall undertake to treat such Confidential Information in a manner consistent with the treatment of its own information of such proprietary nature and agrees that it shall protect the confidentiality of and use reasonable best efforts to prevent disclosure of the Confidential Information to prevent it from falling into the public domain or the possession of unauthorized persons. Each transferee of any Series B Holder, Series C Holder, Series D Holder or Series D-X Holder who receives Confidential Information shall agree to be bound by such provisions. For purposes of this Section 5, "Confidential Information" means any information, technical data, or know-how, including, but not limited to, the Company's research, products, software, services, development, inventions, processes, designs, drawings, engineering, marketing, or finances, disclosed by the Company either directly or indirectly in writing, orally or by drawings or inspection of parts or equipment. 5.2 Confidential Information Defined. Confidential Information does not include information, technical data or know-how which (i) is in the Series B Holder's, Series C Holder's, Series D Holder's or Series D-X Holder's possession at the time of disclosure as shown by such Series B Holder's, Series C Holder's, Series D Holder's or Series D-X Holder's files and records immediately prior to the time of disclosure; (ii) before or after it has been disclosed to the Series B Holder, Series C Holder, Series D Holder or Series D-X Holder, is part of the public knowledge or literature, not as a result of any action or inaction of the Series B Holder, Series C Holder, Series D Holder or Series D-X Holder; or (iii) is approved for release by written authorization of Company. The provisions of this Section 5 shall not apply (A) to the extent that a Series B Holder, Series C Holder, Series D Holder or Series D-X Holder is required to disclose Confidential Information pursuant to any law, statute, rule or regulation or any order of any court or jurisdiction process or pursuant to any direction, request or requirement (whether or not having the force of law but if not having the force of law being of a type with which institutional investors in the relevant jurisdiction are accustomed to comply) of any self- regulating organization or any governmental, fiscal, monetary or other authority; (B) to the disclosure of Confidential Information to a Series B Holder's, Series C Holder's, Series D Holder's or Series D-X Holder's employees, counsel, accountants or other professional advisors; (C) to the extent that a Series B Holder, Series C Holder, Series D Holder or Series D-X Holder needs to disclose Confidential Information for the protection of any such Series B Holder's, Series C Holder's, Series D Holder's or Series D-X Holder's rights or interest against the Company, whether under this Agreement or otherwise; or (D) to the disclosure of Confidential Information to a prospective transferee of securities which agrees to be bound by the provisions of this Section 5 in connection with the receipt of such Confidential Information. Page 18 6. Miscellaneous. 6.1 Governing Law. This Agreement shall be governed by and construed under the laws of the State of Oregon as applied to agreements among Oregon residents entered into and to be performed entirely within Oregon. 6.2 Survival. The representations, warranties, covenants, and agreements made herein shall survive any investigation made by any Holder and the closing of the transactions contemplated hereby. All statements as to factual matters contained in any certificate or other instrument delivered by or on behalf of the Company pursuant hereto in connection with the transactions contemplated hereby shall be deemed to be representations and warranties by the Company hereunder solely as of the date of such certificate or instrument. 6.3 Successors and Assigns. Except as otherwise expressly provided herein, the provisions hereof shall inure to the benefit of, and be binding upon, the successors, assigns, heirs, executors, and administrators of the parties hereto and shall inure to the benefit of and be enforceable by each person who shall be a Holder from time to time; provided, however, that prior to the receipt by the Company of adequate written notice of the transfer of any Registrable Securities specifying the full name and address of the transferee, the Company may deem and treat the person listed as the holder of such shares in its records as the absolute owner and holder of such shares for all purposes, including the payment of dividends or any redemption price. 6.4 Separability. In case any provision of the Agreement shall be invalid, illegal, or unenforceable, the validity, legality, and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. 6.5 Amendment and Waiver. Except as otherwise expressly provided, this Agreement may be amended or modified only upon the written consent of the Company and the Holders of more than sixty percent (60%) of the Registrable Securities. Notwithstanding the foregoing, Section 4.12 of this Agreement may not be amended without the written consent of Reuters and the Company. 6.6 Delays or Omissions. It is agreed that no delay or omission to exercise any right, power, or remedy accruing to any Holder, upon any breach, default or noncompliance of the Company under this Agreement shall impair any such right, power, or remedy, nor shall it be construed to be a waiver of any such breach, default or noncompliance, or any acquiescence therein, or of any similar breach, default or noncompliance thereafter occurring. It is further agreed that any waiver, permit, consent, or approval of any kind or character on any Holder's part of any breach, default or noncompliance under the Agreement or any waiver on such Holder's part of any provisions or conditions of this Agreement must be in writing and shall be effective only to the extent specifically set forth in such writing. All remedies, either under this Agreement, by law, or otherwise afforded to Holders, shall be cumulative and not alternative. Page 19 6.7 Entire Agreement. This Agreement constitutes the entire agreement between the parties relative to the specific subject matter hereof. Any previous agreement among the parties related to the specific subject matter hereof is superseded by this Agreement. 6.8 Notices. Notices will be given to the people designated, at the address designated at the conclusion of this Agreement. Each party can change its own Notice address and designated Notice recipient, by Notice. Notice shall be effective when actually received by the designated person, in any form that leaves a hard copy record of the notice in that person's possession. If sent certified or registered mail, postage prepaid, return receipt requested, notice is considered effective on the date the return receipt shows the notice was accepted, refused, or returned undeliverable. 6.9 Attorneys' Fees. In the event that any dispute among the parties to this Agreement should result in litigation, the prevailing party in such dispute shall be entitled to recover from the losing party all fees, costs and expenses of enforcing any right of such prevailing party under or with respect to this Agreement, including without limitation, such reasonable fees and expenses of attorneys and accountants, which shall include, without limitation, all fees, costs and expenses of appeals. 6.10 Titles and Subtitles. The titles of the sections and subsections of this Agreement are for convenience of reference only and are not to be considered in construing this Agreement. 6.11 Counterparts. This Agreement may be executed in any number of counterparts, each of which shall be an original, but all of which together shall constitute one instrument. In Witness Whereof, the parties hereto have executed this Second Amended and Restated Investor Rights Agreement as of the date set forth in the first paragraph hereof. DIGIMARC CORPORATION By: /s/ Bruce Davis -------------------------------------------- Bruce Davis, Chief Executive Officer Address: One Centerpointe Drive, Suite 500 Lake Oswego, Oregon 97035 [Signatures continue on the next page] Page 20
Holders of Series B Preferred Stock AVI Capital L.P. Associated Venture Investors III L.P. By: AVI Capital Management, L.P., its By: AVI Management Partners III, L.P. General Partner By: /s/ Brian J. Grossi By: /s/ Brian J. Grossi ---------------------------------- ---------------------------------- Title: Brian J. Grossi, General Partner Title: Brian J. Grossi, General Partner Address: One First Street Address: One First Street Los Altos, California 94022 Los Altos, California 94022 AVI Silicon Valley Partners L.P. AVI Partners Growth Fund II L.P. By: AVI Management Partners III, L.P. By: AVI Management Partners III, L.P., its General Partner By: /s/ Brian J. Grossi By: /s/ Brian J. Grossi ---------------------------------- ---------------------------------- Title: Brian J. Grossi, General Partner Title: Brian J. Grossi, General Partner Address: One First Street Address: One First Street Los Altos, California 94022 Los Altos, California 94022 Justsystem, Inc. Softbank Holdings Inc. By: /s/ Jun Iuchi By: /s/ Yoshitaka Kitao ---------------------------------- ---------------------------------- Title: President & Coo Title: Yoshitaka Kitao, President & CEO Address: 2460 Sand Hill Road, Suite 201 Address: 333 W. San Carlos, Suite 1225 Menlo Park, CA 94025 San Jose, CA 95110 Adobe Ventures L.P. By: H & Q Adobe Ventures Management, L.P. H & Q Adobe Ventures Management Corp. By: /s/ Jackie Berterretche ---------------------------------- Title: Jackie Berterrtche, Attorney-In-Fact Address: One Bush Street, 15th Floor San Francisco, CA 94104
Page 21 Holders of Series C Preferred Stock
Reuters, Ltd. AVI, Capital L.P. By: /s/ R.O. Rowley By: AVI Capital Management, L.P., ----------------------------------- its General Partner Finance Director Address: 85 Fleet Street By: /s/ Brian J. Grossi London, EC4P4AJ ---------------------------------- Title: Brian J. Grossi, General Partner Address: One First Street Los Altos, California 94022 Associated Venture Investors III L.P. AVI Silicon Valley Partners L.P. By: AVI Management Partners III, L.P. By: AVI Management Partners III, L.P. By: /s/ Brian J. Grossi By: /s/ Brian J. Grossi ---------------------------------- ---------------------------------- Title: Brian J. Grossi, General Partner Title: Brian J. Grossi, General Partner Address: One First Street Address: One First Street Los Altos, California 94022 Los Altos, California 94022 AVI Partners Growth Fund II L.P. Justsystem, Inc. By: AVI Management Partners III, L.P., its General Partner By: /s/ Brian J. Grossi By: /s/ Jun Iuchi ---------------------------------- ---------------------------------- Title: Brian J. Grossi, General Partner Title: President & Coo Address: One First Street Address: 2460 Sand Hill Road, Suite 201 Los Altos, California 94022 Menlo Park, CA 94025 Adobe Ventures L.P. Macrovision Corporation By: H & Q Adobe Ventures Management, L.P. H & Q Adobe Ventures Management Corp. By:---------------------------------- /s/ Jackie Berterretche Title: By:---------------------------------- Title: Jackie Berterretche, Attorney-In-Fact Address: 1341 Orleans Drive Address: One Bush Street, 15th Floor Sunnyvale, CA 94089 San Francisco, CA 94104
Page 22 Beagle Ltd. By: /s/ Michael Hecht /s/ Steve Combs ----------------------------------- ---------------------------------- Title: Michael Hecht, President Steve Combs Address: c/o Hecht & Co., P.C. Address: 282 20th Avenue 111 W. 40th Street San Francisco, CA 94121 New York, NY 10018 /s/ Steven Joseph Phinney /s/ Warren Rosenfeld /s/ Dana Phinney - -------------------------------------- -------------------------------------- Warren Rosenfeld Steven Joseph and Dana Phinney, JTWROS Address: P.O. Box 10068 Address: 1001 Godetia Drive Portland, OR 97210-0067 Woodside, CA 94062 /s/ Thomas Garnier /s/ Dennis Johnson - -------------------------------------- -------------------------------------- Thomas Garnier Dennis Johnson Address: 9760 SW Freeman Drive Address: 3545 SW Santa Monica Wisonville, OR 97070 Portland, OR 97221 /s/ Philip Monego, Sr. /s/ Thomas Toy - -------------------------------------- -------------------------------------- Philip Monego, Sr. Thomas Toy Address: P.O. Box 620065 Address: 331 Parrott Drive Woodside, CA 94062 San Mateo, CA 94402
Page 23 Holders of Series A Preferred Stock
Deborah A. Coleman Stephen Joseph and Dana Phinney, JTWROS /s/ Stephen Anthony Phinney /s/ Deborah A. Coleman /s/ Dana Phinney - ---------------------------------------- -------------------------------------------- #2904 Fountain Plaza 1001 Godetia Drive 1414 SW 3rd Avenue Woodside, CA 94062 Portland, OR 97201 Dennis Johnson Herbert M. Gardner /s/ Dennis Johnson - ---------------------------------------- ------------------------------------------ SW Santa Monica Court 4 Darley Road Portland, OR 97201 Great Neck, NY 11021 Thomas Garnier Warren Rosenfeld /s/ Thomas Garnier /s/ Warren Rosenfeld - ---------------------------------------- ------------------------------------------ 9760 SW Freeman Drive P.O. Box 10067 Wilsonville, OR 97070 Portland, OR 97210-0067 Hugh Mackworth John C. Thuma /s/ Hugh Mackworth /s/ John C. Thuma - ---------------------------------------- ----------------------------------------- 248 NW Sundown Way 1017 E. Street, Suite D Portland, OR 97229 San Rafael, CA 94901 Philip Monego, Sr. Thomas J. Toy /s/ Philip Monego, Sr. /s/ Thomas J. Toy /s/ Constance K. Toy - ---------------------------------------- ----------------------------------------- P.O. Box 620065 331 Parrott Drive Woodside, CA 94062 San Mateo, CA 94402
Page 24 Holders of Series D Preferred Stock
Reuters, Holdings Switzerland, S.A. Hewlett-Packard Company By: /s/ Illegible By: ----------------------------------------------- ------------------------------------ Title: Address: 3000 Hanover Street Palo Alto, CA 94034 Address: 153 Route Thornon 1245 Collonge Bellgrive, Switzerland Adobe Ventures L.P. Macrovision Corporation By: H & Q Adobe Ventures Management, L.P. H & Q Adobe Ventures Management Corp. By: /s/ Jackie Berterretche, Attorney-In-Fact By: --------------------------------------------- ----------------------------------------- Title: Title: Address: One Bush Street, 15th Floor Address: 1341 Orleans Drive San Francisco, CA 94104 Sunnyvale, CA 94089 Beagle Ltd. By: /s/ Michael Hecht, President /s/ Warren Rosenfeld ---------------------------------- --------------------------------- Title: Warren Rosenfeld Address: c/o Hecht & Co., P.C. Address: P.O. Box 10068 111 W. 40th Street Portland, OR 97210-0067 New York, NY 10018 /s/ Thomas Garnier /s/ Philip Monego - --------------------------------------------- ------------------------------------ Thomas Garnier Philip Monego, Sr. Address: 9760 SW Freeman Drive Address: P.O. Box 620065 Wisonville, OR 97070 Woodside, CA 94062 AVI Management Partners Growth Fund III, L.P. By: AVI Capital Management, L.P., its General Partner By: /s/ Brian Grossi /s/ Dennis Johnson ----------------------------------------- ------------------------------------ Title: Brian Grossi, General Partner Dennis Johnson Address: One First Street Address: 3545 SW Santa Monica Court Los Altos, California 94022 Portland, OR 97221
Page 25 Holders of Series D-X Preferred Stock
/s/ Philip Monego, Sr. BANCBOSTON ROBERTSON STEPHENS - ------------------------------------- By: Bayview Philip Monego, Sr. Address: PO Box 620065 By: Dana Welch Woodside, CA 94062 --------------------------- Title: Authorized Signatory Address: 555 California Street San Francisco, CA ATTN: Jennifer Sherrill
BUILDING C PARTNERS By: /s/ Gavin Grover ------------------- Title: Partner -------------------------- Address: 425 Market St ------------------------- San Francisco, CA 94105 Page 26 EX-4.3 6 SPECIMEN STOCK CERTIFICATE Exhibit 4.3 - ------------------ ------------------ Number Shares DMR - ------------------ ------------------ COMMON STOCK COMMON STOCK [LOGO OF DIGIMARC] INCORPORATED UNDER THE LAWS OF THE STATE OF DELAWARE THIS CERTIFICATE IS TRANSFERABLE IN CUSIP 253807 10 1 SEE REVERSE FOR CERTAIN DEFIN? BOSTON, MA OR NEW YORK, NY STATEMENT AS TO THE RIGHTS, PR? PRIVILEGES AND LIMITATIONS OF S?
THIS CERTIFIES THAT is the owner of FULLY PAID AND NONASSESSABLE SHARES OF COMMON STOCK, OF THE PAR VALUE OF $0.001 EACH, OF DIGIMARC CORPORATION transferable on the books of the Corporation by the holder hereof in person, or by a duly authorized attorney, upon surrender of this Certificate properly endorsed. This Certificate is not valid unless countersigned by the Transfer Agent and registered by the Registrar. WITNESS the facsimile seal of the Corporation and the facsimile signatures of its duly authorized officers. Dated: [SEAL OF DIGIMARC] /s/ E. K. Ranjit /s/ Bruce Davis CHIEF FINANCIAL OFFICER AND PRESIDENT AND CHIEF EXECUTIVE SECRETARY OFFICER TRANSFER AGENT AND REGISTRAR BY /s/ L. E. Seeley-Roger AUTHORIZED SIGNATURE DIGIMARC CORPORATION A statement of the powers, designations, preferences and relative, participating, optional or other special rights of each class of stock or series thereof and the qualifications, limitations or restrictions of such preferences and/or rights as established, from time to time, by the Certificate of Incorporation of the Corporation and by any certificate of designation, and the number of shares constituting each class and series and the designations thereof, may be obtained by the holder hereof upon request and without charge from the Corporation at its principal office. The following abbreviations when used in the inscription on the face of this certificate, shall be construed as though they were written out in full according to applicable laws or regulations. TEN COM - as tenants in common UNIF GIFT MIN ACT - ............... Custodian .............. TEN ENT - as tenants by the entireties (Cust) (Minor) JT TEN - as joint tenants with right of under Uniform Gifts to Minors survivorship and not as tenants Act..................................... in common (State) UNIF TRF MIN ACT - ..........Custodian (until age .........) (Cust) .................under Uniform Transfers (Minors) to Minors Act .......................... (State) Additional abbreviations may also be used though not in the above list. FOR VALUE RECEIVED, ___________________________________________________________________ hereby sell, assign and transfer unto PLEASE INSERT SOCIAL SECURITY OR OTHER IDENTIFYING NUMBER OF ASSIGNEE _________________________________________ _________________________________________ ____________________________________________________________________________________________________________________________________ (PLEASE PRINT OR TYPEWRITE NAME AND ADDRESS, INCLUDING ZIP CODE, OF ASSIGNEE) ____________________________________________________________________________________________________________________________________ ____________________________________________________________________________________________________________________________________ _____________________________________________________________________________________________________________________________ Shares of the common stock represented by the within Certificate, and do hereby irrevocably constitute and appoint ___________________________________________________________________________________________________________________________ Attorney to transfer the said stock on the books of the within named Corporation with full power of substitution in the premises. Dated _____________________________________ X _____________________________________________________________ X _____________________________________________________________ THE SIGNATURE(S) TO THIS ASSIGNMENT MUST CORRESPOND WITH THE NOTICE: NAME(S) AS WRITTEN UPON THE FACE OF THE CERTIFICATE IN EVERY PARTICULAR, WITHOUT ALTERATION OR ENLARGEMENT OF ANY CHANGE WHATEVER. Signature(s) Guaranteed By_____________________________________________________________________________ THE SIGNATURE(S) MUST BE GUARANTEED BY AN ELIGIBLE GUARANTOR INSTITUTION (BANKS, STOCKBROKERS, SAVINGS AND LOAN ASSOCIATIONS AND CREDIT UNIONS WITH MEMBERSHIP IN AN APPROVED SIGNATURE GUARANTEE MEDALLION PROGRAM): PURSUANT TO S.E.C. RULE 17Ad-15.
EX-10.1 7 FORM OF INDEMNIFICATION AGREEMENT Exhibit 10.1 DIGIMARC CORPORATION INDEMNIFICATION AGREEMENT THIS AGREEMENT is entered into, effective as of [the day before the closing of the Company's initial public offering], 1999 by and between Digimarc Corporation, a Delaware corporation (the "Company"), and ___________________ ("Indemnitee"). WHEREAS, it is essential to the Company to retain and attract as directors and officers the most capable persons available; WHEREAS, Indemnitee is a director and/or officer of the Company; and WHEREAS, in recognition of Indemnitee's need for substantial protection against personal liability in order to enhance Indemnitee's continued and effective service to the Company, and in order to induce Indemnitee to provide services to the Company as a director and/or officer, the Company wishes to provide in this Agreement for the indemnification of and the advancing of expenses to Indemnitee to the fullest extent (whether partial or complete) permitted by Delaware law and as set forth in this Agreement, and, to the extent insurance is maintained, for the coverage of Indemnitee under the Company's directors' and officers' liability insurance policies. NOW, THEREFORE, in consideration of the above premises and of Indemnitee's continuing to serve the Company directly or, at its request, with another enterprise, and intending to be legally bound hereby, the parties agree as follows: 1. Certain Definitions. ------------------- (a) Board: the Board of Directors of the Company. (b) Change In Control: shall be deemed to have occurred if (i) any "person" (as such term is used in Sections 13(d) and 14(d) of the Securities Exchange Act of 1934, as amended (the "Act")), other than a trustee or other fiduciary holding securities under an employee benefit plan of the Company or a corporation owned directly or indirectly by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company (collectively "excluded persons"), is or becomes the "Beneficial Owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Company representing 30% or more of the total voting power represented by the Company's then outstanding Voting Securities, or (ii) during any period of two consecutive years, individuals who at the beginning of such period constitute the Board and any new director whose election by the Board or nomination for election by the Company's stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute a majority of the Board, or (iii) the stockholders of the Company approve a merger or consolidation of the Company with any other corporation, other than a merger or consolidation that would result in the Voting Securities of the Company outstanding immediately prior thereto continuing to 1 represent (either by remaining outstanding or by being converted into Voting Securities of the surviving entity) at least 50% of the total voting power represented by the Voting Securities of the Company or such surviving entity outstanding immediately after such merger or consolidation, or (iv) the stockholders of the Company approve a plan of complete liquidation of the Company or an agreement for the sale or disposition by the Company (in one transaction or a series of transactions) of all or substantially all of the Company's assets. (c) Expenses: any expense, liability, or loss, including attorneys' fees, judgments, fines, ERISA excise taxes and penalties, amounts paid or to be paid in settlement, any interest, assessments, or other charges imposed thereon, and any federal, state, local, or foreign taxes imposes as a result of the actual or deemed receipt of any payments under this Agreement, paid or incurred in connection with investigating, defending, being a witness in, or participating in (including on appeal), or preparing for any of the foregoing in, any Proceeding relating to any Indemnifiable Event. (d) Indemnifiable Event: any event or occurrence that takes place either prior to or after the effective date of this Agreement, related to the fact that Indemnitee is or was a director or an officer of the Company, or while a director or officer is or was serving at the request of the Company as a director, officer, employee, trustee, agent, or fiduciary of another foreign or domestic corporation, partnership, joint venture, employee benefit plan, trust, or other enterprise, or was a director, officer, employee, or agent of a foreign or domestic corporation that was a predecessor corporation of the Company or of another enterprise at the request of such predecessor corporation, or related to anything done or not done by Indemnitee in any such capacity. (e) Independent Counsel: the person or body appointed in connection with Section 3. (f) Potential Change In Control: shall be deemed to have occurred if (i) the Company enters into an agreement or arrangement, the consummation of which would result in the occurrence of a Change in Control, (ii) any person (including the Company) publicly announces an intention to take or to consider taking actions that, if consummated, would constitute a Change in Control, (iii) any person (other than an Excluded Person) who is or becomes the Beneficial Owner, directly or indirectly, of securities of the Company representing 10% or more of the combined voting power of the Company's then outstanding Voting Securities, increases his beneficial ownership of such securities by 5% or more over the percentage so owned by such person on the date hereof, or (iv) the Board adopts a resolution to the effect that, for purposes of this Agreement, a Potential Change in Control has occurred. (g) Proceeding: (i) any threatened, pending, or complete action, suit, or proceeding, whether civil, criminal, administrative, investigative, or other, or (ii) any inquiry, hearing, or investigation, whether conducted by the Company or any other party, that Indemnitee in good faith believes might lead to the institution of any such action, or proceeding. 2 (h) Reviewing Party: the person or body appointed in accordance with Section 3. (i) Voting Securities: any securities of the Company that vote generally in the election of directors. 2. Agreement To Indemnify. --------------------- (a) General Agreement. In the event Indemnitee was, is, or become a ----------------- party to or witness or other participant in, or is threatened to be made a party to or witness or other participant in, a Proceeding by reason of (or arising in part out of) an Indemnifiable Event, the Company shall indemnify Indemnitee from and against any and all Expenses to the fullest extent permitted by law, as the same exists or may hereafter be amended or interpreted (but in the case of any such amendment or interpretation, only to the extent that such amendment or interpretation permits the Company to provide broader indemnification rights than were permitted prior thereto). The parties hereto intend that this Agreement shall provide for indemnification in excess of that expressly permitted by statute, including, without limitation, any indemnification provided by the Company's Certificate of Incorporation, its bylaws, vote of its stockholders or disinterested directors, or applicable law. (b) Initiation Of Proceeding. Notwithstanding anything in this ------------------------ Agreement to the contrary, Indemnitee shall not be entitled to indemnification pursuant to this Agreement in connection with any Proceeding initiated by Indemnitee against the Company or any director or officer of the Company unless (i) the Company has joined in or the Board has consented to the initiation of such Proceeding, (ii) the Proceeding is one to enforce indemnification rights under Section 5, or (iii) the Proceeding is instituted after a Change in Control and Independent Counsel has approved its initiation. (c) Expense Advances. If so requested by Indemnitee, the Company ---------------- shall advance (within ten business days of such request) any and all Expenses to Indemnitee (an "Expense Advance"); provided that such request shall be accompanied by reasonable evidence of the expenses incurred by Indemnitee and that, if and to the extent that the Reviewing Party determines that Indemnitee would not be permitted to be so indemnified under applicable law, the Company shall be entitled to be reimbursed by Indemnitee (who hereby agrees to reimburse the Company) for all such amounts theretofore paid. If Indemnitee has commenced legal proceedings in a court of competent jurisdiction to secure a determination that Indemnitee should be indemnified under applicable law, as provided in Section 4, any determination made by the Reviewing Party that Indemnitee would not be permitted to be indemnified under applicable law shall not be binding and Indemnitee shall not be required to reimburse the Company for any Expense Advance until a final judicial determination is made with respect thereto (as to which all rights of appeal therefrom have been exhausted or have lapsed). (d) Mandatory Indemnification. Notwithstanding any other provision of ------------------------- this Agreement (other than Section 2(f) below), to the extent that Indemnitee has been successful on the merits in defense of any Proceeding relating in whole or in part to an 3 Indemnifiable Event or in defense of any issue or matter therein, Indemnitee shall be indemnified against all Expenses incurred in connection therewith. (e) Partial Indemnification. If Indemnitee is entitled under any ----------------------- provision of this Agreement to indemnification by the Company for some or a portion of Expenses, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled. (f) Prohibited Indemnification. No indemnification pursuant to this -------------------------- Agreement shall be paid by the Company on account of any Proceeding in which judgment is rendered against Indemnitee for an accounting of profits made from the purchase or sale by Indemnitee of securities of the Company pursuant to the provisions of Section 16(b) of the Act or similar provisions of any federal, state or local laws. 3. Reviewing Party. --------------- Prior to any Change in Control, the Reviewing Party shall be any appropriate person or body consisting of a member or members of the Board or any other person or body appointed by the Board who is not a party to the particular Proceeding with respect to which Indemnitee is seeking indemnification; after a Change in Control, the Reviewing Party shall be the Independent Counsel referred to below. With respect to all matters arising after a Change in Control (other than a Change in Control approved by a majority of the directors on the Board who were directors immediately prior to such Change in Control) concerning the rights of Indemnitee to indemnity payments and Expense Advances under this Agreement or any other agreement or under applicable law or the Company's Certificate of Incorporation or bylaws now or hereafter in effect relating to indemnification for Indemnifiable Events, the Company shall seek legal advice only from Independent Counsel selected by Indemnitee and approved by the Company and who has not otherwise performed services for the Company or the Indemnitee (other than in connection with indemnification matters) within the last five years. The Independent Counsel shall not include any person who, under the applicable standards of professional conduct then prevailing would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitee's rights under this Agreement. Such counsel, among other things, shall render its written opinion to the Company and Indemnitee as to whether and to what extent the Indemnitee should be permitted to be indemnified under applicable law. The Company agrees to pay the reasonable fees of the Independent Counsel and to indemnify fully such counsel against any and all expenses (including attorney's fees), claims, liabilities, loss, and damages arising out of or relating to this Agreement or the engagement of Independent Counsel pursuant hereto. 4. Indemnification Process And Appeal. ---------------------------------- (a) Suit To Enforce Rights. Regardless of any action by the Reviewing ---------------------- Party, if Indemnitee has not received full indemnification within 60 days after making a request in accordance with Section 2(c), Indemnitee shall have the right to enforce its indemnification rights under this Agreement by commencing litigation, in any 4 appropriate court having subject matter jurisdiction thereof and in which venue is proper, seeking an initial determination by the court or challenging any determination by the Reviewing Party or any aspect thereof, provided, however, that such 60-day period shall be extended for reasonable time, not to exceed another 60 days, if the reviewing party in good faith requires additional time for the obtaining or evaluating of documentation and information relating thereto. The Company hereby consents to service of process and to appear in any such proceeding. Any determination by the Reviewing Party not challenged by the Indemnitee shall be binding on the Company and Indemnitee. The remedy provided for in this Section 4 shall be in addition to any other remedies available to Indemnitee in law or equity. (b) Defense To Indemnification, Burden Of Proof, And Presumptions. It ------------------------------------------------------------- shall be a defense to any action brought by Indemnitee against the Company to enforce this Agreement (other than an action brought to enforce a claim for Expenses incurred in defending a Proceeding in advance of its final disposition where the required undertaking has been tendered to the Company) that is not permissible under applicable law for the Company to indemnify Indemnitee for the amount claimed. In connection with any such action or any determination by the Reviewing Party or otherwise as to whether Indemnitee is entitled to be indemnified hereunder, the burden of proving such a defense or determination shall be on the Company. Neither the failure of the Reviewing Party or the Company (including its Board, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such action by Indemnitee that indemnification of the claimant is proper under the circumstances because Indemnitee has met the standard of conduct set forth in applicable law, nor an actual determination by the Reviewing Party or Company (including its Board, independent legal counsel, or its stockholders) that the Indemnitee had not met such applicable standard of conduct, shall be a defense to the action or create a presumption that the Indemnitee has not met the applicable standard of conduct. For purposes of this Agreement, the termination of any claim, action, suit, or proceeding, by judgment, order, settlement (whether with or without court approval), conviction, or upon a plea of nolo contendere, or its equivalent shall not create a presumption that Indemnitee did not meet any particular standard of conduct or have any particular belief or that a court has determined that indemnification is not permitted by applicable law. 5. Indemnification For Expenses Incurred In Enforcing Rights. --------------------------------------------------------- The Company shall indemnify Indemnitee against any and all Expenses and, if requested by Indemnitee, shall (within ten business days of such request), advance such Expenses to Indemnitee, that are incurred by Indemnitee in connection with any claim asserted against or covered action brought by Indemnitee for (i) indemnification of Expenses or Expense Advances by the Company under this Agreement or any other agreement or under applicable law or the Company's Certificate of Incorporation or bylaws now or hereafter in effect relating to indemnification for Indemnifiable Events, and or (ii) recovery under directors' and officers' liability insurance policies maintained by the Company, regardless of whether Indemnitee ultimately is determined to be entitled to such indemnification, Expense Advances, or insurance recovery, as the case may be. 5 6. Notification And Defense Of Proceeding. -------------------------------------- (a) Notice. Promptly after receipt by Indemnitee of notice of the ------ commencement of any Proceeding, Indemnitee shall, if a claim in respect thereof is to be made against the Company under this Agreement, notify the Company of the commencement thereof, but the omission so to notify the Company will not relieve the Company from any liability that it may have to Indemnitee, except as provided in Section 6(c). (b) Defense. With respect to any Proceeding as to which Indemnitee ------- notifies the Company of the commencement thereof, the Company shall be entitled to participate in the Proceeding at its own expense and except as otherwise provided below, to the extent the Company so wishes, it may assume the defense thereof with counsel reasonably satisfactory to Indemnitee. After notice from the Company to Indemnitee of its election to assume the defense of any Proceeding, the Company shall not be liable to Indemnitee under this Agreement or otherwise for any Expenses subsequently incurred by Indemnitee in connection with the defense of such Proceeding other than reasonable costs of investigation or as otherwise provided below. Indemnitee shall have the right to employ his or her own legal counsel in such Proceeding, but all Expenses related thereto incurred after notice from the Company of its assumption of the defense shall be at Indemnitee's expense unless: (i) the employment of legal counsel by Indemnitee has been authorized by the Company, (ii) Indemnitee has reasonably determined that there may be a conflict of interest between Indemnitee and the Company in the defense of the Proceeding, (iii) after a Change in Control, the employment of counsel by Indemnitee has been approved by the Independent Counsel, or (iv) the Company shall not in fact have employed counsel to assume the defense of such Proceeding, in each of which case all Expenses of the Proceeding shall be borne by the Company. The Company shall not be entitled to assume the defense of any Proceeding brought by or on behalf of the Company or as to which Indemnitee shall have made the determination provided for in (ii) above. (c) Settlement Of Claims. The Company shall not be liable to -------------------- indemnify Indemnitee under this Agreement or otherwise for any amounts paid in settlement of any Proceeding effected without the Company's written consent, provided, however, that if a Change in Control has occurred, the Company shall be liable for indemnification of Indemnitee for amounts paid in settlement if the Independent Counsel has approved the settlement. The Company shall not settle any Proceeding in any manner that would impose any penalty or limitation on Indemnitee without Indemnitee's written consent. The Company shall not be liable to indemnify the Indemnitee under this Agreement with regard to any judicial award if the Company was not given a reasonable and timely opportunity, at its expense, to participate in the defense of such action; the Company's liability hereunder shall not be excused if participation in the Proceeding by the Company was barred by this Agreement. 7. Non-Exclusivity. --------------- The rights of Indemnitee hereunder shall be in addition to any other rights Indemnitee may have under the Company's Certificate of Incorporation, bylaws, 6 applicable law, or otherwise. To the extent that a change in applicable law (whether by statute or judicial decision) permits greater indemnification by agreement than would be afforded currently under the Company's Certificate of Incorporation, bylaws, applicable law, or this Agreement, it is the intent of the parties that Indemnitee enjoy by this Agreement the greater benefits so afforded by such change. 8. Liability Insurance. ------------------- To the extent the Company maintains an insurance policy or policies providing directors' and officers' liability insurance, Indemnitee shall be covered by such policy or policies, in accordance with its or their terms, to the maximum extent of the coverage available for any Company director or officer. 9. Amendment Of This Agreement. --------------------------- No supplement, modification, or amendment of this Agreement shall be binding unless executed in writing by both of the parties hereto. No waiver of any of the provisions of this Agreement shall operate as a waiver of any other provisions hereof (whether or not similar), nor shall such waiver constitute a continuing waiver. Except as specifically provided herein, no failure to exercise or any delay in exercising any right or remedy hereunder shall constitute a waiver thereof. 10. Subrogation. ----------- In the event of payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and shall do everything that may be necessary to secure such rights, including the execution of such documents necessary to enable the Company effectively to bring suit to enforce such rights. 11. No Duplication Of Payments. -------------------------- The Company shall not be liable under this Agreement to make any payment in connection with any claim made against Indemnitee to the extent Indemnitee has otherwise received payment (under any insurance policy, bylaw, or otherwise) of the amounts otherwise indemnifiable hereunder. 12. Binding Effect. -------------- This Agreement shall be binding upon and inure to the benefit of and be enforceable by the parties hereto and their respective successors (including any direct or indirect successor by purchase, merger, consolidation, or otherwise to all or substantially all of the business and/or assets of the Company), assigns, spouses, heirs, and personal and legal representatives. The indemnification provided under this Agreement shall continue as to Indemnitee for any action taken or not taken while serving in an indemnified capacity pertaining to an Indemnifiable Event even though he or she may have ceased to serve in such capacity at the time of any Proceeding. 7 13. Severability. ------------ If any provision (or portion thereof) of this Agreement shall be held by a court of competent jurisdiction to be invalid, void, or otherwise unenforceable, the remaining provisions shall remain enforceable to the fullest extent permitted by law. Furthermore, to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of this Agreement containing any provision held to be invalid, void, or otherwise unenforceable, that is not itself invalid, void, or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, void, or unenforceable. 14. Governing Law. ------------- This Agreement shall be governed by and construed and enforced in accordance with the laws of the State of Delaware applicable to contracts made and to be performed in such State without giving effect to the principles of conflicts of laws. 15. Notices. ------- All notices, demands, and other communications required or permitted hereunder shall be made in writing and shall be deemed to have been duly given if delivered by hand, against receipt, or mailed, postage prepaid, certified or registered mail, return receipt requested, and addressed to the Company at: Digimarc Corporation One Centerpointe Drive Suite 500 Lake Oswego, OR 97035 Notice of change of address shall be effective only when given in accordance with this Section. All notices complying with this Section shall be deemed to have been received on the date of delivery or on the third business day after mailing. 16. Counterparts. ------------ This Agreement may be executed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument. 8 IN WITNESS WHEREOF, the parties hereto have duly executed and delivered this Indemnification Agreement as of the day specified above. DIGIMARC CORPORATION By:________________________________ Title:_____________________________ INDEMNITEE:________________________ Indemnitee 9 EX-10.3 8 REGISTRANT'S 1999 STOCK INCENTIVE PLAN Exhibit 10.3 DIGIMARC CORPORATION RESTATED 1999 STOCK INCENTIVE PLAN 1. Purposes of the Plan. The purposes of this Stock Incentive Plan are to -------------------- attract and retain the best available personnel, to provide additional incentive to Employees, Directors and Consultants and to promote the success of the Company's business. 2. Definitions. As used herein, the following definitions shall apply: ----------- (a) "Affiliate" and "Associate" shall have the respective meanings --------- --------- ascribed to such terms in Rule 12b-2 promulgated under the Exchange Act. (b) "Applicable Laws" means the legal requirements relating to the --------------- administration of stock incentive plans, if any, under applicable provisions of federal securities laws, state corporate and securities laws, the Code, the rules of any applicable stock exchange or national market system, and the rules of any foreign jurisdiction applicable to Awards granted to residents therein. (c) "Award" means the grant of an Option, SAR, Dividend Equivalent ----- Right, Restricted Stock, Performance Unit, Performance Share, or other right or benefit under the Plan. (d) "Award Agreement" means the written agreement evidencing the grant --------------- of an Award executed by the Company and the Grantee, including any amendments thereto. (e) "Board" means the Board of Directors of the Company. ----- (f) "Code" means the Internal Revenue Code of 1986, as amended. ---- (g) "Committee" means any committee appointed by the Board to --------- administer the Plan. (h) "Common Stock" means the common stock of the Company. ------------ (i) "Company" means Digimarc Corporation, a Delaware corporation. ------- (j) "Consultant" means any person (other than an Employee or a ---------- Director, solely with respect to rendering services in such person's capacity as a Director) who is engaged by the Company or any Related Entity to render consulting or advisory services to the Company or such Related Entity. (k) "Continuous Service" means that the provision of services to the ------------------ Company or a Related Entity in any capacity of Employee, Director or Consultant, is not interrupted or terminated. Continuous Service shall not be considered interrupted in the case of (i) any approved leave of absence, (ii) transfers among the Company, any Related Entity, or any successor, in any capacity 1 of Employee, Director or Consultant, or (iii) any change in status as long as the individual remains in the service of the Company or a Related Entity in any capacity of Employee, Director or Consultant (except as otherwise provided in the Award Agreement). An approved leave of absence shall include sick leave, military leave, or any other authorized personal leave. For purposes of Incentive Stock Options, no such leave may exceed ninety (90) days, unless reemployment upon expiration of such leave is guaranteed by statute or contract. (l) "Director" means a member of the Board or the board of directors of -------- any Related Entity. (m) "Disability" means that a Grantee would qualify for benefit ---------- payments under the long-term disability policy of the Company or the Related Entity to which the Grantee provides services regardless of whether the Grantee is covered by such policy (n) "Dividend Equivalent Right" means a right entitling the Grantee to ------------------------- compensation measured by dividends paid with respect to Common Stock. (o) "Employee" means any person, including an Officer or Director, who -------- is an employee of the Company or any Related Entity. The payment of a director's fee by the Company or a Related Entity shall not be sufficient to constitute "employment" by the Company. (p) "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended. (q) "Fair Market Value" means, as of any date, the value of Common ----------------- Stock determined as follows: (i) Where there exists a public market for the Common Stock, the Fair Market Value shall be (A) the closing price for a Share for the last market trading day prior to the time of the determination (or, if no closing price was reported on that date, on the last trading date on which a closing price was reported) on the stock exchange determined by the Plan Administrator to be the primary market for the Common Stock or the Nasdaq National Market, whichever is applicable or (B) if the Common Stock is not traded on any such exchange or national market system, the average of the closing bid and asked prices of a Share on the Nasdaq Small Cap Market for the day prior to the time of the determination (or, if no such prices were reported on that date, on the last date on which such prices were reported), in each case, as reported in The Wall Street Journal or such other source as the Plan Administrator deems reliable; or (ii) In the absence of an established market for the Common Stock of the type described in (i), above, the Fair Market Value thereof shall be determined by the Plan Administrator in good faith. (r) "Grantee" means an Employee, Director or Consultant who receives an ------- Award pursuant to an Award Agreement under the Plan. (s) "Immediate Family" means any child, stepchild, grandchild, parent, ---------------- stepparent, grandparent, spouse, former spouse, sibling, niece, nephew, mother- in-law, father-in-law, son-in law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive 2 relationships, any person sharing the Grantee's household (other than a tenant or employee), a trust in which these persons have more than fifty percent (50%) of the beneficial interest, a foundation in which these persons (or the Grantee) control the management of assets, and any other entity in which these persons (or the Grantee) own more than fifty percent (50%) of the voting interests. (t) "Incentive Stock Option" means an Option intended to qualify as an ---------------------- incentive stock option within the meaning of Section 422 of the Code. (u) "Non-Qualified Stock Option" means an Option not intended to qualify as an Incentive Stock Option. (v) "Officer" means a person who is an officer of the Company or a ------- Related Entity within the meaning of Section 16 of the Exchange Act and the rules and regulations promulgated thereunder. (w) "Option" means an option to purchase Shares pursuant to an Award ------ Agreement granted under the Plan. (x) "Parent" means a "parent corporation," whether now or hereafter ------ existing, as defined in Section 424(e) of the Code. (y) "Performance Shares" means Shares or an Award denominated in Shares ------------------ which may be earned in whole or in part upon attainment of performance criteria established by the Plan Administrator. (z) "Performance Units" means an Award which may be earned in whole or ----------------- in part upon attainment of performance criteria established by the Plan Administrator and which may be settled for cash, Shares or other securities or a combination of cash, Shares or other securities as established by the Plan Administrator. (aa) "Plan" means this 1999 Stock Incentive Plan. ---- (bb) "Plan Administrator" means either the Board or a committee of the ------------------ Board that is responsible for the administration of the Plan as is designated from time to time by resolution of the Board. (cc) "Registration Date" means the first to occur of (i) the closing of ----------------- the first sale to the general public of (A) the Common Stock or (B) the same class of securities of a successor corporation (or its Parent) issued pursuant to a Corporate Transaction in exchange for or in substitution of the Common Stock, pursuant to a registration statement filed with and declared effective by the Securities and Exchange Commission under the Securities Act of 1933, as amended; and (ii) in the event of a Corporate Transaction, the date of the consummation of the Corporate Transaction if the same class of securities of the successor corporation (or its Parent) issuable in such Corporate Transaction shall have been sold to the general public pursuant to a registration statement filed with and declared effective by the Securities and Exchange 3 Commission under the Securities Act of 1933, as amended on or prior to the date of consummation of such Corporate Transaction. (dd) "Related Entity" means any Parent, Subsidiary and any business, -------------- corporation, partnership, limited liability company or other entity in which the Company, a Parent or a Subsidiary holds a substantial ownership interest, directly or indirectly. (ee) "Restricted Stock" means Shares issued under the Plan to the ---------------- Grantee for such consideration, if any, and subject to such restrictions on transfer, rights of first refusal, repurchase provisions, forfeiture provisions, and other terms and conditions as established by the Plan Administrator. (ff) "Rule 16b-3" means Rule 16b-3 promulgated under the Exchange Act ---------- or any successor thereto. (gg) "SAR" means a stock appreciation right entitling the Grantee to --- Shares or cash compensation, as established by the Plan Administrator, measured by appreciation in the value of Common Stock. (hh) "Share" means a share of the Common Stock. ----- (ii) "Subsidiary" means a "subsidiary corporation," whether now or ---------- hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. ------------------------- (a) Subject to the provisions of Section 10, below, the maximum aggregate number of Shares which may be issued pursuant to all Awards is 1,500,000 Shares, increased by (i) any Shares available for future Awards under the Company's 1995 Stock Incentive Plan as of the Registration Date, (ii) any Shares that are represented by Awards under the Company's 1995 Stock Incentive Plan which are forfeited, expire or are cancelled without delivery of Shares or which result in the forfeiture of Shares back to the Company on or after the Registration Date, and (iii) an annual increase to be added on the first day of the Company's fiscal year beginning in 2001 equal to three percent (3%) of the fully-diluted number of Shares outstanding as of such date or a lesser number of Shares determined by the Plan Administrator. Notwithstanding the foregoing, subject to the provisions of Section 10, below, of the number of Shares specified above, the maximum aggregate number of Shares available for grant of Incentive Stock Options shall be 1,500,000 Shares, plus an annual increase to be added on the first day of the Company's fiscal year beginning in 2001 equal to the lesser of (x) 625,000 Shares, (y) three percent (3%) of the fully-diluted number of Shares outstanding as of such date, or (z) a lesser number of Shares determined by the Plan Administrator. For purposes of determining the outstanding number of Shares under this Section 3(a), all outstanding classes of securities of the Company, convertible notes, Awards and warrants that are convertible or exercisable presently or in the future by the holder into Shares (excluding options awarded under the Company's 1999 Employee Stock Purchase Plan), shall be deemed to have been fully converted or exercised (notwithstanding any limits on such conversions or exercises) into the number of Shares represented by such securities, 4 notes, Awards and warrants calculated using the treasury stock method. The Shares to be issued pursuant to Awards may be authorized, but unissued, or reacquired Common Stock. (b) Any Shares covered by an Award (or portion of an Award) which is forfeited or canceled, expires or is settled in cash, shall be deemed not to have been issued for purposes of determining the maximum aggregate number of Shares which may be issued under the Plan. If any unissued Shares are retained by the Company upon exercise of an Award in order to satisfy the exercise price for such Award or any withholding taxes due with respect to such Award, such retained Shares subject to such Award shall become available for future issuance under the Plan (unless the Plan has terminated). Shares that actually have been issued under the Plan pursuant to an Award shall not be returned to the Plan and shall not become available for future issuance under the Plan, except that if unvested Shares are forfeited, or repurchased by the Company at their original purchase price, such Shares shall become available for future grant under the Plan. 4. Administration of the Plan. -------------------------- (a) Plan Administrator. ------------------ (i) Administration with Respect to Directors and Officers. With ----------------------------------------------------- respect to grants of Awards to Directors or Employees who are also Officers or Directors of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws and to permit such grants and related transactions under the Plan to be exempt from Section 16(b) of the Exchange Act in accordance with Rule 16b-3. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. (ii) Administration With Respect to Consultants and Other ---------------------------------------------------- Employees. With respect to grants of Awards to Employees or Consultants who are - --------- neither Directors nor Officers of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws. Once appointed, such Committee shall continue to serve in its designated capacity until otherwise directed by the Board. Subject to Applicable Laws, the Board may authorize one or more Officers to grant such Awards and may limit such authority as the Board determines from time to time. (iii) Administration Errors. In the event an Award is granted in a --------------------- manner inconsistent with the provisions of this subsection (a), such Award shall be presumptively valid as of its grant date to the extent permitted by the Applicable Laws. (b) Powers of the Plan Administrator. Subject to Applicable Laws and -------------------------------- the provisions of the Plan (including any other powers given to the Plan Administrator hereunder), and except as otherwise provided by the Board, the Plan Administrator shall have the authority, in its discretion: 5 (i) to select the Employees, Directors and Consultants to whom Awards may be granted from time to time hereunder; (ii) to determine whether and to what extent Awards are granted hereunder; (iii) to determine the number of Shares or the amount of other consideration to be covered by each Award granted hereunder; (iv) to approve forms of Award Agreements for use under the Plan; (v) to determine the terms and conditions of any Award granted hereunder; (vi) to amend the terms of any outstanding Award granted under the Plan, provided that any amendment that would adversely affect the Grantee's rights under an outstanding Award shall not be made without the Grantee's written consent; (vii) to construe and interpret the terms of the Plan and Awards granted pursuant to the Plan, including without limitation, any notice of Award or Award Agreement, granted pursuant to the Plan; (viii) to establish additional terms, conditions, rules or procedures to accommodate the rules or laws of applicable foreign jurisdictions and to afford Grantees favorable treatment under such laws; provided, however, that no Award shall be granted under any such additional terms, conditions, rules or procedures with terms or conditions which are inconsistent with the provisions of the Plan; and (ix) to take such other action, not inconsistent with the terms of the Plan, as the Plan Administrator deems appropriate. 5. Eligibility. Awards other than Incentive Stock Options may be granted to ----------- Employees, Directors and Consultants. Incentive Stock Options may be granted only to Employees of the Company, a Parent or a Subsidiary. An Employee, Director or Consultant who has been granted an Award may, if otherwise eligible, be granted additional Awards. Awards may be granted to such Employees, Directors or Consultants who are residing in foreign jurisdictions as the Plan Administrator may determine from time to time. 6. Terms and Conditions of Awards. ------------------------------ (a) Type of Awards. The Plan Administrator is authorized under the -------------- Plan to award any type of arrangement to an Employee, Director or Consultant that is not inconsistent with the provisions of the Plan and that by its terms involves or might involve the issuance of (i) Shares, (ii) an Option, a SAR or similar right with a fixed or variable price related to the Fair Market Value of the Shares and with an exercise or conversion privilege related to the passage of time, the occurrence of one or more events, or the satisfaction of performance criteria or other 6 conditions, or (iii) any other security with the value derived from the value of the Shares. Such awards include, without limitation, Options, SARs, sales or bonuses of Restricted Stock, Dividend Equivalent Rights, Performance Units or Performance Shares, and an Award may consist of one such security or benefit, or two (2) or more of them in any combination or alternative. (b) Designation of Award. Each Award shall be designated in the -------------------- Award Agreement. In the case of an Option, the Option shall be designated as either an Incentive Stock Option or a Non-Qualified Stock Option. However, notwithstanding such designation, to the extent that the aggregate Fair Market Value of Shares subject to Options designated as Incentive Stock Options which become exercisable for the first time by a Grantee during any calendar year (under all plans of the Company or any Parent or Subsidiary) exceeds $100,000, such excess Options, to the extent of the Shares covered thereby in excess of the foregoing limitation, shall be treated as Non-Qualified Stock Options. For this purpose, Incentive Stock Options shall be taken into account in the order in which they were granted, and the Fair Market Value of the Shares shall be determined as of the date the Option with respect to such Shares is granted. (c) Conditions of Award. Subject to the terms of the Plan, the ------------------- Plan Administrator shall determine the provisions, terms, and conditions of each Award including, but not limited to, the Award vesting schedule, repurchase provisions, rights of first refusal, forfeiture provisions, form of payment (cash, Shares, or other consideration) upon settlement of the Award, payment contingencies, and satisfaction of any performance criteria. The performance criteria established by the Plan Administrator may be based on any one of, or combination of, increase in share price, earnings per share, total stockholder return, return on equity, return on assets, return on investment, net operating income, cash flow, revenue, economic value added, personal management objectives, or other measure of performance selected by the Plan Administrator. Partial achievement of the specified criteria may result in a payment or vesting corresponding to the degree of achievement as specified in the Award Agreement. (d) Acquisitions and Other Transactions. The Plan Administrator ----------------------------------- may issue Awards under the Plan in settlement, assumption or substitution for, outstanding awards or obligations to grant future awards in connection with the Company or a Related Entity acquiring another entity, an interest in another entity or an additional interest in a Related Entity whether by merger, stock purchase, asset purchase or other form of transaction. (e) Deferral of Award Payment. The Plan Administrator may ------------------------- establish one or more programs under the Plan to permit selected Grantees the opportunity to elect to defer receipt of consideration upon exercise of an Award, satisfaction of performance criteria, or other event that absent the election would entitle the Grantee to payment or receipt of Shares or other consideration under an Award. The Plan Administrator may establish the election procedures, the timing of such elections, the mechanisms for payments of, and accrual of interest or other earnings, if any, on amounts, Shares or other consideration so deferred, and such other terms, conditions, rules and procedures that the Plan Administrator deems advisable for the administration of any such deferral program. 7 (f) Award Exchange Programs. The Plan Administrator may establish ----------------------- one or more programs under the Plan to permit selected Grantees to exchange an Award under the Plan for one or more other types of Awards under the Plan on such terms and conditions as determined by the Plan Administrator from time to time. (g) Separate Programs. The Plan Administrator may establish one ----------------- or more separate programs under the Plan for the purpose of issuing particular forms of Awards to one or more classes of Grantees on such terms and conditions as determined by the Plan Administrator from time to time. (h) Early Exercise. The Award Agreement may, but need not, -------------- include a provision whereby the Grantee may elect at any time while an Employee, Director or Consultant to exercise any part or all of the Award prior to full vesting of the Award. Any unvested Shares received pursuant to such exercise may be subject to a repurchase right in favor of the Company or a Related Entity or to any other restriction the Plan Administrator determines to be appropriate. (i) Term of Award. The term of each Award shall be the term ------------- stated in the Award Agreement, provided, however, that the term of an Incentive Stock Option shall be no more than ten (10) years from the date of grant thereof. However, in the case of an Incentive Stock Option granted to a Grantee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the term of the Incentive Stock Option shall be five (5) years from the date of grant thereof or such shorter term as may be provided in the Award Agreement. (j) Transferability of Awards. Incentive Stock Options may not ------------------------- be sold, pledged, assigned, hypothecated, transferred, or disposed of in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Grantee, only by the Grantee; provided, however, that the Grantee may designate a beneficiary of the Grantee's Incentive Stock Option in the event of the Grantee's death on a beneficiary designation form provided by the Plan Administrator. Other Awards may be transferred by gift or through a domestic relations order to members of the Grantee's Immediate Family to the extent provided in the Award Agreement or in the manner and to the extent determined by the Plan Administrator. (k) Time of Granting Awards. The date of grant of an Award ----------------------- shall for all purposes be the date on which the Plan Administrator makes the determination to grant such Award, or such other date as is determined by the Plan Administrator. Notice of the grant determination shall be given to each Employee, Director or Consultant to whom an Award is so granted within a reasonable time after the date of such grant. 7. Award Exercise or Purchase Price, Consideration, and Taxes. ---------------------------------------------------------- (a) Exercise or Purchase Price. The exercise or purchase price, -------------------------- if any, for an Award shall be as follows: 8 (i) In the case of an Incentive Stock Option: (A) granted to an Employee who, at the time of the grant of such Incentive Stock Option owns stock representing more than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary, the per Share exercise price shall be not less than one hundred ten percent (110%) of the Fair Market Value per Share on the date of grant; or (B) granted to any Employee other than an Employee described in the preceding paragraph, the per Share exercise price shall be not less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant. (ii) In the case of a Non-Qualified Stock Option, the per Share exercise price shall be not less than fifty percent (50%) of the Fair Market Value per Share on the date of grant unless otherwise determined by the Plan Administrator. (iii) In the case of other Awards, such price as is determined by the Plan Administrator. (iv) Notwithstanding the foregoing provisions of this Section 7(a), in the case of an Award issued pursuant to Section 6(d), above, the exercise or purchase price for the Award shall be determined in accordance with the principles of Section 424(a) of the Code. (b) Consideration. Subject to Applicable Laws, the consideration to ------------- be paid for the Shares to be issued upon exercise or purchase of an Award including the method of payment, shall be determined by the Plan Administrator (and, in the case of an Incentive Stock Option, shall be determined at the time of grant). In addition to any other types of consideration the Plan Administrator may determine, the Plan Administrator is authorized to accept as consideration for Shares issued under the Plan the following, provided that the portion of the consideration equal to the par value of the Shares must be paid in cash or other legal consideration permitted by the Delaware General Corporation Law: (i) cash; (ii) check; (iii) delivery of Grantee's promissory note with such recourse, interest, security, and redemption provisions as the Plan Administrator determines as appropriate; (iv) if the exercise or purchase occurs on or after the Registration Date, surrender of Shares or delivery of a properly executed form of attestation of ownership of Shares as the Plan Administrator may require (including withholding of Shares otherwise deliverable upon exercise of the Award) which have a Fair Market Value on the date of surrender or attestation equal to the aggregate exercise price of the Shares as to which said Award shall be exercised (but only to the extent that such exercise of the Award would not result in an 9 accounting compensation charge with respect to the Shares used to pay the exercise price unless otherwise determined by the Plan Administrator); (v) with respect to Options, if the exercise occurs on or after the Registration Date, payment through a broker-dealer sale and remittance procedure pursuant to which the Grantee (A) shall provide written instructions to a Company designated brokerage firm to effect the immediate sale of some or all of the purchased Shares and remit to the Company, out of the sale proceeds available on the settlement date, sufficient funds to cover the aggregate exercise price payable for the purchased Shares and (B) shall provide written directives to the Company to deliver the certificates for the purchased Shares directly to such brokerage firm in order to complete the sale transaction; or (vi) any combination of the foregoing methods of payment. (c) Taxes. No Shares shall be delivered under the Plan to any ----- Grantee or other person until such Grantee or other person has made arrangements acceptable to the Plan Administrator for the satisfaction of any foreign, federal, state, or local income and employment tax withholding obligations, including, without limitation, obligations incident to the receipt of Shares or the disqualifying disposition of Shares received on exercise of an Incentive Stock Option. Upon exercise of an Award, the Company shall withhold or collect from Grantee an amount sufficient to satisfy such tax obligations. 8. Exercise of Award. ----------------- (a) Procedure for Exercise; Rights as a Stockholder. ----------------------------------------------- (i) Any Award granted hereunder shall be exercisable at such times and under such conditions as determined by the Plan Administrator under the terms of the Plan and specified in the Award Agreement. (ii) An Award shall be deemed to be exercised when written notice of such exercise has been given to the Company in accordance with the terms of the Award by the person entitled to exercise the Award and full payment for the Shares with respect to which the Award is exercised, including, to the extent selected, use of the broker-dealer sale and remittance procedure to pay the purchase price as provided in Section 7(b)(v). Until the issuance (as evidenced by the appropriate entry on the books of the Company or of a duly authorized transfer agent of the Company) of the stock certificate evidencing such Shares, no right to vote or receive dividends or any other rights as a stockholder shall exist with respect to Shares subject to an Award, notwithstanding the exercise of an Option or other Award. The Company shall issue (or cause to be issued) such stock certificate promptly upon exercise of the Award. No adjustment will be made for a dividend or other right for which the record date is prior to the date the stock certificate is issued, except as provided in the Award Agreement or Section 10, below. (b) Exercise of Award Following Termination of Continuous Service. ------------------------------------------------------------- 10 (i) An Award may not be exercised after the termination date of such Award set forth in the Award Agreement and may be exercised following the termination of a Grantee's Continuous Service only to the extent provided in the Award Agreement. (ii) Where the Award Agreement permits a Grantee to exercise an Award following the termination of the Grantee's Continuous Service for a specified period, the Award shall terminate to the extent not exercised on the last day of the specified period or the last day of the original term of the Award, whichever occurs first. (iii) Any Award designated as an Incentive Stock Option to the extent not exercised within the time permitted by law for the exercise of Incentive Stock Options following the termination of a Grantee's Continuous Service shall convert automatically to a Non-Qualified Stock Option and thereafter shall be exercisable as such to the extent exercisable by its terms for the period specified in the Award Agreement. 9. Conditions Upon Issuance of Shares. ---------------------------------- (a) Shares shall not be issued pursuant to the exercise of an Award unless the exercise of such Award and the issuance and delivery of such Shares pursuant thereto shall comply with all Applicable Laws, and shall be further subject to the approval of counsel for the Company with respect to such compliance. (b) As a condition to the exercise of an Award, the Company may require the person exercising such Award to represent and warrant at the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Shares if, in the opinion of counsel for the Company, such a representation is required by any Applicable Laws. 10. Adjustments Upon Changes in Capitalization. Subject to any required ------------------------------------------ action by the stockholders of the Company, the number of Shares covered by each outstanding Award, and the number of Shares which have been authorized for issuance under the Plan but as to which no Awards have yet been granted or which have been returned to the Plan, the exercise or purchase price of each such outstanding Award, the maximum number of Shares with respect to which Options and SARs may be granted to any Employee in any fiscal year of the Company, as well as any other terms that the Plan Administrator determines require adjustment shall be proportionately adjusted for (i) any increase or decrease in the number of issued Shares resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Shares, or similar event affecting the Shares, (ii) any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Company, or (iii) as the Plan Administrator may determine in its discretion, any other transaction with respect to Common Stock to which Section 424(a) of the Code applies or any similar transaction; provided, however that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Plan Administrator and its determination shall be final, binding and conclusive. Except as the Plan Administrator determines, no issuance by the Company of shares of stock of any class, or 11 securities convertible into shares of stock of any class, shall affect, and no adjustment by reason hereof shall be made with respect to, the number or price of Shares subject to an Award. 11. Effective Date and Term of Plan. The Plan shall become effective upon ------------------------------- the earlier to occur of its adoption by the Board or its approval by the stockholders of the Company. It shall continue in effect for a term of ten (10) years unless sooner terminated. Subject to Section 16, below, and Applicable Laws, Awards may be granted under the Plan upon its becoming effective. 12. Amendment, Suspension or Termination of the Plan. ------------------------------------------------ (a) The Board may at any time amend, suspend or terminate the Plan. To the extent necessary to comply with Applicable Laws, the Company shall obtain stockholder approval of any Plan amendment in such a manner and to such a degree as required. (b) No Award may be granted during any suspension of the Plan or after termination of the Plan. (c) Any amendment, suspension or termination of the Plan (including termination of the Plan under Section 11, above) shall not affect Awards already granted, and such Awards shall remain in full force and effect as if the Plan had not been amended, suspended or terminated, unless mutually agreed otherwise between the Grantee and the Plan Administrator, which agreement must be in writing and signed by the Grantee and the Company. 13. Reservation of Shares. --------------------- (a) The Company, during the term of the Plan, will at all times reserve and keep available such number of Shares as shall be sufficient to satisfy the requirements of the Plan. (b) The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed by the Company's counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of the failure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 14. No Effect on Terms of Employment/Consulting Relationship. The Plan -------------------------------------------------------- shall not confer upon any Grantee any right with respect to the Grantee's Continuous Service, nor shall it interfere in any way with his or her right or the Company's right to terminate the Grantee's Continuous Service at any time, with or without cause. 15. No Effect on Retirement and Other Benefit Plans. Except as ----------------------------------------------- specifically provided in a retirement or other benefit plan of the Company or a Related Entity, Awards shall not be deemed compensation for purposes of computing benefits or contributions under any retirement plan of the Company or a Related Entity, and shall not affect any benefits under any other benefit plan of any kind or any benefit plan subsequently instituted under which the availability or 12 amount of benefits is related to level of compensation. The Plan is not a "Retirement Plan" or "Welfare Plan" under the Employee Retirement Income Security Act of 1974, as amended. 16. Stockholder Approval. The grant of Incentive Stock Options under the -------------------- Plan shall be subject to approval of the Plan by the stockholders of the Company within twelve (12) months before or after the date the Plan is adopted excluding Incentive Stock Options issued in substitution for outstanding Incentive Stock Options pursuant to Section 424(a) of the Code. Such stockholder approval shall be obtained in the degree and manner required under Applicable Laws. The Plan Administrator may grant Incentive Stock Options under the Plan prior to approval by the stockholders, but until such approval is obtained, no such Incentive Stock Option shall be exercisable. In the event that stockholder approval is not obtained within the twelve (12) month period provided above, all Incentive Stock Options previously granted under the Plan shall be exercisable as Non-Qualified Stock Options. 13 EX-10.4 9 REGISTRANT'S 1999 EMPLOYEE STOCK PURCHASE PLAN EXHIBIT 10.4 DIGIMARC CORPORATION 1999 EMPLOYEE STOCK PURCHASE PLAN --------------------------------- The following constitute the provisions of the 1999 Employee Stock Purchase Plan of Digimarc Corporation. 1. Purpose. The purpose of the Plan is to provide employees of the ------- Company and its Designated Parents or Subsidiaries with an opportunity to purchase Common Stock of the Company through accumulated payroll deductions. It is the intention of the Company to have the Plan qualify as an "Employee Stock Purchase Plan" under Section 423 of the Code. The provisions of the Plan, accordingly, shall be construed so as to extend and limit participation in a manner consistent with the requirements of that section of the Code. 2. Definitions. As used herein, the following definitions shall ----------- apply: (a) "Applicable Laws" means the legal requirements relating to the --------------- administration of employee stock purchase plans, if any, under applicable provisions of federal securities laws, state corporate and securities laws, the Code, the rules of any applicable stock exchange or national market system, and the rules of any foreign jurisdiction applicable to participation in the Plan by residents therein. (b) "Board" means the Board of Directors of the Company. ----- (c) "Change in Control" means a change in ownership or control of the ------------------ Company effected through the direct or indirect acquisition by any person or related group of persons (other than an acquisition from or by the Company or by a Company-sponsored employee benefit plan or by a person that directly or indirectly controls, is controlled by, or is under common control with, the Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities. (d) "Code" means the Internal Revenue Code of 1986, as amended. ---- (e) "Common Stock" means the common stock of the Company. ------------ (f) "Company" means Digimarc Corporation, a Delaware corporation. ------- (g) "Compensation" means an Employee's base salary and other cash ------------ payments for commissions, overtime, bonuses, annual awards, and other cash incentive payments from the Company or one or more Designated Parents or Subsidiaries, including such amounts as are deferred by the Employee (i) under a qualified cash or deferred arrangement described in Section 401(k) of the Code, or (ii) to a plan qualified under Section 125 of the Code. Compensation does not include reimbursements or other expense allowances, fringe benefits (cash or noncash), moving expenses, deferred compensation, contributions (other than contributions described in the 1 first sentence) made on the Employee's behalf by the Company or one or more Designated Parents or Subsidiaries under any employee benefit or welfare plan now or hereafter established, and any other payments not specifically referenced in the first sentence. (h) "Corporate Transaction" means any of the following transactions: --------------------- (1) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principal purpose of which is to change the state in which the Company is incorporated; (2) the sale, transfer or other disposition of all or substantially all of the assets of the Company (including the capital stock of the Company's subsidiary corporations) in connection with complete liquidation or dissolution of the Company; (3) any reverse merger in which the Company is the surviving entity but in which securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities are transferred to a person or persons different from those who held such securities immediately prior to such merger; or (4) acquisition by any person or related group of persons (other than the Company or by a Company-sponsored employee benefit plan) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fifty percent (50%) of the total combined voting power of the Company's outstanding securities (whether or not in a transaction also constituting a Change in Control), but excluding any such transaction that the Plan Administrator determines shall not be a Corporate Transaction (i) "Designated Parents or Subsidiaries" means the Parents or ---------------------------------- Subsidiaries which have been designated by the Plan Administrator from time to time as eligible to participate in the Plan. (j) "Effective Date" means the effective date of the Registration -------------- Statement relating to the Company's initial public offering of its Common Stock. However, should any Designated Parent or Subsidiary become a participating company in the Plan after such date, then such entity shall designate a separate Effective Date with respect to its employee-participants. (k) "Employee" means any individual, including an officer or director, -------- who is an employee of the Company or a Designated Parent or Subsidiary for purposes of Section 423 of the Code. For purposes of the Plan, the employment relationship shall be treated as continuing intact while the individual is on sick leave or other leave of absence approved by the individual's employer. Where the period of leave exceeds ninety (90) days and the individual's right to reemployment is not guaranteed either by statute or by contract, the employment relationship will be deemed to have terminated on the ninety-first (91st) day of such leave, for purposes of determining eligibility to participate in the Plan. 2 (l) "Enrollment Date" means the first day of each Offer Period. --------------- (m) "Exchange Act" means the Securities Exchange Act of 1934, as ------------ amended. (n) "Exercise Date" means the last day of each Purchase Period. ------------- (o) "Fair Market Value" means, as of any date, the value of Common ----------------- Stock determined as follows: (1) Where there exists a public market for the Common Stock, the Fair Market Value shall be (A) the closing price for a share of Common Stock for the last market trading day prior to the time of the de termination (or, if no closing price was reported on that date, on the last trading date on which a closing price was reported) on the stock exchange determined by the Plan Administrator to be the primary market for the Common Stock or the Nasdaq National Market, whichever is applicable or (B) if the Common Stock is not traded on any such exchange or national market system, the average of the closing bid and asked prices of a share of Common Stock on the Nasdaq Small Cap Market for the day prior to the time of the determination (or, if no such prices were reported on that date, on the last date on which such prices were reported), in each case, as reported in The Wall Street Journal or such other source as the Plan Administrator deems reliable; or (2) In the absence of an established market of the type described in (1), above, for the Common Stock, the Fair Market Value thereof shall be determined by the Plan Administrator in good faith. (p) "Offer Period" means an Offer Period established pursuant to ------------ Section 4 hereof. (q) "Parent" means a "parent corporation," whether now or hereafter ------ existing, as defined in Section 424(e) of the Code. (r) "Participant" means an Employee of the Company or Designated ----------- Parent or Subsidiary who is actively participating in the Plan. (s) "Plan" means this Employee Stock Purchase Plan. ---- (t) "Plan Administrator" means either the Board or a committee of the ------------------ Board that is responsible for the administration of the Plan as is designated from time to time by resolution of the Board. (u) "Purchase Period" means a period of approximately six months, --------------- commencing on June 1 and December 1 of each year and terminating on the next following November 30 or May 31, respectively; provided, however, that the first Purchase Period shall commence on the Effective Date and shall end on May 31, 2000. 3 (u) "Purchase Period" means a period specified as such pursuant to --------------- Section 4(b) hereof. (v) "Purchase Price" shall mean an amount equal to 85% of the Fair -------------- Market Value of a share of Common Stock on the Enrollment Date or on the Exercise Date, whichever is lower. (w) "Reserves" means the sum of the number of shares of Common Stock -------- covered by each option under the Plan which have not yet been exercised and the number of shares of Common Stock which have been authorized for issuance under the Plan but not yet placed under option. (x) "Subsidiary" means a "subsidiary corporation," whether now or ---------- hereafter existing, as defined in Section 424(f) of the Code. 3. Eligibility. ----------- (a) General. Any individual who is an Employee on a given Enrollment ------- Date shall be eligible to participate in the Plan for the Offer Period commencing with such Enrollment Date. (b) Limitations on Grant and Accrual. Any provisions of the Plan to -------------------------------- the contrary notwithstanding, no Employee shall be granted an option under the Plan (i) if, immediately after the grant, such Employee (taking into account stock owned by any other person whose stock would be attributed to such Employee pursuant to Section 424(d) of the Code) would own stock and/or hold outstanding options to purchase stock possessing five percent (5%) or more of the total combined voting power or value of all classes of stock of the Company or of any Parent or Subsidiary, or (ii) which permits the Employee's rights to purchase stock under all employee stock purchase plans of the Company and its Parents or Subsidiaries to accrue at a rate which exceeds Twenty-Five Thousand Dollars ($25,000) worth of stock (determined at the Fair Market Value of the shares at the time such option is granted) for each calendar year in which such option is outstanding at any time. The determination of the accrual of the right to purchase stock shall be made in accordance with Section 423(b)(8) of the Code and the regulations thereunder. (c) Other Limits on Eligibility. Notwithstanding Subsection (a), --------------------------- above, the following Employees shall not be eligible to participate in the Plan for any relevant Offer Period: (i) Employees whose customary employment is fewer than 20 hours per week; (ii) Employees whose customary employment is for not more than 5 or fewer months in any calendar year; (iii) Employees who have been employed for 10 or fewer days; and (iv) Employees who are subject to rules or laws of a foreign jurisdiction that prohibit or make impractical the participation of such Employees in the Plan. 4. Offer Periods. ------------- (a) The Plan shall be implemented through overlapping or consecutive Offer Periods until such time as the Plan shall have been terminated in accordance with Section 19 or 22 hereof. The maximum duration of an Offer Period shall be twenty-seven (27) months. 4 Initially, the Plan shall be implemented through overlapping Offer Periods of twenty-four (24) months' duration commencing each June 1 and December 1 following the Effective Date (except that the initial Offer Period shall commence on the Effective Date and shall end on November 30, 2001). (b) A Participant shall be granted a separate option for each Offer Period in which he or she participates. The option shall be granted on the Enrollment Date and shall be automatically exercised in successive installments on the Exercise Dates ending within the Offer Period. (c) An Employee may participate in only one Offer Period at a time. Accordingly, except as provided in Section 4(d), an Employee who wishes to join a new Offer Period must withdraw from the current Offer Period in which the Employee is participating and must also enroll in the new Offer Period prior to the Enrollment Date for that Offer Period. (d) If on the first day of any Purchase Period in an Offer Period in which a Participant is participating, the Fair Market Value of the Common Stock is less than the Fair Market Value of the Common Stock on the Enrollment Date of the Offer Period (after taking into account any adjustment during the Offer Period pursuant to Section 18(a)), the Offer Period shall be terminated automatically and the Participant shall be enrolled automatically in the new Offer Period which has its first Purchase Period commencing on that date, provided the Participant is eligible to participate in the Plan on that date and has not elected to terminate participation in the Plan. (e) Except as specifically provided herein, the acquisition of Common Stock through participation in the Plan for any Offer Period shall neither limit nor require the acquisition of Common Stock by a Participant in any subsequent Offer Period. 5. Participation. ------------- (a) An eligible Employee may become a Participant in the Plan by completing a subscription agreement authorizing payroll deductions in the form of Exhibit A to this Plan and filing it with the designated payroll office of the Company at least ten (10) business days prior to the Enrollment Date for the Offer Period in which such participation will commence, unless a later time for filing the subscription agreement is set by the Plan Administrator for all eligible Employees with respect to a given Offer Period. (b) Payroll deductions for a Participant shall commence with the first partial or full payroll period beginning on the Enrollment Date and shall end on the last complete payroll period during the Offer Period, unless sooner terminated by the Participant as provided in Section 10. 6. Payroll Deductions. ------------------ (a) At the time a Participant files a subscription agreement, the Participant shall elect to have payroll deductions made during the Offer Period in amounts between one percent 5 (1%) and not exceeding fifteen percent (15%) of the Compensation which the Participant receives during the Offer Period. (b) All payroll deductions made for a Participant shall be credited to the Participant's account under the Plan and will be withheld in whole percentages only. A Participant may not make any additional payments into such account. (c) A Participant may discontinue participation in the Plan as provided in Section 10, or may increase or decrease the rate of payroll deductions during the Offer Period by completing and filing with the Company a change of status notice in the form of Exhibit B to this Plan authorizing an increase or decrease in the payroll deduction rate. Any increase or decrease in the rate of a Participant's payroll deductions shall be effective with the first full payroll period commencing ten (10) business days after the Company's receipt of the change of status notice unless the Company elects to process a given change in participation more quickly. A Participant's subscription agreement (as modified by any change of status notice) shall remain in effect for successive Offer Periods unless terminated as provided in Section 10. The Plan Administrator shall be authorized to limit the number of payroll deduction rate changes during any Offer Period. (d) Notwithstanding the foregoing, to the extent necessary to comply with Section 423(b)(8) of the Code and Section 3(b) herein, a Participant's payroll deductions may be decreased to 0% at such time during any Purchase Period which is scheduled to end during the current calendar year (the "Current Purchase Period") that the aggregate of all payroll deductions which were previously used to purchase stock under the Plan in a prior Purchase Period which ended during that calendar year plus all payroll deductions accumulated with respect to the Current Purchase Period equal $21,250. Payroll deductions shall recommence at the rate provided in such Participant's subscription agreement, as amended, at the beginning of the first Purchase Period which is scheduled to end in the following calendar year, unless terminated by the Participant as provided in Section 10. 7. Grant of Option. On the Enrollment Date, each Participant shall --------------- be granted an option to purchase (at the applicable Purchase Price) three thousand (3,000) shares of the Common Stock, subject to adjustment as provided in Section 18 hereof; provided (i) that such option shall be subject to the limitations set forth in Sections 3(b), 6 and 12 hereof, and (ii) the maximum number of shares of Common Stock a Participant shall be permitted to purchase in any Purchase Period shall be seven hundred fifty (750) shares, subject to adjustment as provided in Section 18 hereof. Exercise of the option shall occur as provided in Section 8, unless the Participant has withdrawn pursuant to Section 10, and the option, to the extent not exercised, shall expire on the last day of the Offer Period. 8. Exercise of Option. Unless a Participant withdraws from the Plan ------------------ as provided in Section 10, below, the Participant's option for the purchase of shares will be exercised automatically on each Exercise Date, by applying the accumulated payroll deductions in the Participant's account to purchase the number of full shares subject to the option by dividing such Participant's payroll deductions accumulated prior to such Exercise Date and retained in the 6 Participant's account as of the Exercise Date by the applicable Purchase Price. No fractional shares will be purchased; any payroll deductions accumulated in a Participant's account which are not sufficient to purchase a full share shall be carried over to the next Purchase Period or Offer Period, whichever applies, or returned to the Participant, if the Participant withdraws from the Plan. Notwithstanding the foregoing, any amount remaining in a Participant's account following the purchase of shares on the Exercise Date due to the application of Section 423(b)(8) of the Code or Section 7, above, shall be returned to the Participant and shall not be carried over to the next Offer Period. During a Participant's lifetime, a Participant's option to purchase shares hereunder is exercisable only by the Participant. 9. Delivery. Upon receipt of a request from a Participant after each -------- Exercise Date on which a purchase of shares occurs, the Company shall arrange the delivery to such Participant, as promptly as practicable, of a certificate representing the shares purchased upon exercise of the Participant's option. 10. Withdrawal; Termination of Employment. ------------------------------------- (a) A Participant may either (i) withdraw all but not less than all the payroll deductions credited to the Participant's account and not yet used to exercise the Participant's option under the Plan or (ii) terminate future payroll deductions, but allow accumulated payroll deductions to be used to exercise the Participant's option under the Plan at any time by giving written notice to the Company in the form of Exhibit B to this Plan. If the Participant elects withdrawal alternative (i) described above, all of the Participant's payroll deductions credited to the Participant's account will be paid to such Participant as promptly as practicable after receipt of notice of withdrawal, such Participant's option for the Offer Period will be automatically terminated, and no further payroll deductions for the purchase of shares will be made during the Offer Period. If the Participant elects withdrawal alternative (ii) described above, no further payroll deductions for the purchase of shares will be made during the Offer Period, all of the Participant's payroll deductions credited to the Participant's account will be applied to the exercise of the Participant's option on the next Exercise Date, and after such Exercise Date, such Participant's option for the Offer Period will be automatically terminated. If a Participant withdraws from an Offer Period, payroll deductions will not resume at the beginning of the succeeding Offer Period unless the Participant delivers to the Company a new subscription agreement. (b) Upon termination of a Participant's employment relationship (as described in Section 2(k)) at any time prior to the next scheduled Exercise Date, the payroll deductions credited to such Participant's account during the Offer Period but not yet used to exercise the option will be returned to such Participant or, in the case of his/her death, to the person or persons entitled thereto under Section 14, and such Participant's option will be automatically terminated. 11. Interest. No interest shall accrue on the payroll deductions -------- credited to a Participant's account under the Plan. 7 12. Stock. ----- (a) Subject to adjustment upon changes in capitalization of the Company as provided in Section 18, the maximum number of shares of Common Stock which shall be made available for sale under the Plan shall be 625,000 shares, plus an annual increase to be added on the first day of the Company's fiscal year beginning in 2001 equal to the lesser of (i) 250,000 shares, (ii) one percent (1%) of the fully-diluted number of outstanding shares on such date, or (iii) a lesser number of shares determined by the Plan Administrator. For purposes of determining the outstanding number of Shares under this Section 12(a), all outstanding classes of securities of the Company, convertible notes, stock options, other equity compensation arrangements (excluding options granted under this Plan), and warrants that are convertible or exercisable presently or in the future by the holder into Shares, shall be deemed to have been fully converted or exercised (notwithstanding any limits on such conversions or exercises) into the number of Shares represented by such securities, notes, stock options, other equity compensation arrangements, and warrants calculated using the treasury stock method. If on a given Exercise Date the number of shares with respect to which options are to be exercised exceeds the number of shares then available under the Plan, the Plan Administrator shall make a pro rata allocation of the shares remaining available for purchase in as uniform a manner as shall be practicable and as it shall determine to be equitable. (b) A Participant will have no interest or voting right in shares covered by the Participant's option until such shares are actually purchased on the Participant's behalf in accordance with the applicable provisions of the Plan. No adjustment shall be made for dividends, distributions or other rights for which the record date is prior to the date of such purchase. (c) Shares to be delivered to a Participant under the Plan will be registered in the name of the Participant or in the name of the Participant and his or her spouse. 13. Administration. The Plan shall be administered by the Plan -------------- Administrator which shall have full and exclusive discretionary authority to construe, interpret and apply the terms of the Plan, to determine eligibility and to adjudicate all disputed claims filed under the Plan. Every finding, decision and determination made by the Plan Administrator shall, to the full extent permitted by Applicable Law, be final and binding upon all persons. 14. Designation of Beneficiary. -------------------------- (a) Each Participant will file a written designation of a beneficiary who is to receive any shares and cash, if any, from the Participant's account under the Plan in the event of such Participant's death. If a Participant is married and the designated beneficiary is not the spouse, spousal consent shall be required for such designation to be effective. (b) Such designation of beneficiary may be changed by the Participant (and the Participant's spouse, if any) at any time by written notice. In the event of the death of a Participant and in the absence of a beneficiary validly designated under the Plan who is living (or in existence) at the time of such Participant's death, the Company shall deliver such shares 8 and/or cash to the executor or administrator of the estate of the Participant, or if no such executor or administrator has been appointed (to the knowledge of the Plan Administrator), the Plan Administrator shall deliver such shares and/or cash to the spouse (or domestic partner, as determined by the Administrator) of the Participant, or if no spouse (or domestic partner) is known to the Plan Administrator, then to the issue of the Participant, such distribution to be made per stirpes (by right of representation), or if no issue are known to the Plan Administrator, then to the heirs at law of the Participant determined in accordance with Section 27. 15. Transferability. Neither payroll deductions credited to a --------------- Participant's account nor any rights with regard to the exercise of an option or to receive shares under the Plan may be assigned, transferred, pledged or otherwise disposed of in any way (other than by will, the laws of descent and distribution or as provided in Section 14 hereof) by the Participant. Any such attempt at assignment, transfer, pledge or other disposition shall be without effect, except that the Plan Administrator may treat such act as an election to withdraw funds from an Offer Period in accordance with Section 10. 16. Use of Funds. All payroll deductions received or held by the ------------ Company under the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such payroll deductions. 17. Reports. Individual accounts will be maintained for each ------- Participant in the Plan. Statements of account will be given to Participants at least annually, which statements will set forth the amounts of payroll deductions, the Purchase Price, the number of shares purchased and the remaining cash balance, if any. 18. Adjustments Upon Changes in Capitalization; Corporate ----------------------------------------------------- Transactions. - ------------ (a) Adjustments Upon Changes in Capitalization. Subject to any ------------------------------------------ required action by the stockholders of the Company, the Reserves, the Purchase Price, as well as any other terms that the Plan Administrator determines require adjustment shall be proportionately adjusted for (i) any increase or decrease in the number of issued shares of Common Stock resulting from a stock split, reverse stock split, stock dividend, combination or reclassification of the Common Stock, (ii) any other increase or decrease in the number of issued shares of Common Stock effected without receipt of consideration by the Company, or (iii) as the Plan Administrator may determine in its discretion, any other transaction with respect to Common Stock to which Section 424(a) of the Code applies; provided, however that conversion of any convertible securities of the Company shall not be deemed to have been "effected without receipt of consideration." Such adjustment shall be made by the Plan Administrator and its determination shall be final, binding and conclusive. Except as the Plan Administrator determines, no issuance by the Company of shares of stock of any class, or securities convertible into shares of stock of any class, shall affect, and no adjustment by reason hereof shall be made with respect to, the Reserves and the Purchase Price. (b) Corporate Transactions. In the event of a proposed Corporate ---------------------- Transaction, each option under the Plan shall be assumed by such successor corporation or a parent or subsidiary of such successor corporation, unless the Plan Administrator determines, in the 9 exercise of its sole discretion and in lieu of such assumption, to shorten the Offer Period then in progress by setting a new Exercise Date (the "New Exercise Date"). If the Plan Administrator shortens the Offer Period then in progress in lieu of assumption in the event of a Corporate Transaction, the Plan Administrator shall notify each Participant in writing, at least ten (10) days prior to the New Exercise Date, that the Exercise Date for the Participant's option has been changed to the New Exercise Date and that the Participant's option will be exercised automatically on the New Exercise Date, unless prior to such date the Participant has withdrawn from the Offer Period as provided in Section 10. For purposes of this Subsection, an option granted under the Plan shall be deemed to be assumed if, in connection with the Corporate Transaction, the option is replaced with a comparable option with respect to shares of capital stock of the successor corporation or Parent thereof. The determination of option comparability shall be made by the Plan Administrator prior to the Corporate Transaction and its determination shall be final, binding and conclusive on all persons. 19. Amendment or Termination. ------------------------ (a) The Plan Administrator may at any time and for any reason terminate or amend the Plan. Except as provided in Section 18, no such termination can affect options previously granted, provided that an Offer Period may be terminated by the Plan Administrator on any Exercise Date if the Plan Administrator determines that the termination of the Offer Period is in the best interests of the Company and its stockholders. Except as provided in Section 18, no amendment may make any change in any option theretofore granted which adversely affects the rights of any Participant without the consent of affected Participants. To the extent necessary to comply with Section 423 of the Code (or any successor rule or provision or any other Applicable Law), the Company shall obtain stockholder approval in such a manner and to such a degree as required. (b) Without stockholder consent and without regard to whether any Participant rights may be considered to have been "adversely affected," the Plan Administrator shall be entitled to limit the frequency and/or number of changes in the amount withheld during Offer Periods, change the length of Purchase Periods within any Offer Period, determine the length of any future Offer Period, whether future Offer Periods shall be consecutive or overlapping, establish the exchange ratio applicable to amounts withheld in a currency other than U.S. dollars, establish additional terms, conditions, rules or procedures to accommodate the rules or laws of applicable foreign jurisdictions, permit payroll withholding in excess of the amount designated by a Participant in order to adjust for delays or mistakes in the Company's processing of properly completed withholding elections, establish reasonable waiting and adjustment periods and/or accounting and crediting procedures to ensure that amounts applied toward the purchase of Common Stock for each Participant properly correspond with amounts withheld from the Participant's Compensation, and establish such other limitations or procedures as the Plan Administrator determines in its sole discretion advisable and which are consistent with the Plan. 20. Notices. All notices or other communications by a Participant to ------- the Company under or in connection with the Plan shall be deemed to have been duly given when 10 received in the form specified by the Plan Administrator at the location, or by the person, designated by the Plan Administrator for the receipt thereof. 21. Conditions Upon Issuance of Shares. Shares shall not be issued ---------------------------------- with respect to an option unless the exercise of such option and the issuance and delivery of such shares pursuant thereto shall comply with all Applicable Laws and shall be further subject to the approval of counsel for the Company with respect to such compliance. As a condition to the exercise of an option, the Company may require the Participant to represent and warrant at the time of any such exercise that the shares are being purchased only for investment and without any present intention to sell or distribute such shares if, in the opinion of counsel for the Company, such a representation is required by any of the aforementioned Applicable Laws. In addition, no options shall be exercised or shares issued hereunder before the Plan shall have been approved by stockholders of the Company as provided in Section 23. 22. Term of Plan. The Plan shall become effective upon the earlier to ------------ occur of its adoption by the Board or its approval by the stockholders of the Company. It shall continue in effect for a term of ten (10) years unless sooner terminated under Section 19. 23. Stockholder Approval. Continuance of the Plan shall be subject to -------------------- approval by the stockholders of the Company within twelve (12) months before or after the date the Plan is adopted. Such stockholder approval shall be obtained in the degree and manner required under Applicable Laws. 24. No Employment Rights. The Plan does not, directly or indirectly, -------------------- create any right for the benefit of any employee or class of employees to purchase any shares under the Plan, or create in any employee or class of employees any right with respect to continuation of employment by the Company or a Designated Parent or Subsidiary, and it shall not be deemed to interfere in any way with such employer's right to terminate, or otherwise modify, an employee's employment at any time. 25. No Effect on Retirement and Other Benefit Plans. Except as ----------------------------------------------- specifically provided in a retirement or other benefit plan of the Company or a Designated Parent or Subsidiary, participation in the Plan shall not be deemed compensation for purposes of computing benefits or contributions under any retirement plan of the Company or a Designated Parent or Subsidiary, and shall not affect any benefits under any other benefit plan of any kind or any benefit plan subsequently instituted under which the availability or amount of benefits is related to level of compensation. The Plan is not a "Retirement Plan" or "Welfare Plan" under the Employee Retirement Income Security Act of 1974, as amended. 26. Effect of Plan. The provisions of the Plan shall, in accordance -------------- with its terms, be binding upon, and inure to the benefit of, all successors of each Participant, including, without limitation, such Participant's estate and the executors, administrators or trustees thereof, heirs and legatees, and any receiver, trustee in bankruptcy or representative of creditors of such Participant. 11 27. Governing Law. The Plan is to be construed in accordance with and ------------- governed by the internal laws of the State of Oregon without giving effect to any choice of law rule that would cause the application of the laws of any jurisdiction other than the internal laws of the State of Oregon to the rights and duties of the parties, except to the extent the internal laws of the State of Oregon are superseded by the laws of the United States. Should any provision of the Plan be determined by a court of law to be illegal or unenforceable, the other provisions shall nevertheless remain effective and shall remain enforceable. 28. Dispute Resolution. The provisions of this Section 28 shall be the ------------------ exclusive means of resolving disputes arising out of or relating to the Plan. The Company, the Grantee, and the Grantee's beneficiary pursuant to Section 14 (the "parties") shall attempt in good faith to resolve any disputes arising out of or relating to the Plan by negotiation between individuals who have authority to settle the controversy. Negotiations shall be commenced by either party by notice of a written statement of the party's position and the name and title of the individual who will represent the party. Within thirty (30) days of the written notification, the parties shall meet at a mutually acceptable time and place, and thereafter as often as they reasonably deem necessary, to resolve the dispute. If the dispute has not been resolved by negotiation, the parties agree that any suit, action, or proceeding arising out of or relating to the Plan shall be brought before the U.S. District Court, District of Oregon, and that the parties shall submit to the jurisdiction of such court. If the U.S. District Court, District of Oregon, does not have jurisdiction over the dispute, the parties agree that any suit, action, or proceeding arising out of or related to the Plan shall be brought before the Oregon Circuit Court, 4th Judicial District, located in Portland, Oregon, and that the parties shall submit to the jurisdiction of such court. The parties irrevocably waive, to the fullest extent permitted by law, any objection the party may have to the laying of venue for any such suit, action or proceeding brought in such courts. THE PARTIES ALSO EXPRESSLY WAIVE ANY RIGHT THEY HAVE OR MAY HAVE TO A JURY TRIAL OF ANY SUCH SUIT, ACTION OR PROCEEDING. If any one or more provisions of this Section 28 shall for any reason be held invalid or unenforceable, it is the specific intent of the parties that such provisions shall be modified to the minimum extent necessary to make it or its application valid and enforceable. ------------------------------------------------ 12 Exhibit A Digimarc Corporation 1999 Employee Stock Purchase Plan SUBSCRIPTION AGREEMENT Effective with the Offer Period beginning on: [_] ESPP Effective Date [_] June 1, 200__ or [_] December 1, 200__ 1. Personal Information Legal Name (Please Print)___________________________________________________________ ______________________ ____________________ (Last) (First) (MI) Location Department Street Address______________________________________________________________________ ___________________________________________ Daytime Telephone City, State/Country, Zip____________________________________________________________ ___________________________________________ E-Mail Address Social Security No. __ __ __ - __ __ - __ __ __ __ Employee I.D. No. ______________ ___________________________________________ Manager Mgr. Location
2. Eligibility Any Employee whose customary employment is more than 20 hours per week and more than 5 months per calendar year, who has been an Employee for more than 10 days and who does not hold (directly or indirectly) five percent (5%) or more of the combined voting power of the Company, a parent or a subsidiary, whether in stock or options to acquire stock is eligible to participate in the Digimarc Corporation 1999 Employee Stock Purchase Plan (the "ESPP"); provided, however, that Employees who are subject to the rules or laws of a foreign jurisdiction that prohibit or make impractical the participation of such Employees in the ESPP are not eligible to participate. 3. Definitions Each capitalized term in this Subscription Agreement shall have the meaning set forth in the ESPP. 4. Subscription I hereby elect to participate in the ESPP and subscribe to purchase shares of the Company's Common Stock in accordance with this Subscription Agreement and the ESPP. I have received a complete copy of the ESPP and a prospectus describing the ESPP and understand that my participation in the ESPP is in all respects subject to the terms of the ESPP. The effectiveness of this Subscription Agreement is dependent on my eligibility to participate in the ESPP. 5. Payroll Deduction Authorization I hereby authorize payroll deductions from my Compensation during the Offer Period in the percentage specified below (payroll reductions may not exceed 15% of Compensation nor $21,250 per calendar year): ============================================================================ Percentage to be Deducted (circle one) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% ---------------------------------------------------------------------------- 6. ESPP Accounts and Purchase Price I understand that all payroll deductions will be credited to my account under the ESPP. No additional payments may be made to my account. No interest will be credited on funds held in the account at any time including any refund of the account caused by withdrawal from the ESPP. All payroll deductions shall be accumulated for the purchase of Company Common Stock at the applicable Purchase Price determined in accordance with the ESPP. 7. Withdrawal and Changes in Payroll Deduction I understand that I may discontinue my participation in the ESPP at any time prior to an Exercise Date as provided in Section 10 of the ESPP, but if I do not withdraw from the ESPP, any accumulated payroll deductions will be applied automatically to purchase Company Common Stock. I may increase or decrease the rate of my payroll deductions in whole percentage increments to not less than one percent (1%) on one occasion during any Purchase Period by completing and timely filing a Change of Status Notice. Any increase or decrease will be effective for the full payroll period occurring after ten (10) business days from the Company's receipt of the Change of Status Notice. A-1 8. Perpetual Subscription I understand that this Subscription Agreement shall remain in effect for successive Offer Periods until I withdraw from participation in the ESPP, or termination of the ESPP. 9. Taxes I have reviewed the ESPP prospectus discussion of the federal tax consequences of participation in the ESPP and consulted with tax consultants as I deemed advisable prior to my participation in the ESPP. I hereby agree to notify the Company in writing within thirty (30) days of any disposition (transfer or sale) of any shares purchased under the ESPP if such disposition occurs within two (2) years of the Enrollment Date (the first day of the Offer Period during which the shares were purchased) or within one (1) year of the Exercise Date (the date I purchased such shares), and I will make adequate provision to the Company for foreign, federal, state or other tax withholding obligations, if any, which arise upon the disposition of the shares. In addition, the Company may withhold from my Compensation any amount necessary to meet applicable tax withholding obligations incident to my participation in the ESPP, including any withholding necessary to make available to the Company any tax deductions or benefits contingent on such withholding. 10. Designation of Beneficiary In the event of my death, I hereby designate the following person or trust as my beneficiary to receive all payments and shares due to me under the ESPP: [_] I am single [_] I am married Beneficiary (please print)_________________________________________________________________ Relationship to Beneficiary (if any) (Last) (First) (MI) Street Address____________________________________________________________________________ _____________________________________ City, State/Country, Zip__________________________________________________________________
11. Termination of ESPP I understand that the Company has the right, exercisable in its sole discretion, to amend or terminate the ESPP at any time, and a termination may be effective as early as an Exercise Date (after purchase of shares on such date) within each outstanding Offer Period. Date: ___________________________________ Employee Signature: ______________________________________________________________ _____________________________________________________________ spouse's signature (if beneficiary is other than spouse)
A-2 Exhibit B Digimarc Corporation 1999 Employee Stock Purchase Plan CHANGE OF STATUS NOTICE ____________________________________________ Participant Name (Please Print) ____________________________________________ Social Security Number ================================================================================ Withdrawal From ESPP I hereby withdraw from the Digimarc Corporation 1999 Employee Stock Purchase Plan (the "ESPP") and agree that my option under the applicable Offer Period will be automatically terminated and all accumulated payroll deductions credited to my account will be refunded to me or applied to the purchase of Common Stock depending on the alternative indicated below. No further payroll deductions will be made for the purchase of shares in the applicable Offer Period and I shall be eligible to participate in a future Offer Period only by timely delivery to the Company of a new Subscription Agreement. [_] Withdrawal and Purchase of Common Stock Payroll deductions will terminate, but your account balance will be applied to purchase Common Stock on the next Exercise Date. Any remaining balance will be refunded. [_] Withdrawal Without Purchase of Common Stock Entire account balance will be refunded to me and no Common Stock will be purchased on the next Exercise Date provided this notice is submitted to the Company ten (10) business days prior to the next Exercise Date. ================================================================================ [_] Change in Payroll Deduction I hereby elect to change my rate of payroll deduction under the ESPP as follows (select one): ================================================================================ Percentage to be Deducted (circle one) 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- The following rule under the ESPP applies to changing your payroll deduction rate: An increase or a decrease in payroll deduction will be effective for the first full payroll period commencing no fewer than ten (10) business days following the Company's receipt of this notice, unless this change is processed more quickly. ================================================================================ B-1 ================================================================================ [_] Change of Beneficiary [_] I am single [_] I am married This change of beneficiary shall terminate my previous beneficiary designation under the ESPP. In the event of my death, I hereby designate the following person or trust as my beneficiary to receive all payments and shares due to me under the ESPP: Beneficiary (please print)________________________________________________________________ Relationship to Beneficiary (if any) (Last) (First) (MI) Street Address ___________________________________________________________________________ _____________________________________ City, State/Country, Zip _________________________________________________________________
=============================================================================== Date: ___________________________________ Employee Signature: ______________________________________________________________ _____________________________________________________________ spouse's signature (if beneficiary is other than spouse)
B-1 EX-10.9 10 COUNTERFEIT DETERRENCE SYSTEM DEVELOPMENT AND LICENSE AGRMT EXHIBIT 10.9 COUNTERFEIT DETERRENCE SYSTEM DEVELOPMENT AND LICENSE AGREEMENT This Counterfeit Deterrence System Development and License Agreement (the "Agreement") is made Between DIGIMARC CORPORATION, a corporation incorporated under the laws of Oregon and having its head office at One Centerpointe Drive, Suite 500, Lake Oswego, Oregon. U.S.A. 97035-8615 ( "Digimarc") and [*] Recitals - -------- Digimarc has expertise in, and owns extensive intellectual property, including patents, patent applications, copyrights and trade secrets, [*]. [*] possesses or will possess the right to grant licences in respect of intellectual property rights related to the application of such intellectual property to the detection and deterrence of bank note couterfeiting. Digimarc and [*] have cooperated in the development of means, using such intellectual property, to detect and deter the counterfeiting of bank notes [*]. The CDS is an improvement to Digimarc's existing copyright protection system for deterring personal computer-based counterfeiting of bank notes. The CDS has [*] [*] [*] In return, [*] will acquire the exclusive right, as more particularly detailed herein, to grant and direct Digimarc to [*] to [*] the CDS [*] and [*]. [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. [*] is also investing in certain improvements to [*] and a broadening of the deployment of the [*] across the personal computer industry. In return, [*] during the term of the Agreement [*], as more particularly detailed herein. In consideration of these premises, the covenants set out in this Agreement and other good and valuable consideration, the receipt and adequacy of which are acknowledged by each of the parties, the parties agree as follows: 1. DEFINITIONS AND PRINCIPLES OF INTERPRETATION 1.1 Definitions - Whenever used in this Agreement, the following words and ----------- terms shall have the meanings set out below: "Agreement" means these articles of agreement, including the Schedules, and those documents as specified or referenced in this Agreement as forming part of the Agreement, all as may be amended from time to time; "Allowable Cost" means a cost of the kind identified in Schedule I; "Arbitration Agreement" means the Arbitration Agreement dated June 21, 1999, a copy of which is attached as Schedule E; "[*]" has the meaning assigned to it by clause 5.1; "[*]" means that technology, if any, from the technology described in Schedule "F" in respect of which from time to time [*] after discussion between the [*] and the [*], [*] offers, and Digimarc accepts in writing, a [*] on the [*] in clause 8.2 to use, design or implement the CDS and all Intellectual Property Rights in that [*]; "Business Day" means a day on which both [*] and Digimarc are open for business at their respective addresses noted above; "CDS Technology" collectively, means whatever of the [*], the Digimarc Technology and the Project Technology is incorporated into the CDS; "Confidential Information" means information disclosed during the Term of this Agreement in any form which, if disclosed in tangible form, is labelled "Confidential", "Proprietary" or with a similar legend, or if disclosed orally is information that by its nature would be understood to be confidential to the Discloser; "Counterfeit Deterrence System" or "CDS" or "System" means a system for [*] that [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. includes, without limitation, [*]. The System incorporates means for [*]; "Deliverable" for a [*] means a task to be performed or an item to be delivered by Digimarc to [*], identified in the Statement of Work for [*], and in the case of a Deliverable [*] Digimarc's obligations to [*] with the Escrow Agent as part of the Technical Information; "Designated Country" means a country, the [*] of which is designated in writing by [*] effective on the Effective Date, and any additional country as may be designated by [*] in writing to Digimarc from time to time; "[*]" means those portions of the Project Technology and the Digimarc Technology which relate to [*] of [*] including [*]; "Device" means a [*] for a general purpose [*], or a device [*]; [*] means the [*] of a [*]; "Digimarc Contract Authority" means the President of Digimarc; "Digimarc Project Manager" means the Project Manager appointed by Digimarc in accordance with the provisions of clause 4.1; "Digimarc Technology" means: (a) the technology partially described in Schedule "G" developed or owned by Digimarc prior to [*] to the extent that it forms part of the CDS, (b) all Improvements to the technology described in (a) made by or on behalf of Digimarc other than under this Agreement to the extent that they form part of the CDS, (c) all Improvements to the technology described in (a) made by or on behalf of Digimarc under this Agreement to the extent that they relate to or form part of the CDS, and (d) all Intellectual Property Rights in all such technology and Improvements; "Digital Watermark" refers to [*] (including [*]) that are [*] from [*] by [*] of [*], which [*] of [*] and yet do not significantly [*] from the aesthetics of the [*] or [*] thereby. Examples include, but are not limited to: 1. generally imperceptible changes to [*] or placement in [*]; 2. [*] of a substrate, where the [*] substantially uniform to human touch; 3. slight localized changes to [*] or [*] of a printed document; 4. slight changes to [*]; or [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 5. [*] of substantially [*]; "Discloser" means a party which has disclosed or otherwise made available its Confidential Information to the other party; "DLA Contract Authority" means the Contract Authority designated by [*] in writing to Digimarc from time to time; "DLA Project Manager" means the project manager appointed by the DLA Contract Authority from time to time on notice to the Digimarc Contract Authority who shall also serve as the person primarily responsible to conduct inspections on behalf of [*]; [*]; [*]; [*]; "Effective Date" means [*]; [*]; [*]; [*]; "Escrow Agent" means [*] or any mutually acceptable new custodian appointed pursuant to clause 11.2 or 11.3 of the Escrow Agreement; "Escrow Agreement" means the agreement in the form attached as Schedule M; "Escrowed Materials" means any and all materials deposited or to be deposited by Digimarc with the Escrow Agent under this Agreement and the Escrow Agreement including the Technical Information and Improvements pertaining to the CDS Technology which shall include but not be limited to the following: 1. details of the deposit including: full name and version details, number of media items, media type and density, file or archive format, list or retrieval commands, archive hardware and operating system details; 2 name and functionality of each module or application of the Escrowed Materials; 3. names and versions of development tools; 4. documentation describing the procedures for building, compiling, executing and using the software which forms part of the Escrowed Materials ([*]); [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 5. hardcopy directory listings and tables of the contents of the computer media, manuals and other materials; and 6. name and contact details of employee(s) with knowledge of how to maintain and support the Escrowed Materials; "Feasibility Work" means that portion of [*] performed by Digimarc between [*] and the date of signature of this Agreement; "Improvement" means any change in the CDS Technology or the Technical Information made by or at the direction of Digimarc after [*] which enhances, whether by improvement, enhancement, correction, addition or otherwise, the properties, characteristics or manufacture of the CDS including, for greater certainty, [*]; "Integration Support" means the consulting and programming services to be provided by Digimarc to a [*] on the terms described in Schedule P attached to assist the [*] to ensure that the [*]; "Intellectual Property Rights" means all intellectual property rights existing now and in the future including, without limitation, trade secrets, copyright, database rights, know-how, topographies, patents and patent applications; "[*]" means an entity responsible for the [*]; "Licensed [*]" means an [*] licensed by Digimarc pursuant to clause 2.8; "[*]" means an entity, regardless of whether it has a legal status distinct from that of an [*] pursuant to clause 2.9; "Other [*] Technology" means any of the technology described in Schedule F which is not [*] Technology, but in respect of which Digimarc elects, on written notice given to the DLA Contract Authority prior to the expiry of the [*] of the Project, to obtain a licence on the terms set out in clause 8.2 to use in relation to [*] for a Security Purpose in accordance with clause 9.2; "Person" means any individual or other legal entity, including without limitation a sole proprietorship, partnership, unincorporated association, unincorporated syndicate, unincorporated organization, trust, body corporate, or a natural person in the capacity of trustee, executor, administrator or other legal representative; [*]; [*]; [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. [*]; [*]; [*] means the tasks and Deliverables identified in the [*] attached as Schedule B to be performed or produced [*]; [*] means the tasks and Deliverables identified in the [*] attached as Schedule C to be performed or produced [*]; [*] means the tasks and Deliverables identified in the [*] attached as Schedule D to be performed or produced [*]; "Problem Report" means a report of a problem addressing as many of the topics specified in Schedule "R" as are relevant to a reasonable understanding of the problem; "Project Technology" means the technology described in Schedule "H" developed by or on behalf of Digimarc under this Agreement after [*], all Improvements to that technology or to the [*] Technology or to the Other [*] Technology, and all Intellectual Property Rights in that technology and those Improvements; "Properly Embedded" when used in reference to a [*] means that the [*] is [*] in accordance with the written instructions provided by Digimarc with the [*] used to [*] and is capable of passing the Verification Test; "Recipient" means a party to which the Confidential Information of the other party has been disclosed or otherwise made available; "Schedule" means a schedule to this Agreement; [*]; "Security Purpose" means the purpose of [*]; "Security Requirements" means the requirements for physical security including, without limitation, electronic systems security set out in Schedule J; "Specifications" for the CDS or any part thereof means the specifications for the CDS or part thereof accepted by [*] under this Agreement; [*]; [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. "Statement of Work" means the Statement of Work set out in Schedules B, C or D as applicable; "System Support" means the maintenance and other support for the CDS described in Schedule "O" attached; "Technical Information" means all information including, without limitation, source code, programming instructions, algorithms, software and other works of authorship, manufacturing and technical data, drawings, specifications, instruction manuals, user manuals, procedures, facilities, prices, suppliers' lists and all other information comprising or relating to the development of the [*] Technology, or any part thereof, or the application of the CDS Technology, or any part thereof, in the [*]; "Term" means the period commencing on the Effective Date and ending on [*]; "Training" means the training in the use and operation of the [*] described in Schedule Q; "Verification Test" means a test or tests developed by Digimarc as part of the [*] to determine if [*]; and "Work" means the Work that is required to be performed by Digimarc in order to complete the tasks and deliver the Deliverables and otherwise comply with its obligations under this Agreement. 1.2 Interpretation - In this Agreement: -------------- 1.2.1 unless otherwise specified, all references to money amounts are to the currency of the United States of America; 1.2.2 the use of words in the singular or plural, or with a particular gender, shall not limit the scope or exclude the application of any provision of this Agreement to such Person or Persons or circumstances as the context otherwise permits; 1.2.3 whenever a provision of this Agreement requires an acceptance, approval or consent by a party to this Agreement and notice of such acceptance, approval or consent is not delivered within the applicable time, then the party shall be conclusively deemed to have withheld the acceptance, consent or approval; 1.2.4 unless otherwise specified, the number of days within or following which any payment is to be made or act is to be done shall be interpreted to be continuous and shall be calculated by [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. excluding the day on which the period commences and including the day which ends the period and by extending the period to the next Business Day if the last day of the period is not a Business Day; 1.2.5 unless otherwise specified, the order of precedence for interpreting this Agreement shall be: (a) this Agreement, excluding Schedules; (b) the Schedules; and (c) as between the delivery schedules forming part of a Statement of Work, and other provisions of such Statement of Work, the delivery schedules shall take precedence. 1.2.6 for greater certainty, a party or representative to which this Agreement grants the right to make a decision or determination in the sole discretion of the party or representative is not required to act reasonably in making the decision or determination and no such decision or determination may be challenged by the other party under the Arbitration Agreement or otherwise; 1.2.7 the words "includes" or "including" will be construed as meaning "included without limitation" and "including without limitation" as the case may be; and 1.2.8 a clause or Schedule, unless the context requires otherwise, is a reference to a clause to, a Schedule of, or a paragraph of a Schedule to, this Agreement, as amended from time to time in accordance with this Agreement. 1.3 Applicable Law - This Agreement shall be construed in accordance with the -------------- laws of England to the exclusion of its rules of conflicts of laws. 1.4 Schedules - The Schedules to this Agreement, listed below, are an --------- integral part of this Agreement: Schedule Description -------- ----------- Schedule "A" System Description Schedule "B" [*] Schedule "C" [*] Schedule "D" [*] Schedule "E" Arbitration Agreement Schedule "F" [*] [*] Schedule "G" Digimarc Technology Schedule "H" Project Technology Schedule "I" [*] [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. Schedule "J" Security Requirements Schedule "K-1" [*] Schedule "K-2" [*] - Non-[*] Schedule "L-1" [*] Schedule "L-2" [*] - Non-[*] Schedule "M" Escrow Agreement Schedule "N" Progress Reporting and Project Reviews Schedule "O" System Support Services Agreement Schedule "P" Fees for Integration Support and Verification Testing Schedule "Q" Training Schedule "R" Problem Report Schedule "S" Proforma Invoice Schedule "T" Form of Deed of Adherence Schedule "U" Form of Comfort Letter 2. SCOPE OF THE WORK 2.1 Digimarc shall perform [*] in accordance with the [*] and, subject to [*]' acceptance of the corresponding Offer described in clause 2.3, the [*] in accordance with the [*] and the [*] in accordance with the [*]. 2.2 On or before (i) [*] and (ii) [*], Digimarc shall deliver to [*] and the DLA Project Manager a written proposal (the "Proposal") for the Work to be done [*], which Proposal will be in the form of a proposed amendment to this Agreement and will include, but not be limited to: (a) changes to the Statement of Work for [*]; (b) an estimate of the [*] to be incurred by Digimarc in connection with Digimarc's performance of the Work for [*]; and (c) the nature, timing and estimated quantity of the effort which will be required from [*] to enable Digimarc to perform the Work as proposed [*] including, for greater certainty, the assistance reasonably required from [*]. 2.3 The Proposal for [*] when delivered by Digimarc to [*] pursuant to clause 2.2 shall be deemed to constitute an irrevocable offer (the "Offer") to amend the Agreement. Digimarc undertakes and represents that each Proposal will be prepared with all due care and diligence and that at the date of [*]' acceptance of each Offer it will not be aware of any matters within its reasonable control which might or will adversely affect its ability to perform the Work for the [*]. 2.4 The Offer (i) for [*] shall remain open until [*] and (ii) for the [*] shall remain open until [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. [*] for written acceptance by [*] at its sole discretion. If requested by the DLA Contract Authority at least seven (7) days before the expiry date for an Offer, Digimarc shall prepare and submit a revised Offer to take into account any reasonable revisions and clarifications to the original Offer requested by the DLA Contract Authority and [*] will have ten (10) days from receipt of the revised Offer to accept it. 2.5 Effective immediately on [*]' acceptance of the Offer or revised Offer in respect of a [*], the Statement of Work [*] and all other relevant provisions of this Agreement will be deemed to have been amended to reflect the Proposal as accepted by [*]. 2.6 The Term will continue notwithstanding that [*] elects not to accept the Offer for [*]. 2.7 Pending acceptance, or express or implied rejection by [*] of the Offer as provided in clause 2.4, the DLA Contract Authority may, in his or her sole discretion, authorize Digimarc to perform all or part of the Work described in the Offer (or other Work as agreed between the parties' respective Contract Authorities). If [*] accepts the Offer for [*], all such authorized Work will be deemed to form part of the Work [*] to which the Offer relates. In any event, [*] shall compensate Digimarc for such authorized Work as though it were [*]. 2.8 Commencing no later than ten (10) Business Days after every written request made during the Term by the DLA Contract Authority, Digimarc shall make an irrevocable offer, which offer shall remain open for acceptance within sixty (60) days from the date of receipt by the [*] to which the Offer is addressed, to grant to an [*] a [*] to [*] in connection with [*] of the [*] on terms no less favourable to that [*] than those set out in whichever of Schedules "K-1" and "K-2" is applicable. 2.9 Commencing no later than ten (10) Business Days after every written request made during the Term by the DLA Contract Authority or a [*], Digimarc shall make an irrevocable offer, which offer shall remain open for acceptance within sixty (60) days of receipt by [*] to which the Offer is addressed, to: (a) [*] designated by the DLA Contract Authority or a [*] a [*] to [*] in connection with [*] of a [*], on terms no less favourable to the [*] than those set out in whichever of Schedules "L-1" and "L-2" is applicable; and (b) [*] referred to in clause 2.9(a) at no charge and provide the Training to the [*] for the charges to the [*] described in clause 2.12 within ten (10) Business Days after the [*] acceptance of the offer to [*], or at such other time as may be agreed between Digimarc and the [*]. 2.10 No later than sixty (60) Business Days after every written request made by a [*] during the Term, Digimarc shall provide Integration Support to the [*] on a date or dates agreed [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. between Digimarc and the [*] for the charges described in clause 2.12 provided that in 1999 the sixty (60) Business Day limit shall apply only to the first three [*]s which require such services. 2.11 No later than twenty (20) Business Days after every written request made by [*] or a [*] during the Term, Digimarc shall conduct Verification Tests of [*] on a date or dates agreed between Digimarc and the [*] or the [*], as the case may be, for the charges specified in clause 2.12. 2.12 The amount charged by Digimarc to the [*] or Licensed [*] for the Training, Integration Support and Verification Tests provided: (i) before the [*], will be determined in accordance with the provisions of Schedule "P"; (ii) [*], will not be greater than the charge then paid to Digimarc for similar support by Digimarc's most favoured customer. 2.13 At any time during the Term following [*] which [*] elects to proceed with as described in clause 2.4 Digimarc shall on receipt of a written request from a [*]. 2.14 Digimarc shall report to the DLA Contract Authority at least once each calendar quarter of the Term on Improvements and [*] which Digimarc has made or caused to be made since the last report. Promptly following notice by the DLA Contract Authority, Digimarc [*] the [*] provided to the [*] designated by the DLA Contract Authority to [*] the [*]. Digimarc shall in any event issue the [*] to the [*]. The [*] of such [*] by Digimarc (i) before [*] of the [*] and (ii) following [*] of the [*] and will be [*]. Notwithstanding the foregoing, [*] an Improvement into [*] employed by it in [*]. Digimarc shall [*] the System Support for the two (2) versions of [*] which preceded the then current version of [*] or for all versions of [*] released within twenty-four (24) months prior to the date of issue of the [*],[*] at [*] to the [*] above the [*] for the System Support. 2.15 Digimarc shall obtain at its own expense all licenses or permits required to be obtained from the Government of the United States in order for Digimarc to comply with its obligations under this Agreement including, without limitation, to [*] and Escrowed Materials, and grant the associated licenses, to [*] and other licensees. 2.16 Digimarc acknowledges and confirms [*]' right to enforce clauses 2.9 and 2.11 by an application for specific performance or otherwise. 3. PRICE AND PAYMENT 3.1 In addition to the amounts payable in accordance with clause 8, [*] shall pay Digimarc [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. [*] for the [*] to the Digimarc Technology granted to [*] under clause 8 of this Agreement by the later of (a) five (5) Business Days after the date that the Escrow Agent notifies [*] that it has taken possession of the reproductions of the Technical Information for the CDS Technology under clause 8.7 and successfully verified that Technical Information in accordance with the Verification Process (as defined in the Escrow Agreement), and (b) thirty (30) days after this Agreement is signed by both parties. Both parties will use their best efforts to ensure the activities in a) are completed within 30 days after this Agreement is signed. 3.2 Subject to the limits set out in this Agreement and unless otherwise expressly set out herein, [*] shall [*] Digimarc for all the [*] reasonably and properly incurred by Digimarc during each calendar month to perform [*], and any other Work authorized by [*] in writing, plus a [*] on the [*] (the "[*]"). Digimarc shall invoice [*] monthly in arrears for such Costs and [*]. Each invoice shall specify the time spent by the staff and sub-contractors of Digimarc in performing the Work and shall give a [*] of the [*] in the form attached as Schedule S. 3.3 The amount which [*] is required to pay Digimarc for the [*] incurred in performing [*] and [*] in calendar year 1999 will not be greater than [*]. The amount which [*] is required to reimburse Digimarc for the [*] incurred in performing [*], respectively, will not be greater than the estimates for that Work accepted by [*] pursuant to the provisions of clause 2.4. Digimarc shall complete all relevant work notwithstanding that it is unable to recover [*] incurred in relation thereto due to the operation of the limits set out in this clause 3.3. 3.4 Except as otherwise expressly provided herein, the total amount which [*] will be liable to pay Digimarc for or in connection with the [*] and [*] for the [*] will not be greater than [*] and, assuming that (i) [*] has accepted Digimarc's Offer for [*] and, (ii) [*] does not terminate this Agreement as permitted herein prior to the date on which Digimarc completes [*] in accordance with the provisions of this Agreement, not less than [*], subject to Digimarc having performed the Work equal to this amount of [*] and [*]. 3.5 If [*] elects not to proceed with [*] as described in clause 2.4 above, and at the time of such election [*] has not served notice of breach, or termination for Digimarc's default, under clause 15, [*] shall pay Digimarc an amount equal to [*] of the total amount paid for [*] and the corresponding [*] for the Work done during the previous nine (9) months. 3.6 [*] shall pay Digimarc each amount which [*] owes Digimarc under this Agreement no later than thirty (30) days after the later of the payment due date and the date on which [*] receives a detailed and correct invoice for the amount. 3.7 For a period commencing on the Effective Date and ending on the date [*] following the last date on which Digimarc issues an invoice to [*] for [*], Digimarc shall maintain proper, up-to-date, accurate and complete books, records and other documentation substantiating the [*] invoiced under this Agreement including, without limitation, time sheets showing the hours spent [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. on each task which forms part of the Work and receipts for all disbursements. Digimarc shall produce such books, records and documentation to [*] or its representatives for inspection and copying at all reasonable times on request by the DLA Project Manager. 3.8 Except as otherwise expressly provided in this Agreement, [*] shall pay Digimarc all sales, use, goods and services or other similar taxes levied by any government in the [*] which Digimarc is obliged to collect and remit to such government(s) in connection with any amount paid by [*] to Digimarc under this Agreement. Such payments by [*] shall be in addition to those set forth in clause 3.4. 3.9 Digimarc is responsible for, and shall indemnify [*] against, and hold [*] harmless from, the payment of all taxes levied by any government on or in respect of Digimarc's income and any amounts required by law to be paid in respect of social benefits for Digimarc's employees relating to or arising out of the performance of the Work by Digimarc. If required by law, [*] shall deduct all such taxes and amounts from the amounts otherwise payable to Digimarc and remit them to the appropriate authorities. 3.10 [*] may set off against any amount which [*] owes Digimarc under or in connection with this Agreement any amount which Digimarc owes [*] under or in connection with this Agreement. 4. PROJECT MANAGEMENT 4.1 Digimarc shall designate a responsible individual with adequate authority and competence as the Digimarc Project Manager whose responsibilities, in addition to those expressly set out in this Agreement, shall be to serve as project leader and primary interface with [*]. 4.2 The DLA Project Manager shall be responsible for coordinating fulfilment by [*] of its obligations under this Agreement including the provision of all the general information about [*] that Digimarc may reasonably require in order to perform its obligations under this Agreement. The DLA Project Manager shall have no authority to amend this Agreement, approve payments or approve or accept Deliverables or other Work or Proposals on behalf of [*], all of which actions shall be within the exclusive authority of [*]. 4.3 The Digimarc Project Manager shall be responsible for coordinating the performance of the Work by Digimarc but shall have no authority to agree to an amendment of this Agreement on behalf of Digimarc which action shall be within the exclusive authority of the Digimarc Contract Authority. 4.4 Either party's Project Manager or Contract Authority may from time to time appoint one or more persons to represent him or her on prior written notice to the other party's Project Manager or Contract Authority. [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 4.5 Digimarc shall not, without first obtaining the written consent of the DLA Contract Authority which consent will not be unreasonably withheld, remove or replace: (a) any employee of Digimarc or its authorized subcontractors assigned to do any part of the Work if the employee or subcontractor is critical to completion of the Work by Digimarc in accordance with this Agreement; or (b) its Project Manager. "Critical" means that the Work cannot timely be completed by Digimarc without such employee. 4.6 Digimarc shall replace within a reasonable time under the circumstances any of its employees or authorized subcontractors engaged in fulfilling its obligations under this Agreement, including its Project Manager, whose removal is required by the DLA Contract Authority, provided that the DLA Contract Authority specifies reasonable cause for such removal in writing. 4.7 Digimarc represents that all personnel assigned to do the Work will be employees of Digimarc. Digimarc shall not engage any subcontractor other than the subcontractors identified by Digimarc in writing to [*] before this Agreement was executed to do any part of the Work without first obtaining the prior written consent of the DLA Project Manager, who may give or withhold such consent in his or her sole discretion. Digimarc undertakes that it shall obtain from each subcontractor prior to permitting that subcontractor to do any part of the Work a written undertaking that all Intellectual Property Rights in any Work created by that subcontractor vest absolutely in Digimarc upon the date of creation. Digimarc hereby warrants and represents that it has obtained such undertakings from all subcontractors engaged in relation to the Work prior to the date of execution of this Agreement. 4.8 Digimarc shall report on progress of the Work and conduct progress reviews in accordance with the provisions of Schedule "N". 4.9 In the event that it becomes evident to either party's Project Manager that a failure or delay by either party to perform in accordance with its obligations under this Agreement will result in a material impact on the completion of the Work in accordance with the applicable Statement of Work, then the relevant Project Manager shall immediately bring the issue to the attention of the other party's Project Manager. 5. RESPONSIBILITIES OF [*] 5.1 [*] shall perform all tasks assigned to it in the Statement of Work [*] (herein sometimes referred to as the [*] Tasks). [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 5.2 Unless otherwise expressly set out in this Agreement, [*] shall respond in writing within ten (10) Business Days to every written request for consent required by this Agreement received from Digimarc. 5.3 If [*] is delayed in complying with any of its obligations under clauses 5.1 or 5.2 for any reason not attributable to Digimarc, and such delay is the cause of a delay in the completion and delivery by Digimarc of any Deliverable, then the time for completion of the Deliverable, and all subsequent Deliverables dependent thereon, will be extended automatically by one day for each day of delay by [*] or such other period as may be agreed in writing between the parties' respective Contract Authorities. If Digimarc suffers increased costs by reason of such delay, other than a delay due to a force majeure event, such costs shall be borne by [*] and shall be in addition to the [*] otherwise contemplated by this Agreement. If the delay is due to a force majeure event, such costs shall be borne equally by [*] and Digimarc, and shall be in addition to the [*]. This clause 5.3 sets forth Digimarc's only remedy for a delay by [*] in complying with any such obligation. 6. CHANGES TO THE WORK 6.1 Either party may propose a change to the Work from time to time by submitting a request in writing to the other party's Project Manager. 6.2 On making such a request or within three (3) Business Days after receiving such a request from the DLA Project Manager, Digimarc shall inform the DLA Project Manager of the amount, if any, which Digimarc intends to invoice [*] to investigate whether the change can be made and the effect the change will have on the Statement of Work and the [*] for [*]. 6.3 Within ten (10) Business Days after receiving the written authorization of the DLA Project Manager to conduct the investigation or such longer period as may be authorized by the DLA Project Manager, Digimarc shall report to the DLA Project Manager, in writing, on the results of the investigation. 6.4 Within ten (10) Business Days after the DLA Project Manager receives the report, the DLA Contract Authority shall, on behalf of [*], notify Digimarc whether or not [*] authorizes the change. 6.5 Digimarc shall not implement any change to the Work until the change is authorized in writing by the DLA Contract Authority on behalf of [*]. 6.6 Pending receipt of a written authorization from the DLA Contract Authority, on behalf of [*], Digimarc shall proceed with the Work in accordance with the Agreement. [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 7. APPROVAL OF DELIVERABLES 7.1 If Digimarc fails to produce a Deliverable acceptable to [*] by the date set out in the applicable Statement of Work, or in the case where the Statement of Work requires the parties to agree on whether a Deliverable is acceptable, if the parties fail to agree for any reason by the date specified in the Statement of Work or, if no date is specified, within ten (10) Business Days after a party's Contract Authority asks the other party's Contract Authority for agreement, then the DLA Contract Authority may, in its sole discretion, by written notice to Digimarc, either: (a) allow additional time for Digimarc to produce a Deliverable acceptable to [*] or for the parties to come to agreement, whereupon the time for completion of all other Deliverables which depend on the acceptance or agreement will be automatically extended by one day for each additional day or such other period as may be agreed in writing between the parties' respective Contract Authorities; or (b) cancel any further Work on the Deliverable and all Deliverables which depend on the acceptance or agreement, whereupon the Statement or Statements of Work which provide for the cancelled Work or Deliverables will be deemed to be amended to exclude them. 7.2 Neither party shall refer for arbitration any failure to agree referred to in clause 7.1. [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 8. INTELLECTUAL PROPERTY MATTERS 8.1 [*] acknowledges that Digimarc does not have sufficient basis on which to determine whether [*] is the owner of the [*] Technology or the Other [*] Technology. 8.2 [*] shall grant to Digimarc following Digimarc's written acceptance of an offer by [*] to obtain a licence for any [*] Technology a [*] such [*] Technology to comply with its obligations under this Agreement and any license agreement entered into as directed or permitted by the DLA Contract Authority under this Agreement and for no other purpose. 8.3 Digimarc acknowledges that [*] does not have sufficient basis on which to determine whether Digimarc is the owner of the Digimarc Technology or the Project Technology but as between [*] and Digimarc, Digimarc is the owner of the Project Technology, the Improvements thereon and the Technical Information related thereto. Except as otherwise provided herein, Digimarc may freely use and license all such technology. 8.4 Digimarc hereby grants to [*], effective upon the date specified in clause 8.5, the [*] the Digimarc Technology and the Project Technology, and all Improvements thereto, and the Technical Information pertaining to the Digimarc Technology, the Project Technology and such Improvements, and to sublicense the use of the Digimarc Technology and the Project Technology and such Improvements and Technical Information to other Persons, for the purposes of [*] the System and any such component thereof, and making the System and any component available to others solely for [*]. On the effective date of the grant of the license referred to above, [*], copy and use the Escrowed Materials for the purpose of exercising all rights granted under the license and the Escrow Agent shall be deemed authorized to release the Escrowed Materials to [*]. The expressions "[*]" as used in this clause 8.4, shall be deemed to refer to [*]. 8.5 The license described in clause 8.4 shall take effect on the earliest of: (a) the date on which the DLA Contract Authority requests in writing the license and [*] pays Digimarc the difference, if any, between [*] and the total of the amounts paid and owing to Digimarc pursuant to clause 3.3 above; (b) [*], subject to payment of all sums properly due to Digimarc under clause 3.2 for Work completed up to [*]; (c) sixty (60) days following the effective date of termination of this Agreement by [*] in accordance with the provisions of clause 15.2 (a), (b), (d) or (e) unless Digimarc demonstrates within such sixty (60) day period that, notwithstanding the occurrence of the events giving rise to the termination, Digimarc is willing and able to comply with its obligations under the Agreement; and [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. (d) the effective date of termination of this Agreement by [*] in accordance with the provisions of clauses 15.2(c), 15.2 (f), 15.2(g) or 15.3. 8.6 Digimarc hereby grants to [*], effective on the date specified in this clause, the [*] the Digimarc Technology and the Project Technology and all Improvements thereto, and the Technical Information pertaining to the Digimarc Technology, the Project Technology and such Improvements, and to sublicense the use of the Digimarc Technology, the Project Technology and such Improvements and Technical Information to other Persons, for the sole purpose of [*], solely for [*]. This license shall take effect on written request by the DLA Contract Authority at any time following the later of the date on which the license referred to in 8.4 takes effect and the date on which [*] pays Digimarc [*]. 8.7 Upon the date on which this Agreement is last signed by them, [*] and Digimarc shall sign the Escrow Agreement and procure that the Escrow Agent signs that Agreement within thirty (30) days. Upon complete signature of the Escrow Agreement, Digimarc shall make available a complete and accurate copy of the Technical Information for the Digimarc Technology and the Project Technology existing on April 19, 1999, for collection and the carrying out of the Verification Process referred to in clause 3.1 by the Escrow Agent at Digimarc's premises. 8.8 From time to time during the Term, on no less than five (5) Business Days prior written notice by the DLA Project Manager, Digimarc shall, at Digimarc's premises, present representatives of the Escrow Agent with all the material, in any form, in Digimarc's possession or control which contains or describes the Technical Information pertaining to the Digimarc Technology and the Project Technology. The representatives may identify any or all of such material and Digimarc shall arrange, at the expense of [*], for a complete, accurate and up- to-date copy of the selected material to be made and sent to the Escrow Agent within five (5) Business Days of the selection being made for deposit under the terms of the Escrow Agreement. If [*] exercises the right granted by this provision 8.8, [*] shall reimburse Digimarc's costs related thereto which costs are in addition to the [*] otherwise contemplated by this Agreement. 8.9 Within twenty (20) Business Days after the end of each calendar quarter during each Phase, Digimarc shall update the Escrowed Material in the possession of the Escrow Agent to reflect all Improvements to the CDS Technology and [*] made by or at the request of Digimarc during that quarter. 8.10 Nothing in this Agreement shall be construed to grant any broader license rights than those expressly granted by the Agreement. [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 8.11 From and after the date on which [*] gets access to the Escrowed Materials pursuant to the Escrow Agreement, [*] shall inform Digimarc within thirty (30) days after the end of each calendar quarter during the Term of all improvements relating to (i) [*]; (ii) [*]; (iii) [*]; and (iv) any other part of the CDS, [*], or caused or permitted to be made, as a result of access to and use of the Escrowed Materials or the Digimarc Confidential Information. The first such information shall be provided to Digimarc within thirty (30) days after the first calendar quarter following said access, and shall cover improvements made from the date [*] first received, or caused or permitted others to receive, any of the Escrowed Materials or any Digimarc Confidential Information. Following the provision of the information under this clause 8.11, [*] shall provide to Digimarc within a reasonable period of time following request, the Technical Information for those improvements requested by Digimarc in writing. 8.12 [*] hereby grants to Digimarc a [*]. 8.13 The license referred to in clause 8.12 shall continue until this Agreement expires or is terminated, or until [*] has no further rights to the Escrowed Materials and Digimarc Confidential Information, whichever occurs last. 8.14 For greater certainty, the obligations set out in clauses 8.11, 8.12 and 8.13 shall not apply to any improvement which [*] can demonstrate would have been made irrespective of access to the Escrowed Materials or Digimarc Confidential Information. 8.15 [*] shall take all reasonable steps to ensure that Persons, other than its directors, officers and employees, to whom it allows access to the Escrowed Materials will be contractually bound in accordance with terms substantially like those set forth in clauses 8.11, 8.12, 8.13 and 8.14, granting rights in favour of Digimarc. 8.16 Notwithstanding any other provision of this Agreement to the contrary, [*]' right to acquire the license described in clause 8.4 by payment of the fee described in clause 8.5(a) shall survive termination of this Agreement by [*] in accordance with the provisions of clause 15.2 (a), (b), (d) or (e) and be exercisable at any time during a period of sixty (60) days following such termination. 9. SECURITY 9.1 Unless otherwise expressly permitted by this Agreement or authorized in writing by the DLA Contract Authority pursuant to this Agreement, Digimarc shall not use, or permit or suffer, to be used: (a) [*] [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. (b) the [*] Technology or the Other [*] Technology for any purpose except solely to comply with Digimarc's obligations under this Agreement and any license agreement entered into as directed by the DLA Contract Authority under this Agreement. Subject to the restrictions set out in this clause 9.1, Digimarc may, at its option, [*]. 9.2 Notwithstanding the provisions of clause 9.1, Digimarc may use the [*] Technology, the Other [*] Technology and the [*], and any Improvements, and the Technical Information pertaining to the [*] Technology, the Other [*] Technology and the [*] and such Improvements, to [*] to a Security Client for a Security Purpose. Such use may continue so long as: (a) [*]; and (b) [*]. 9.3 Digimarc may, at any time, make a proposal to the DLA Contract Authority to use the [*] Technology, the Other [*] Technology and the Technical Information pertaining thereto, to develop products and services and to license the use of those products and services to other clients or for other purposes. The DLA Contract Authority may, in his or her sole discretion, authorize the proposed use. Following authorization, such use may continue so long as: (a) the use does not have a material adverse impact on the effectiveness for [*] provided by Digimarc to any Person during the Term for incorporation into any Device in [*]; and (b) Digimarc uses its best efforts, including obtaining a legally binding commitment from the proposed user, to ensure that the proposed user does not use the product or service or permit or suffer the product or service to be used, for any purpose other than the permitted purpose. 9.4 For the purposes of clauses 9.2 and 9.3: (a) a license to use shall not, unless expressly agreed to by the DLA Contract Authority in his or her sole discretion, include the right to grant a sublicense to any Person except end-user customers of the licensee; and (b) a "material adverse impact" will be deemed to arise if, as a result of such use or enjoyment, a [*] referred to therein fails to meet the Specifications for the version of the [*] last accepted by [*] under this Agreement. 9.5 Digimarc shall supply the DLA Contract Authority with all information reasonably available and required to evaluate the effect of each use proposed by Digimarc pursuant to clause 9.3 including, but not limited to, details of the ownership, affiliations, financial stability, security [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. practises, industry reputation, business plans and business operations of the proposed user. 9.6 If Digimarc learns, or has reasonable cause to believe, that any Person to whom Digimarc: (a) licenses the use of a product or service as permitted by the DLA Contract Authority under clauses 9.2 or 9.3 has used, or permitted or suffered to be used, or proposes to use, or permit or suffer to be used, the product or the results of the services for any purpose which is not permitted as described above, or (b) has granted a license as requested by the DLA Contract Authority under clause 2.8 or 2.9 in respect of, or has used, or permitted or suffered to be used, or proposes to use or permit or suffer to be used, the [*] or the Technical Information pertaining thereto subject of the license for any purpose other than as permitted by this Agreement, Digimarc shall immediately notify the DLA Contract Authority of such unauthorised use and Digimarc shall use its best efforts, at its own expense, to prevent any further such use including exercising whatever legal remedies (including, without limitation, an application for injunctive relief) are available to Digimarc. Digimarc shall, immediately on notice by the DLA Contract Authority, assign to [*] any right of action which Digimarc may have in respect of any such further use, or transfer to [*] the control and conduct of legal proceedings and claims in relation to such use. Following such assignment or transfer, Digimarc shall cooperate with [*] to achieve the successful prosecution or, if directed by [*], settlement, of any such action, proceedings or claims. 9.7 Digimarc shall not, except as reasonably necessary to fulfill its obligations under this Agreement or any license agreement entered into as requested by the DLA Contract Authority under clause 2.8 or 2.9, enable any product referred to in clauses 9.2 or 9.3 to produce, display or otherwise make detectable, [*] which is or may be used in [*] by any Licensed [*]. 9.8 Digimarc shall at all times comply, and shall ensure that its employees, agents and subcontractors comply, with the Security Requirements. 10. REPRESENTATIONS AND WARRANTIES OF DIGIMARC 10.1 Digimarc represents, warrants and undertakes to [*] that from and after the Effective Date: (a) the Work will be of professional quality conforming to generally accepted [*] practices and will be performed at all times in a timely and cost effective manner and, for greater certainty Digimarc shall employ the standard of care in performing the work that would be expected of [*] of the same or similar type as the [*] which comprises the CDS Technology; [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. (b) Digimarc is duly incorporated and organized and is validly subsisting under the laws of the State of Oregon, U.S.A. or some other state in the United States with full corporate power and authority to enter into this Agreement; (c) to the best of its knowledge, neither this Agreement nor the Work will contravene, breach, or result in any default under any agreement, permit, by-law, or law or regulation to which Digimarc is subject or by which it is bound including, for greater certainty, any laws or regulations in effect in the United States governing export; (d) this Agreement when executed and delivered by Digimarc shall constitute a valid and binding agreement with Digimarc enforceable against Digimarc according to its terms; (e) Digimarc owns all rights in and to, or is properly licensed in respect of, the Digimarc Technology, the Project Technology and the Technical Information pertaining thereto; (f) Digimarc will at all material times have the right to grant the licenses to the Digimarc Technology, the Project Technology and the Improvements thereon and the Technical Information pertaining to the Digimarc Technology and the Project Technology and all such Improvements as required by this Agreement; and (g) for greater certainty, neither the Project Technology, the Digimarc Technology or Improvements thereon or the Technical Information pertaining to the Project Technology, the Digimarc Technology or such Improvements infringe any Intellectual Property Right of any Person. 10.2 Digimarc represents, warrants and undertakes to [*] that: (a) incorporated as part of its [*] practices and procedures are those measures and security procedures commercially and reasonably available on the date for delivery of a component of the CDS [*] in the CDS that could interfere with the use of the CDS or corrupt, interfere with or damage any data; (b) the CDS shall contain no lock, clock, timer, counter, copy protection feature, replication device or intentional defects (including but not limited to "viruses" or "worms" as such terms are commonly used in the computer industry), CPU serial number reference, or other device which might: (i) lock, disable or erase the CDS or any data which is loaded on the CDS so as to prevent full use of the CDS by authorized Persons; or (ii) require action or intervention by Digimarc or any other Person to allow properly [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. trained and authorized Persons to use the CDS; (c) the source code for the CDS, including that deposited with the Escrow Agent, will, without reference to Digimarc or any of its employees or authorized subcontractors, be understandable and usable by expert personnel familiar with the programming languages, and scientific and processing techniques, used therein, and will not involve any programming components that such personnel could not reasonably be expected to understand, and if necessary such source code shall contain sufficient commentary to enable such personnel to understand and use such components; the source code for the CDS will support the year 2000 and neither performance nor functionality will be affected by dates prior to, during and after the year 2000 and, for greater certainty, the CDS will switch to 1 January 2000 on 1 January 2000, and the year 2000 will be recognized as a leap year; and (d) the Technical Information and all other Escrowed Materials deposited with the Escrow Agent under this Agreement will contain all information in human readable form and on suitable media to enable an expert technical consultant, familiar with the scientific and processing techniques used therein, to understand and use the same without reference to Digimarc or any of its employees and authorised subcontractors. 10.3 Digimarc represents, warrants and undertakes to [*] that: (a) [*] accepted by [*] will meet the Specifications for that version from the date that it is accepted by [*] until the earlier of the date on which the next version is accepted by [*] and the last day of the Term; and (b) until the last day of the Term, [*] provided by Digimarc to any Person for incorporation into any Device will be capable of meeting the performance criteria which formed part of the Specifications for the version of the [*] last accepted by [*] under this Agreement at the time such detector was so provided. 10.4 [*] will not be counted in the determination under clause 10.3 as to whether or not an [*] meets the Specifications. 10.5 If any version of the [*] fails to meet the Specifications for that version within one (1) year of the date of acceptance thereof by [*], and such failure could not have been discovered by [*] using reasonable diligence during the acceptance procedure for that version, then Digimarc shall, at its own expense, within sixty (60) days after receipt of the Problem Report from the DLA Contract Authority or the DLA Project Manager or such other period as the DLA Project Manager may agree, rectify the failure and at the direction of the DLA Project Manager provide a corrected [*] to which Digimarc had previously provided the [*]. [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 10.6 If a particular version of [*] provided by Digimarc to any Person during the Term for incorporation into any Device, including for greater certainty any version of a [*], fails to meet the relevant Specifications within one (1) year of the date of acceptance thereof by [*], and such failure could not have been discovered by [*] using reasonable diligence during the acceptance procedure for that version, then Digimarc shall, at its own expense, within sixty (60) days after receipt of written notice of a Problem Report from the DLA Contract Authority or the DLA Project Manager or such other period as the DLA Project Manager may agree, rectify the failure and at the direction of the DLA Project Manager provide [*] to all Persons to which Digimarc had previously provided such [*]. 11. REPRESENTATIONS AND WARRANTIES OF THE [*] 11.1 [*] represents and warrants to Digimarc that: (a) [*] has full power and authority to enter into this Agreement; (b) this Agreement when executed and delivered by [*] shall constitute a valid, binding and enforceable obligation of [*]; (c) [*] will at all material times have the right to grant the licenses required by this Agreement to the [*] Technology and the Technical Information pertaining to the [*] Technology; (d) from and after the date on which [*] gets access to the Escrowed Materials (the "Release Date") as provided by clause 8.4 or 8.6 above until the last day of the Term, every [*] which [*] develops, permits, or causes to be developed using the Escrowed Materials for incorporation into any Device will be capable of [*] with the same or better performance ([*]) than the version of the [*] last accepted by [*] possessed on the Release Date on which [*] gets access to the Escrowed Materials. 11.2 [*] makes no representations, warranties or undertakings that [*] has any right to grant any license in respect of any Other [*] Technology or grant the licenses required to be granted by clause 8.12 in relation to any improvements referred to therein and in each case Digimarc shall be solely responsible for determining that any Other [*] Technology and/or such improvements are suitable for the intended use and for the consequences of any use of the same, whether by Digimarc or others, and [*] hereby disclaims all liability in connection therewith. 11.3 For greater certainty, the provisions of clauses 16.5 and 16.6 shall not apply to any Other [*] Technology. 12. CONFIDENTIALITY [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 12.1 Except as otherwise expressly permitted by this Agreement, a Recipient shall not use, reproduce or disclose the Confidential Information of the Discloser for any purpose other than as reasonably necessary to comply with its obligations under this Agreement or to exercise any rights or licenses granted to it under or pursuant to this Agreement. 12.2 The Recipient shall protect the Confidential Information of the Discloser from disclosure by using the same degree of care, which shall be no less than a reasonable degree of care, as the Recipient uses to protect its own confidential information. 12.3 On written request from the Discloser, the Recipient shall return, or certify the destruction of, all originals and copies of the Discloser's Confidential Information in the Recipient's possession or control which the Recipient does not need to retain in order to perform any obligations imposed, or exercise any rights acquired, by this Agreement. 12.4 A Recipient may, on a need to know basis, and only for the purposes described in clause 12.1, give the other party's Confidential Information to the Recipient's employees, authorized subcontractors or representatives provided that such employee, subcontractor or representative shall have entered into a non-disclosure agreement in respect of such Confidential Information in favour of the Discloser on terms materially similar to the provisions of this clause 12. For greater certainty, [*]' representatives shall include the DLA Contract Authority, the DLA Project Manager and all representatives of members of [*]. 12.5 The obligations set out in this clause 12 will not apply to any Confidential Information that: (a) is or becomes publicly available other than through the fault of the Recipient; (b) was known to the Recipient prior to disclosure as shown by documentation sufficient to establish such knowledge; (c) was or is lawfully disclosed to the Recipient by a third party who did not breach any obligation of confidence by such disclosure and who made the disclosure without restriction on further disclosure all of which is shown by documentation sufficient to establish same; or (d) is required by law to be disclosed provided, however, that the Recipient shall first give written notice to the Discloser before the disclosure so that the Discloser may seek an appropriate protective order. The fact that Confidential Information, or any part thereof, can be linked together by a search of publications and other information, followed by a selection of a series of such items of knowledge from unconnected sources, and fitting together those items of knowledge so as to [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. duplicate or recreate any item of Confidential Information, shall not be deemed to cause the Confidential Information, or any part thereof, to be included within exceptions (a), (b) or (c), above. 12.6 If either party is required by applicable law or regulation, by legal process or by the U.S. Securities and Exchange Commission or listing requirements of any exchange or quotation system on which securities of any party may be listed or quoted, to disclose the terms of this Agreement (such disclosure being referred to herein as "Legally Required Disclosure"), such party shall provide the other party with prompt notice of such requirement so that the other party may seek an appropriate protective order or remedy. In the event the other party fails to obtain an order or remedy that would permit the requested party not to disclose the required terms, the disclosure shall be permitted, but the disclosing party will use all reasonable efforts to have the disclosure treated confidentially by the recipient. 12.7 The [*] Technology, the Other [*] Technology, and solely for the purposes of clause 12 the [*] insofar as it pertains to [*], and the Technical Information which pertains solely to the [*] Technology and the Other [*] Technology and those aspects of the [*], including any [*] which is or may be used [*] by any Licensed [*], shall be deemed to be the Confidential Information of [*]. Digimarc may disclose such Confidential Information to a person to whom Digimarc has granted a license pursuant to clause 9.2 or 9.3 but only if: (a) Digimarc can demonstrate to the reasonable satisfaction of [*] that disclosure is necessary to enable Digimarc to grant the license under clause 9.2 or 9.3; and (b) such person enters into a non-disclosure agreement in respect of such Confidential Information in favour of [*] on terms materially similar to the provisions of this clause 12. 12.8 Nothing in this Agreement shall be construed to require [*] or any representative of [*] including, for greater certainty, the DLA Project Manager or the DLA Contract Authority, to disclose any information which is confidential to a third party including for greater certainty a [*] or a Licensed [*]. 12.9 [*] shall not reverse-engineer, disassemble, or decompile any [*] forming part of the CDS, [*] (except to the extent that any such activity is reasonably necessary to permit [*] to exercise its licence rights under clauses 8.4 and 8.6 of this Agreement or [*]' right to do so may not be contractually restricted under applicable law), and shall contractually ensure that any other Person to whom [*] provides [*] shall be similarly obliged. 12.10 For greater certainty the obligations imposed by this clause 12 shall continue to apply to the Escrowed Material after it comes into the possession of [*] notwithstanding the circumstances that give rise to such possession. [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 12.11 General attributes of the CDS may be [*] in connection with promotion of the CDS to the [*], and to customers or prospects in related markets; information relating to the [*] may be [*] to [*] vendors of [*] subject to a nondisclosure agreement but in all such cases Digimarc shall not disclose any information relating to the [*]. [*] 13. AUDIT AND INSPECTION 13.1 [*], or its duly authorised representatives, may from time to time, without notice, at its own expense, conduct an audit or inspection during normal business hours to verify Digimarc's compliance with its obligations under this Agreement. Digimarc shall facilitate such audit activities by providing access to its premises, as well as any books, records, and other information relating to this Agreement and the Work as may be reasonably requested by [*]. [*] shall promptly advise Digimarc in writing of the results of any audit. If [*] exercises this right more frequently than twice in each calendar year, [*] shall reimburse Digimarc's reasonable costs related thereto which costs are in addition to the [*] otherwise contemplated by this Agreement except in the case where the exercise of such right is reasonably required to follow-up on a non- compliance detected during a previous audit or inspection. 13.2 If, as a result of any such audit, [*] is of the view that Digimarc has engaged in or is about to engage in any act, or has omitted to perform any act, which act or omission is not in compliance with Digimarc's obligations under this Agreement, the DLA Contract Authority may issue to Digimarc a directive requiring Digimarc to refrain from engaging in such act or to perform such act or acts as the DLA Contract Authority deems necessary, acting reasonably, for Digimarc to comply with the Agreement and Digimarc shall promptly comply with such directive at its own expense. 13.3 No act performed by [*], its duly authorised representatives or the DLA Contract Authority pursuant to the provisions of this clause 13 and no omission by any of them to perform an act pursuant to the provisions of this clause 13 shall in any way affect Digimarc's obligation to comply with this Agreement. 14. DISPUTE RESOLUTION 14.1 Any Dispute (as defined in the Arbitration Agreement) shall be finally settled by arbitration in accordance with the Arbitration Agreement. 14.2 Unless otherwise agreed between the parties or unless the subject matter of the dispute resolution proceedings is a party's right to terminate this Agreement, the Work shall continue during the arbitration proceedings and payments due to Digimarc shall not be withheld on account of such proceedings unless that particular Work or payment is the subject matter of the proceedings. Notwithstanding the foregoing, [*] may at its sole discretion instruct Digimarc to [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. continue the performance of that Work, and Digimarc shall act in accordance with those instructions, subject to payment in accordance with clause 3.2. [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 15. TERM AND TERMINATION 15.1 This Agreement shall take effect on the Effective Date and shall remain in force throughout the Term unless sooner terminated as provided herein. 15.2 [*] may in its sole discretion terminate this Agreement effective immediately on notice to Digimarc if: (a) Digimarc makes a general assignment or any other arrangement for the benefit of its creditors; (b) a proposal or arrangement under applicable bankruptcy or insolvency legislation, or a petition is filed by or against Digimarc under applicable bankruptcy or insolvency legislation and is not discontinued within thirty (30) days; (c) Digimarc is declared or adjudicated bankrupt or goes into liquidation; (d) a liquidator, trustee in bankruptcy, custodian, receiver, administrator, administrative - receiver, manager, or any other officer with similar power is appointed over all or any part of the assets and undertaking of Digimarc; (e) Digimarc commits an act of bankruptcy, institutes proceedings to be adjudged bankrupt or insolvent, consents to the initiation of such appointment or proceedings or admits in writing inability to pay debts generally as they become due; (f) Digimarc assigns the Agreement without [*] consent in breach of clause 19.7; or (g) Digimarc ceases or threatens to cease business. 15.3 Either party may terminate this Agreement effective immediately on notice to the other party if: (a) the other party fails, or is unable or unwilling to perform any of its obligations under this Agreement (hereinafter referred to as a "breach") and fails to remedy such breach within sixty (60) days after receiving written notice of such breach from the other party; or (b) an event of force majeure (as defined in clause 17) has continued for a period longer than sixty (60) continuous days or such longer period as the parties may agree and no satisfactory alternative arrangements have been agreed to continue the Work. 15.4 Notwithstanding the foregoing, [*] has no right to terminate this Agreement for breach under clause 15.3 if the breach consists of a failure by Digimarc to perform a particular task the [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. performance of which proves to be technically infeasible provided that the DLA Project Manager has agreed with the Digimarc Project Manager in writing before the task is commenced that the task may be technically infeasible. 15.5 As of the effective date of a termination of this Agreement by Digimarc as permitted by clause 15.3(a) above, the licenses granted by Digimarc pursuant to clause 2.8 or 2.9 above shall continue but be deemed to be restricted [*]. 15.6 Termination of this Agreement by [*] for any reason in accordance with the provisions of this clause 15 shall not affect any license granted by Digimarc pursuant to clauses 2.8, 2.9, 8.4, or 8.6 above. 15.7 On termination of this Agreement by Digimarc or [*] for any reason Digimarc shall within fifteen (15) Business Days deliver to the Escrow Agent all Work in progress done up to the effective date of termination, including all Technical Information relating to such Work, and all Technical Information pertaining to the Digimarc Technology or the Project Technology which has not previously been deposited with the Escrow Agent and issue to the DLA Contract Authority a certificate signed by an officer of Digimarc that it has fully complied with this obligation. 16. INTELLECTUAL PROPERTY INDEMNIFICATION 16.1 [*] shall provide Digimarc with prompt written notice of any claim, demand or action against [*] based on an allegation that the CDS, the Digimarc Technology or the Project Technology or any Improvements thereto or any part thereof, infringes any Intellectual Property Right of any Person (referred to below as a "Claim"). [*] shall use its reasonable efforts to conduct the defence of any Claim in a timely and cost effective manner. Digimarc shall, at Digimarc's expense, comply with all reasonable requests for assistance from [*] in connection with the defence of the Claim. 16.2 Notwithstanding any other provision of this Agreement to the contrary, Digimarc shall indemnify [*] against and save [*] harmless from all loss, costs, liabilities including, for greater certainty an award of damages, and expenses, including, for greater certainty, reasonable legal fees, arising from each Claim. The obligation set out in this clause 16 shall not apply in respect of any settlement made by [*] without the consent of Digimarc. 16.3 If the CDS, the Digimarc Technology or the Project Technology, or any Improvement thereto or part thereof is held to infringe, or if Digimarc believes that it is likely to be held to infringe, any of the Intellectual Property Rights described in clause 16.1, Digimarc shall, in addition to its other obligations set out above, at its own expense either: (a) procure for [*] the right to continue using the allegedly infringing materials; or [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. (b) replace or modify the materials to the reasonable satisfaction of [*] so that they are no longer infringing but remain functionally equivalent; Failing either of which result [*] may, at its option, terminate this Agreement without prejudice to [*]' other rights and remedies available in law, at equity or otherwise. 16.4 Digimarc shall provide [*] with prompt written notice of any claim, demand or action against Digimarc based on an allegation that the [*] Technology or any part thereof, infringes any Intellectual Property Right of any person (referred to below as a "[*] Technology Claim"). Digimarc shall, at [*] expense, comply with all reasonable requests for assistance from [*] in connection with the settlement or defence of any [*] Technology Claim. 16.5 Notwithstanding any other provision of this Agreement to the contrary, [*] shall indemnify Digimarc against and save Digimarc harmless from all loss, costs, liabilities including, for greater certainty an award of damages, and expenses, including, for greater certainty, reasonable legal fees, arising from each [*] Technology Claim. The obligation set out in this clause 16.5 shall not apply in respect of any settlement made by Digimarc without the consent of [*]. 16.6 If the [*] Technology or any part thereof is held to infringe, or if [*] believes that it is likely to be held to infringe, any of the Intellectual Property Rights described in clause 16.4, [*] may, in addition to its other obligations set out above, at its own expense either: (a) procure for Digimarc the right to continue using the allegedly infringing materials; or (b) replace or modify the materials to the reasonable satisfaction of Digimarc so that they are no longer infringing but remain functionally equivalent. 17. FORCE MAJEURE 17.1 If the performance by either party of any of its obligations under this Agreement is prevented or delayed by any circumstance of force majeure, which shall mean fire, flood, earthquakes, war, riots, or insurrection, the party shall immediately notify the other party. 17.2 The time period within which the party delayed is obliged to perform its obligations will be delayed during the period such circumstance exists. During the period of delay the party delayed shall use its best efforts to make alternate arrangements satisfactory to the other party to avoid delay or resume performance. 18. NOTICES [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 18.1 All notices under this Agreement shall be delivered by fax, or recognized international courier service. The notice shall be deemed effective as of the date of delivery to the address of the party specified below as evidenced by a delivery receipt or the addressee's registry of incoming correspondence. Unless otherwise expressly set out in this Agreement, all notices to a party will be sent to the party's authorized representative identified below and all notices from a party will be sent by the party's authorized representative identified below. 18.2 Any notice to DIGIMARC shall be sent to both of, and any notice from Digimarc shall be sent by either: Mr. Bruce Davis Mr. William Y. Conwell President and CEO Klarquist, Sparkman, Campbell, Digimarc Corporation Leigh & Whinston One Centerpointe Drive 121 SW Salmon Street Suite 500 Suite 1600 Lake Oswego, Oregon 97035 USA Portland, Oregon 97204 USA FAX: (503) 968-0219 FAX: (503) 228-9446 18.3 Any notice to [*] shall be sent to both of, and any notice from [*] shall be sent by either: [*] [*] 18.4 A party may change its address for notice by notice to the other party in accordance with the provisions of this clause 18. 19. MISCELLANEOUS PROVISIONS 19.1 Remedies Cumulative - Except as otherwise expressly set out in this Agreement: (a) each and every right, power and remedy of a party will be considered to be cumulative with and in addition to any other right, power and remedy which such party may have at law or in equity in the event of breach of any of the terms of this Agreement; (b) the exercise or partial exercise of any right, power or remedy will neither constitute the exclusive election thereof nor the waiver of any other right, power or remedy available to such party; and (c) a party terminating this Agreement in accordance with the provisions of this Agreement will have no liability or obligation to the other as a result of or with respect to the termination. [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 19.2 Severability - If any part of this Agreement is held by an arbitral tribunal appointed pursuant to the Arbitration Agreement or by any other competent authority to be void or unenforceable, the parties agree that such determination will not result in the nullity or unenforceability of the remaining parts of this Agreement, which will continue in force to the fullest extent permitted by law. The parties further agree to replace such void or unenforceable part of this Agreement with a valid and enforceable provision that will achieve, to the extent legally permissible, the economic, business and other purposes of the void or unenforceable part. 19.3 Counterparts. This Agreement may be executed in separate counterparts, and by facsimile, each of which will be deemed an original, and when executed, separately or together, will constitute a single original instrument, effective in the same manner as if the parties had executed one and the same instrument. 19.4 Entire Agreement. This Agreement is intended by the parties to be the final expression of their agreement and constitutes and embodies the entire agreement and understanding between the parties hereto and constitutes a complete and exclusive statement of the terms and conditions thereof, and will supersede any and all prior correspondence, conversations, negotiations, agreements or understandings between the parties relating to the same subject matter. 19.5 Amendments. No change in, modification of or addition to the terms and conditions contained herein will be valid as between the parties unless set forth in a writing that is signed by an authorized representative of each party and which specifically states that it constitutes an amendment to this Agreement. 19.6 Waiver. No waiver of any term, provision, or condition of this Agreement will be effective unless in a written document signed by the waiving party and no such waiver in any one or more instances, will be deemed to be, or be construed as, a further or continuing waiver of that term, provision or condition or any other term, provision or condition of this Agreement. 19.7 Assignment and Successors. This Agreement may not be assigned, novated or otherwise transferred by Digimarc without the prior written consent of [*], which consent shall not be unreasonably withheld. For the purpose of this Agreement, an assignment includes a change in the voting control of Digimarc or the sale or other disposal of substantially all of Digimarc's assets. This Agreement and all of its terms, conditions and covenants are intended to be fully effective and binding, to the extent permitted by law, on the successors and permitted assigns of the parties hereto. 19.8 Substitution. [*] may by written notice to Digimarc at any time substitute any of the following ("Substitute") as a party to this Agreement in place of and in substitution for [*], provided that such notice is accompanied by a Deed Of Adherence duly executed by the Substitute in the form attached as Schedule T: [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. (a) any wholly owned subsidiary of [*]; (b) any [*] existing at the Effective Date or any partnership or joint venture, the entire economic interest in which is owned by one or more of such [*]; (c) any body corporate, the entire economic interest in which is owned by one or more of the [*] described in clause 19.8(b); or (d) [*]. With effect from the date of such notice the Substitute shall benefit from the same rights and be subject to the same obligations as [*] under this Agreement, and [*] shall no longer benefit from such rights and shall no longer be subject to such obligations. 19.9 Upon exercising its right of substitution in favour of any wholly owned subsidiary of the [*], the [*] shall provide Digimarc with a comfort letter in the form attached as Schedule "U". 19.10 Captions. Captions are provided in this Agreement for convenience only and they form no part, and are not to serve as a basis for interpretation or construction, of this Agreement, nor as evidence of the intention of the parties. 19.11 Disclaimer of Agency. Nothing contained in this Agreement is intended or will be interpreted so as to constitute the parties to this Agreement as partners or joint venturers or as agents of each other. Neither party will have any express or implied right or authority to assume or create any obligations on behalf of or in the name of any other party or to bind any other party in any contract, agreement or undertaking with any third party. No employee of a party shall be deemed or considered to be an employee of the other party or of both parties. 19.12 Publicity. The parties agree that from time-to-time it will be beneficial to both parties to issue press releases and other public announcements concerning benefits arising from the CDS. Each party agrees to submit such releases or announcements for prior approval by the other party which approval may be withheld by the party in its sole discretion. The DLA Contract Authority shall recommend to the [*] that they issue a communique produced by the DLA Project Manager at an appropriate time [*]. 19.13 Effectiveness. This Agreement shall be effective only after it is signed by both of the parties. 19.14 Ambiguities. Each party and its counsel have participated fully in the review and revision of this Agreement. Any rule or construction to the effect that ambiguities are to be [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. resolved against the drafting party shall not apply in interpreting this Agreement. 19.15 Survival. All clauses of this Agreement which expressly or by implication are intended to survive the termination of this Agreement will do so and, for greater certainty and notwithstanding any provision in this Agreement to the contrary, the provisions set out in clauses 2.5, 3.6, 3.7, 3.8, 3.9, 3.10, 8.4, 8.6, 8.11 - 8.16, inclusive, 9.1, 9.2, 9.3, 9.7, 10, 11, 12, 13, 14, 16, 18 and 19 of this Agreement shall survive termination of this Agreement by either party for any reason. IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto as of the Effective Date. [*] DIGIMARC CORPORATION Signature Signature Name: Name: Bruce Davis Title: Title: President & CEO Date: Date: Signature Name: Title: Date: [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. SCHEDULE "A" DIGITAL COUNTERFEIT DETERRENCE SYSTEM DESCRIPTION 1.0 GENERAL DESCRIPTION OF THE DIGITAL COUNTERFEIT DETERRENCE SYSTEM ("CDS") The CDS is a system designed to hinder or deter the counterfeiting of bank notes by the use of personal computer-based equipment. [*] [*] The capitalized terms in this Schedule A have the meanings provided in the Counterfeit Deterrence System Development and License Agreement to the extent same are not elaborated herein. The term [*] refers to a [*] 2.0 FUNCTIONAL DESCRIPTION OF THE [*] The CDS is comprised of the following three subsystems: 1. [*] 2. [*] 3. [*] The functions of the various subsystems and components described below may be changed by the [*] or the [*] ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. -1- 2.1 [*] 2.1.1 [*] 1. [*] 2. [*] 3. [*] 4. [*] 2.1.2 [*] 1. [*] 2. [*] 3. [*] 4. [*] 5. [*] ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. -2- 2.1.3 [*] 1. [*] 2.2 [*] 1. [*] 2. [*] 3. [*] 4. [*] (a) [*] (b) [*] (c) [*] 5. [*] 6. [*] 7. [*] ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. -3- SCHEDULE "B" [*] 1.0 DESCRIPTION OF [*] Digimarc shall perform the following Work [*]. (The specific responsibilities to be discharged by [*] are also described below.) 1.1 [*] Study Digimarc shall conduct the "[*] Study" described below. 1. Digimarc shall examine the feasibility of integrating [*] in the form of the [*]. This study will investigate viable technical approaches and report on the performance, false positive rates, and [*] time that might be expected from the preferred approach. 2. Digimarc shall deliver a final report to the [*] by the date set out in the Delivery Schedule attached as Attachment 2 (the "Delivery Schedule") describing the findings of the study and providing recommendations useful in the development of a prototype including the detection rates for [*]. 1.2 [*] Study Digimarc shall conduct a study to attempt to characterise the behaviour of [*] and its measure of strength, as determined by [*], through the [*]. Digimarc shall relate the results of this characterisation to [*] performance. Digimarc shall submit a report on this study to the DLA Project Manager [*]. The results, and other information as available, will be made available by Digimarc to the [*] as guidance in the use of [*]. As part of [*], Digimarc shall: 1. deliver a study plan to the DLA Project Manager outlining the objects, test and analysis methods for the [*]; 2. perform a suite of tests on [*] on [*]. [*] shall assist Digimarc in the performance of a reasonable number of tests involving the [*]; 3. conduct parameter measurements (e.g. signal correlation and error rate) on the experimental designs listed in paragraph 4 below and report on and attempt to characterise how the parameters change through the sequence from [*]. ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 4. [*]. 1.3 Design, Development and Production of the CDS [*] Digimarc shall design, develop and produce for acceptance by [*] of each of the [*] and each component thereof and the [*] according to the following process: 1. By the date set out in the Delivery Schedule, Digimarc shall develop a detailed specification for each subsystem and component which support the functional description of the subsystem or component described in Schedule A and the additional requirements for the subsystem or component, if any, specified below. 2. Digimarc shall deliver the specifications to the DLA Project Manager by the dates set out in the Delivery Schedule for [*] review, comment and acceptance or rejection. 3. As soon as possible after receiving them under 2, the DLA Project Manager shall notify the Digimarc Project Manager in writing whether or not [*] approves the specifications and if not, why not. Within fifteen (15) calendar days after receiving notice of rejection, Digimarc shall change the specifications to make them acceptable to [*] and redeliver them to [*] for approval as provided above. 4. Upon notice of approval under 3, Digimarc shall develop the subsystem or component which will meet the approved specifications and deliver the "evaluation release" of the subsystem or component to [*] for testing and acceptance. 5. Within forty five (45) calendar days after receiving an evaluation version under 4, the DLA Project Manager shall notify the Digimarc Project Manager in writing whether or not the evaluation release meets the specifications with details of the non-compliance. Any problems shall be detailed using, to the extent appropriate, the [*] form attached as Schedule "R." 6. By the date set out in the Delivery Schedule, Digimarc shall develop a final release of the subsystem or component incorporating any changes required to the evaluation release to rectify the non-compliance with the specifications and any other modifications agreed in writing between the parties' respective project managers and deliver the final release to [*] for testing and acceptance. 7. Within forty five (45) calendar days after receiving the final release under 6, the DLA Project Manager shall notify the Digimarc Project Manager in writing whether or not the final release meets the specifications with details of the non-compliance. Within thirty (30) calendar days after receiving notice of rejection, Digimarc shall rectify all non-compliance and redeliver ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 2 the final release to [*] for approval as provided above. 1.4 Acceptance Procedures 1.4.1 The acceptance procedures for the [*] will include the following: 1. The [*] will be evaluated at the facilities of up to three [*]. 2. Digimarc will train one person on the [*] from each evaluation facility to enable them to evaluate the [*] as part of the acceptance process. Digimarc shall conduct the training at a single facility to be agreed between Digimarc Project Manager and the DLA Project Manager. 1.4.2 The acceptance procedures for the [*] will include the following: 1. Digimarc shall deliver the [*] to the DLA Project Manager in an example [*] that Digimarc will develop to allow the [*] to conduct acceptance tests on performance, robustness, and resistance to [*]. Digimarc shall deliver a detailed description of how the [*] was integrated and the techniques used to defend against [*]. 1.5 Implementation of [*] 1.5.1 Digimarc shall implement [*] as follows: 1. [*]. 1.6 Training Program 1. Digimarc shall develop a training program acceptable to the DLA Project Manager to train the personnel of [*] as set out in Schedule "Q" to the Agreement. This training program will be delivered according to the Delivery Schedule for [*]. 2. Each [*] shall equip its site for training and installation prior to the start of training, following a pre-site configuration guide to be developed by Digimarc. Failure to establish the required hardware and software environment in advance of installation will lengthen the required installation and training time and costs. 3. Training will be provided in English and will be designed for delivery in five days to students who speak English. Translation, if required, shall be provided by the [*], and may lengthen the training time and costs. 2.0 DESCRIPTION OF, AND REQUIREMENTS FOR, VERSIONS 1.0 ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 3 2.1 [*] [*]: 2.1.1 [*] 1. [*]. 2. [*]. 3. [*]. 4. [*]. 5. [*]. 6. [*]. 2.1.2 [*] 1. [*]. 2. [*]. 2.1.3 [*] 1. [*]. 2. [*]. 3. [*] 4. [*]. 5. [*]. 6. [*]. 2.2 [*] ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 4 2.2.1 [*]: 1. [*]. 2. [*]: (a) [*]. (b) [*]. 3. [*]. 4. [*]. 5. [*]. 6. [*] 7. [*]: (a) [*]. (b) [*] CDS [*]. (c) [*]. ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 5 Attachment 1 BASELINE, EXTENDED BASELINE, AND OPTIONAL TESTS 1.0 [*] 1.1 [*] 1.1.1 [*] 1.1.2 [*] 1.1.3 [*] 1.1.3.1 [*] 1.1.3.2 [*] 1.1.3.3 [*] 1.2 [*] 1.2.1 [*] 1.2.3 [*] 1.2.4 [*] 1.2.5 [*] [*] 2.0 [*] 2.1 [*] 2.1.1 [*] 2.1.2 [*] 2.1.3 [*] 2.1.4 [*] 2.1.5 [*] 2.1.6 [*] 2.1.7 [*] 2.1.8 [*] ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 2.2 [*] 2.2.1 [*] 2.2.2 [*] 2.2.3 [*] 2.2.4 [*] 3.0 [*] 3.1 [*] 3.2 [*] 3.2.1 [*] 3.2.2 [*] 3.2.3 [*] ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 2 Attachment 2 CDS PHASE 1 DELIVERY SCHEDULE [*] [*] ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 Attachment 3 DEVICE VENDORS [*] [*] [*] - --- --- --- [*] [*] [*] ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 SCHEDULE "C" [*] STATEMENT OF WORK Subject to the agreement to the contrary as part of the process defined in the Agreement for determining the [*], Digimarc shall deliver the following deliverables [*]: 1.0 [*] 1.1 [*] will meet the following requirements: 1.1.1 be capable of being integrated into [*] 1.1.2 meets all the specifications [*]. 1.1.3 [*]. 1.1.4 [*]. 1.1.5 [*] may, at its option, evaluate the production version of each [*] into which the [*] has been implemented. The DLA Project Manager shall identify to Digimarc any concerns which [*] may have relating to [*] resistance or performance. Digimarc shall make a proposal to the DLA Project Manager to address those concerns for approval by the DLA Project Manager. 2.0 [*] Prototype This deliverable is a prototype of the system that records [*]. The system prototype includes prototype tools intended for use [*]. 3.0 [*] Prototype This deliverable is a prototype of [*] module that integrates [*]. The specific [*] to be supported will be agreed to between Digimarc and the [*]. 4.0 [*] Study This is [*] that attempts to characterise the relationship between [*]. The study is intended to be expanded [*] to characterise the strength relationship between [*]. ____________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 5.0 [*] 5.1 Digimarc shall integrate [*]. 5.2 Digimarc shall provide [*]. 5.3 Digimarc shall implement an [*]. 5.4 Digimarc shall license the [*] to at least [*] in addition to those required by [*] and [*], all of which vendors shall be selected from the list in Schedule B or otherwise agreed between the parties' respective Project Managers. 6.0 Outreach / Market Research 6.1 Digimarc shall continue to build CDS program awareness and [*] adoption across the [*], with a focus on [*]. 6.2 Digimarc shall support any [*] initiatives, if any, to expand use of the CDS [*]. 6.3 Digimarc shall track and summarize computer technology and product trends that affect the CDS [*] and development strategy. 7.0 [*] Study 7.1 Digimarc shall investigate the feasibility of [*]. The study will investigate methods including [*]. 7.2 [*] shall assist in the conduct of the study by [*] from files supplied by Digimarc [*]. 8.0 Certification Program 8.1 Digimarc shall develop and implement a certification program acceptable to [*] for the ongoing review and certification of Devices that include [*] will be required to submit their products for certification prior to shipment. Digimarc will use an appropriate test suite to confirm operation and compliance of the [*]. Certification will test that vendors' [*]; vendors' [*] meets minimum [*] performance criteria for false positive and false negative characteristics; and vendors' [*] of the [*] follows agreed to security guidelines to help guard against code-centric attacks. ____________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 2 9.0 Verification Tests Digimarc shall develop for approval by the DLA Project Manager a series of tests to be used by Digimarc to determine if a [*]. ____________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 3 SCHEDULE "D" [*] Subject to the agreement to the contrary as part of the process defined in the Agreement for determining [*], Digimarc shall deliver the following deliverables [*]: 1.0 [*] 1.1 [*] 2.0 [*] 2.1 completion of the [*] and integration of this system with [*]. 3.0 [*] [*] will meet the following requirements: 3.1 Meets all the specifications for v 2.0. 3.2 Includes a [*] module to be integrated into [*]. 3.3 Includes [*] and [*]. 4.0 [*] 4.1 Digimarc shall integrate [*]. 4.2 Digimarc shall provide [*] support to [*]. 4.3 Digimarc shall continue [*] certification program, expanding it to include [*]. 4.4 Digimarc shall license the [*] to at least [*] in addition to those required by [*] and [*] in addition to those required by [*], all of which vendors shall be selected from the list in Schedule B or as otherwise agreed with the DLA Project Manager. 5.0 [*]. __________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 5.1 [*]. 6.0 Outreach / Market Research 6.1 Digimarc shall [*] the CDS [*]. 6.2 Digimarc shall [*] the CDS [*]. __________________ [*] Omitted pursuant to a confidential treatment requested. The material has been filed separately with the Securities and Exchange Commission. 2 SCHEDULE "E" ARBITRATION AGREEMENT An Agreement dated June 21, 1999, by and among the Parties (as defined below) to submit for final and binding resolution by international arbitration all Disputes (as defined below) arising out of or otherwise connected to a project relating to the development and potential licensing, marketing and servicing of a Counterfeit Deterrence System (as defined in the Development and License Agreement identified below) and the services of Digimarc (as defined below) in relation to the project. WHEREAS, Digimarc Corporation, a corporation existing under the laws of the State of Oregon, USA, is developing, in conjunction with [*], technology to [*] (the "Counterfeit Deterrence System" or "CDS" as defined in the Development and License Agreement identified below); WHEREAS, the [*], to provide it with limited assistance in connection with the development and potential subsequent licensing of the CDS as set out in a Development and Licensing Agreement (the "DLA") effective from [*]; WHEREAS, in performance of the DLA, the [*] and Digimarc will enter into a contract with [*], which will act as escrow agent for certain purposes pursuant to an Escrow Agreement (the "Escrow Agreement") which is attached as Schedule M to the DLA; WHEREAS, in the course of performance of the DLA, Digimarc may be directed to issue licenses to [*] in accordance with standard forms of license agreement which are attached at Schedules K-1, K-2, L-1 and L-2 to the DLA; WHEREAS, in the course of performance of the DLA, Digimarc may enter into System Support Services Agreements, a form of which is attached at Schedule O to the DLA, with licensees; WHEREAS, in the course of performance of the DLA, Digimarc may provide consulting and programming services to [*] on the terms described in Schedule P to the DLA to assist [*]; WHEREAS, the [*] have, pursuant to an Indemnity Agreement of or of approximately the same date as this Arbitration Agreement (the "Indemnity Agreement"), agreed to compensate and to indemnify and hold harmless the [*] in respect of any liability in connection with the project; WHEREAS, given the international nature of the Agreements (as defined below), all the Parties (as defined below) to the Agreements (as defined below) are desirous to avoid recourse to ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 national courts and the potential expense and delay of prosecuting connected Claims (as defined below) in more than one proceeding and also to exclude the risk of having to apply contradictory or inconsistent fact-findings, conclusions, judgments or awards for any Dispute (as defined below) which may arise between or among the Parties (as defined below) and instead wish to resort to international arbitration as the exclusive means of resolving in a final, binding and consistent manner all Disputes (as defined below) arising in connection with the Agreements (as defined below) for the CDS and of establishing through this Arbitration Agreement a mechanism to these ends. The Parties agree as follows: 1. The meaning of the following terms in this Arbitration Agreement shall be as set out below: (a) "Agreements" shall mean all agreements, contracts, schedules or other arrangements in connection with the development or licensing or marketing or servicing of the CDS as listed in Schedule B, as amended from time to time. (b) "Appointing Authority" shall mean the [*]. (c) "Arbitrating Party" or "Arbitrating Parties" shall mean (i) any and all Parties which have become involved in any arbitration under this Arbitration Agreement as Claimants or Respondents or (ii) which have been otherwise joined to any arbitration under this Arbitration Agreement or (iii) the [*], Digimarc, any [*] or any licensed [*] in the aforementioned circumstances or when it or they has or have exercised their right of Intervention in any arbitration under this Arbitration Agreement. (d) "Claim" shall include without limitation any claim or counterclaim or crossclaim made by an Arbitrating Party. (e) "Claimant" or "Claimants" shall mean any Party which, either separately or together with any other Party or Parties, initiates an arbitration under this Arbitration Agreement. (f) "Dispute" shall mean any dispute, difference, controversy or claim except only for an Excluded Dispute (as defined below) between or among the parties arising out of or relating to or in connection with this Arbitration Agreement or any of the Agreements listed in Schedule B, including, but not limited to, their signature, validity, interpretation, performance, amendment, breach, termination and post-termination obligations. (g) "Excluded Dispute" shall mean only a dispute between the [*] and Digimarc as described in clause 6.4 of the Escrow Agreement as to the occurrence of a Release Event as defined ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 2 in clause 6.1 of the Escrow Agreement. Any such dispute shall be referred to an expert appointed by the Managing Director of the Escrow Agent (as defined in the Escrow Agreement) and any decision rendered by such an expert pursuant to clause 6.4 of the Escrow Agreement shall be accorded res judicata effect by any arbitral tribunal appointed under this Arbitration Agreement. (h) "Intervention" shall mean the right of any of the [*], Digimarc, [*] or any licensed [*] to intervene into a particular arbitration as an Arbitrating Party even when it is not a Claimant or Respondent and has not been joined into any arbitration by an Arbitrating Party. (i) "Notice of Arbitration" shall mean the document given when initiating recourse to arbitration or to join any Party as an Arbitrating Party as well as to initiate recourse in arbitration against any Party which is already an Arbitrating Party. (j) "Party" or "Parties" shall mean any of the signatories to this Arbitration Agreement as listed in Schedule A and any entity which in accordance with Articles 6 and 7 of this Arbitration Agreement also becomes a signatory to this Arbitration Agreement. (k) "Respondent" or "Respondents" shall mean any Party which, either separately or together with any other Party, is named as a Respondent in an arbitration by any Claimant or Claimants. (l) In interpreting this Arbitration Agreement, singular shall be read for plural where appropriate to reflect the multi-party nature of any arbitration. 2. Any Dispute shall be finally settled by arbitration under the [*] as in force at the date of commencement of this Arbitration Agreement except as the [*] Rules are modified in the body and Schedule C of this Arbitration Agreement and to the exclusion of any provisions of the [*] Rules as are inconsistent with the express provisions of this Arbitration Agreement or with the multi-party nature of an arbitration under this Arbitration Agreement. 3. The language used in any arbitration shall be English. All documents submitted into any arbitration shall be in English or submitted with a complete English translation. Oral evidence may be submitted in a language other than English provided that the Arbitrating Party submitting the oral evidence makes provision for its simultaneous interpretation into English. The cost of any translation or interpretation into English shall be borne entirely by the Arbitrating Party on whose behalf the non-English document or oral evidence is submitted and shall not be included among the "costs of arbitration" apportioned pursuant to Article 40 of the [*]. 4. The place of Arbitration shall be [*]. ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 3 5. Arbitration pursuant to this Arbitration Agreement shall be the sole and exclusive means for resolving any Dispute. 6. No entity shall become a Party unless that entity has become a Party to this Arbitration Agreement by executing a counterpart of this Arbitration Agreement. 7. No Party shall enter into any contract or agreement relating to the performance of an Agreement or which alters or amends in any material respect any of the rights or obligations of any Party under any Agreement, except as follows: (a) the contract or agreement shall contain the clause set out in Schedule D and (b) the parties to the contract or agreement shall sign counterparts to the Arbitration Agreement, thereby expressly consenting to be added to the list of Parties at Schedule A and to the addition of the contract or agreement to Schedule B, said signed counterparts and notice of these additions being sent to all Parties. Each Party to this Arbitration Agreement hereby expressly accepts the addition of said parties to Schedule A and of said contracts or agreements to Schedule B. Any Party which fails to act in conformity with this Article 7 shall be fully liable for any loss, injury or damage whatsoever resulting therefrom to any other Party. 8. (a) Any Claimant or Claimants shall initiate recourse to arbitration by giving to each Respondent a Notice of Arbitration and statement of claim which specify, inter alia, the Agreement or Agreements involved in the Dispute. Any Claimant or Claimants shall also at the same time send a copy of the same Notice of Arbitration and statement of claim to all other Parties and to the [*]. An arbitration shall be deemed to commence upon receipt of the Notice of Arbitration and statement of claim by the [*]. (b) Within thirty (30) days of the date on which each Respondent received the Notice of Arbitration, a Respondent may give a third party Notice of Arbitration in order to join into the arbitration any Party or Parties as an Arbitrating Party or Arbitrating Parties. The Respondent shall also at the same time send a copy of any third party Notice of Arbitration to all other Parties and to the [*]. (c) Any third party joined as an Arbitrating Party may, within thirty (30) days of receipt of any third party Notice of Arbitration, give fourth party Notices of Arbitration in order to join any Party or Parties as an Arbitrating Party or Arbitrating Parties. The third party shall also at the same time send a copy of any fourth party Notice of Arbitration to all other Parties and to the [*]. (d) Parties may be joined as further additional Arbitrating Parties by any Arbitrating Party or Arbitrating Parties until such time as thirty (30) days have elapsed without a new Arbitrating Party being joined into the arbitration. ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 4 (e) The [*], Digimarc, [*], and any licensed [*], whether or not joined as a Respondent or as a further additional Arbitrating Party, shall each have the right to intervene in any arbitration by giving a Notice of Arbitration to each of the Arbitrating Parties within thirty (30) days after receipt of the copy of a Notice of Arbitration from the last Arbitrating Party to be joined or from the last Party to intervene. The [*], Digimarc, [*], and any licensed [*] shall also at the same time send a copy of the Notice of Arbitration to the [*] and to all other Parties. (f) The arbitral tribunal, once constituted and after affording the Arbitrating Parties and all other Parties a reasonable period of time in which to comment, shall have the authority to require by an order that any Party or Parties which is not or are not an Arbitrating Party or Arbitrating Parties shall nonetheless be joined into the arbitration as an Arbitrating Party or Arbitrating Parties should the arbitral tribunal determine that: (a) the absence of said Party or Parties from the pending arbitration would prevent the according of complete relief in regard to the Claims of the Arbitrating Parties; or (b) that the Party or Parties has or have a real and significant interest in the Agreement or Agreements out of or in connection with which the Disputes involved in the pending arbitration have arisen and that the absence of said Party or Parties would significantly impede its or their ability to protect that interest. Any such order issued by the arbitral tribunal shall be final and binding upon the Parties. (g) Any Arbitrating Party may join into a pending arbitration any Dispute which presents issues of law or fact common with those in the Dispute or Disputes already in the pending arbitration by issuing, within 30 days of its receipt of a Notice of Arbitration, a Notice of Arbitration and a statement of claim which specify, inter alia, the Agreement or Agreements involved in the Dispute and sets out the issues of law or fact it alleges are common with those in the Dispute or those Disputes already in the pending arbitration. (h) The arbitral tribunal shall determine by an order, which shall be final and binding upon the Parties, any issue raised by an Arbitrating Party as to whether or not a Dispute joined into any pending arbitration did, in fact, at the time it was joined into the arbitration, present issues of law or fact common with those presented in other Disputes in the pending arbitration. Any Dispute which is found not to have presented common issues of law or fact shall be dismissed without prejudice from the pending arbitration. (i) Joinder of any Party or Parties or of any Dispute or Disputes to any arbitration pursuant to this Arbitration Agreement shall be permitted only when made in accordance with the provisions of this Arbitration Agreement, including, without limitation, the strict time limits and no joinder or Intervention other than those provided for shall be permitted. ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 5 (j) Any multi-party arbitration arising as a result of there being more than two Arbitrating Parties will be conducted as a single arbitration involving all Arbitrating Parties. (k) Any Arbitrating Party giving any Notice of Arbitration or sending any copy of a Notice of Arbitration shall send to each recipient according to the provisions set out above a full copy of the document by international courier or other appropriate means of ensuring rapid and certain delivery and, when required to send documents to several recipients, the Arbitrating Party shall send all documents on the same day. (l) Any advances deemed necessary to cover the costs of any arbitration shall be made in equal shares by all Arbitrating Parties, provided that multiple Claimants or multiple Respondents shall be deemed to constitute one Arbitrating Party for purposes of this subparagraph only, and provided further that should any Arbitrating Party fail to advance its share (a "Defaulting Arbitrating Party"), it shall be the responsibility of the Arbitrating Party which gave the Notice of Arbitration against the Defaulting Arbitrating Party or Defaulting Arbitrating Parties to advance the share due from the Defaulting Arbitrating Party or Defaulting Arbitrating Parties. Any Claim brought by a Defaulting Arbitrating Party shall be dismissed without prejudice. However, the recipient of any Notice of Arbitration given by a Defaulting Arbitrating Party shall continue to be an Arbitrating Party if it has itself given any Notice of Arbitration, unless it withdraws any such Notice of Arbitration. Should any Defaulting Arbitrating Party commence arbitration in order to reassert any Claim which has been dismissed pursuant to this subparagraph, that Claim shall be deemed to be connected to the pending arbitration from which it was dismissed for the purposes of [*] and the Defaulting Arbitrating Party shall be required to cover the costs of the arbitration as though its Claim had not been dismissed. 9. If any Dispute arises whilst an arbitration is pending in accordance with the provisions of this Arbitration Agreement, but one or more of the Arbitrating Parties to that Dispute cannot be joined to the pending arbitration in accordance with the provisions of Article 8 of this Arbitration Agreement, the Dispute and the Arbitrating Parties thereto shall nonetheless be joined into the pending arbitration at the request of a Party which is an Arbitrating Party in both the pending arbitration and the Dispute which has arisen so that the Disputes may be resolved in the same arbitration, provided the arbitral tribunal decides that the later Dispute presents issues of law or fact common with those in the pending arbitration and that joinder under these circumstances would not result in undue delay for the pending arbitration. 10. Each Party agrees that neither an arbitral tribunal established pursuant to this Arbitration Agreement nor the Parties shall be authorised to take or seek from any arbitral tribunal or judicial authority any interim measure or any pre-award relief against the [*], any provision of the [*] notwithstanding. Nothing in this Arbitration Agreement shall operate or be regarded as a waiver, renunciation or other modification of the privileges, immunities and exemptions enjoyed by the ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 6 [*] for itself or in respect of its assets, of whatever nature and wherever situated, under international convention or under any applicable law. Except as otherwise provided in this Article 10 with regard to the [*], each Party irrevocably agrees that, to the extent that it or any of its assets has or hereafter may acquire any right of immunity, whether characterized as sovereign immunity or otherwise, from any legal proceedings, whether in [*] or elsewhere, to enforce or collect upon any obligation of that Party in connection with the transaction contemplated under any Agreement, including, without limitation, immunity from jurisdiction of any arbitral tribunal, immunity from service of process, immunity from execution of judgment and immunity of any of its property from attachment prior to the rendering of an arbitral award under this Arbitration Agreement or entry of judgment, it hereby expressly and irrevocably waives all such immunity. 11. (a) Any Dispute, regardless of the number of Arbitrating Parties, shall be submitted to an arbitral tribunal of three (3) arbitrators appointed by the Appointing Authority. (b) The arbitral tribunal shall be appointed by the Appointing Authority once the time has terminated during which any Party is entitled to give a Notice of Arbitration to join any other Party or the [*], Digimarc, [*] or any licensed [*] is entitled to intervene. (c) The presiding arbitrator of the arbitral tribunal shall be a British national and shall have been admitted to practice as a barrister or solicitor in England and shall also have significant expertise in the resolution of disputes in international commercial matters. All arbitrators shall have a full command of the English language. (d) The arbitrators appointed in accordance with this Arbitration Agreement shall be remunerated in accordance with the provisions of the Rules of [*] in effect at the time any arbitration is commenced. 12. Awards shall be final and binding as from the date the awards are made. The Parties undertake to carry out all awards without delay and waive their right to any form of appeal or recourse to a court of law or other judicial authority, insofar as any such waiver may validly be made. All awards may if necessary be enforced by any court having jurisdiction in the same manner as the judgment of any such court. 13. Each Party explicitly agrees hereby that it shall recognise any arbitral award rendered in an arbitration under this Arbitration Agreement as final and binding upon it unless a competent arbitral tribunal or a competent judicial authority determines that said Party never received notice of the pendency of the arbitration in which the award was rendered. 14. Any arbitral award rendered under this Arbitration Agreement shall be accorded res judicata effect by any arbitral tribunal appointed under this Arbitration Agreement in regard to those Parties which are bound by an award pursuant to Article 13. ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 7 15. The obligations of the Parties to the Agreements shall not be altered or suspended by reason of any arbitration being conducted during the life of any Agreement. 16. Any Agreement in regard to which a Dispute has arisen shall be governed by the applicable law as specified in that Agreement. 17. This Arbitration Agreement shall bind and inure to the benefit of the respective successors and permitted assigns of the Parties, subject to all Parties respecting Articles 6 and 7 hereto. 18. This Arbitration Agreement may be executed in several counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same agreement. 19. Any provision of this Arbitration Agreement which is invalid or unenforceable in any jurisdiction shall, as to such jurisdiction, be ineffective to the extent of such invalidity or unenforceability, without invalidating the remaining provisions of this Agreement or affecting the validity or enforceability of such provision in any other jurisdiction. 20. This Arbitration Agreement shall enter into full force and effect on the date first written above and shall continue in full force and effect indefinitely, unless it is terminated by mutual written consent of all of the Parties. 21. This Arbitration Agreement shall be governed by and construed in all respects in accordance with the laws of England, to the exclusion of its rules of conflicts of law. The Parties have caused this Arbitration Agreement to be executed in multiple copies, with effect from January 1, 1999. [Signatures] ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 8 Schedule A to Arbitration Agreement The following, together with their assigns or successors are Parties to the Arbitration Agreement. Each Party has the obligation to advise every other Party of any change in address and each Party expressly agrees that any notice delivered to that Party at the listed address or to any duly notified change of address shall be deemed to be valid notice and that any notice shall be deemed to have been received on the day it is so delivered. ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 Schedule B to Arbitration Agreement The following are considered to be Agreements: 1. Development and License Agreement 2. Indemnity Agreement 3. Escrow Agreement 4. [*] License Agreements - [*] 5. [*] License Agreements - [*] 6. [*] License Agreements - [*] 7. [*] License Agreements - [*] 8. System Support Services Agreements ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 Schedule C to Arbitration Agreement In accordance with Article 1.1 of the [*], in addition to such other modifications of the [*] as are contained in this Arbitration Agreement, the Parties to this Arbitration Agreement and to the Agreements modify the [*] as follows: (a) Notwithstanding Article 3.1 of the [*], a Notice of Arbitration may be given by any Arbitrating Party to any Party or Parties so as to join said Party or Parties into any pending arbitration and this Arbitration Agreement shall allow for multi-party arbitration involving third parties, fourth parties and any further additional parties. (b) Notwithstanding Article 3.2 of the [*], arbitral proceedings under this Arbitration Agreement shall be deemed to commence on the date on which the Claimant's Notice of Arbitration is received by the [*]. (c) Notwithstanding Article 3.3(g), Article 3.4(a) and Article 3.4(b) of the [*], the Notice of Arbitration shall not contain a proposal as to the number or appointment or the notification of the appointment of arbitrators (and, if made, any such proposal shall be disregarded). (d) Notwithstanding Article 19.3 of the [*], any Arbitrating Party must make any counter-claim or claim for the purpose of set-off in its statement of defence and not at a later stage of the arbitral proceedings. (e) Notwithstanding Article 20 of the [*], the arbitral tribunal shall, in considering whether it is appropriate to allow a party to amend or supplement a written communication (given the interests of economy, efficiency and the desire to avoid the risk of inconsistent awards), have particular regard to the multi-party nature of any arbitration proceeding, the consequences in terms of delay and the objective of resolving related Claims in a single arbitration involving all relevant Parties. (f) Notwithstanding Article 23 of the [*], in considering whether an extension of a time-limit for the communication of written statements is justified, the arbitral tribunal shall have particular regard to the multi-party nature of any arbitration proceeding and the consequences in terms of delay. (g) Notwithstanding Article 26 of the [*], no interim measures shall be sought or applied against the [*] in connection with any Dispute by either an arbitral tribunal established pursuant to this Arbitration Agreement or any judicial authority. ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 Schedule D to Arbitration Agreement Standard language to be inserted in each Agreement. "[Article No: and heading (e.g., Settlement of Disputes), if applicable] Any Dispute (as defined in the Arbitration Agreement) shall be finally settled by arbitration in accordance with the Arbitration Agreement dated [ ], a copy of which is attached as Appendix [ ] to this [Agreement] (the "Arbitration Agreement") [or, alternatively, "entered into between the parties and others effective 1 January 1999 "]. "[Article No: and heading (e.g., Governing Law), if applicable] This [Agreement] shall be governed by and construed in all respects in accordance with the laws of [INSERT], to the exclusion of [INSERT]'s rules of conflicts of law." ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 SCHEDULE "F" OTHER [*] TECHNOLOGY 1. Techniques for [*]. 2. Copyright in the [*]. 3. The above technology is partially described in the following UK patent applications: UK Patent Application Nos: [*] [*] [*] [*] [*] ______________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. SCHEDULE "G" DIGIMARC TECHNOLOGY The Digimarc Technology includes techniques and system applications for [*]. This technology is partially described in the following issued U.S. patents: US 5850481 US 5841978 US 5841886 US 5832119 US 5822436 US 5809160 US 5768426 US 5765152 US 5748783 US 5748763 US 5745604 US 5721788 US 5710834 US 5636292 US 5862260 _____________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. -1- SCHEDULE "H" PROJECT TECHNOLOGY The Project Technology will include: 1. The modification of techniques for using the Digimarc and [*] Technologies in the [*]. 2. The effects and behaviours [*]. 3. The effects of various types [*]. 4. Improvements to Digimarc's testing and certification processes used in testing and certifying [*]. 5. The improvement of [*]. 6. The use of [*]. 7. Detailed techniques [*]. 8. [*]. __________ [*] Omitted pursuant to confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. SCHEDULE "I" ALLOWABLE COSTS 1. For the purposes of this Schedule I: [*] __________ [*] Omitted pursuant to confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 SCHEDULE "J" SECURITY REQUIREMENTS 1. Digimarc shall implement the "Security Measures" normally followed by a [*] and distributor comparable to Digimarc in number of employees and revenue engaged in the development and distribution of [*] and maintain such Security Measures in effect at all times throughout the Term. The Security Measures will include but not be limited to: 1.1 Electronic security for protection of the network and protection of the CDS software products that are under development. (a) Network protection which will ensure that unauthorized users will not get access to design information, sensitive test data, proprietary information, released software products or software documentation that is hosted on the network. This protection will include: (i) erecting barriers to prevent hackers, whether inside or outside the Digimarc facility, from accessing the secure network; and (ii) the customizing of developmental and operational procedures for the software development team that maximize security while not impeding the team's ability to work efficiently and effectively. 1.2 Physical Security, including the following: (a) the Digimarc facility at which the Work will be performed will be secure from unauthorized visitors; (b) the software development laboratory and the computer network employed in the Work shall be secure; (c) all personnel authorized to have access to sensitive CDS information, data and designs including but not limited to the employees of authorised Subcontractors will be properly screened; and (d) production and handling of interim and final versions of the Deliverables will be carefully controlled, monitored and audited. _____________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities Exchange Commission. -1- 2. Within sixty (60) days after the Agreement is last signed, [*] shall conduct an audit, at its own expense, of the Security Measures. 3. Following the audit, the DLA Project Manager shall submit a "Security Plan" to Digimarc which will prescribe the actions which Digimarc must take, if any, to improve the Security Measures to be followed by Digimarc until the end of Phase 3 and the dates by which Digimarc shall take them. 4. Within twenty (20) Business Days after receipt of the Security Plan, Digimarc shall notify the DLA Project Manager of the cost to implement the Plan. Within ten (10) Business Days after receipt of the notice, the DLA Project Manager shall notify Digimarc which aspects of the Security Plan to implement and Digimarc shall implement them in accordance with the Plan. 5. Any cost incurred providing security required by the Security Plan, beyond what is reasonable and customary for a similarly-situated [*] company in the Portland area, will be an Allowable Cost and compensated by [*] accordingly. Digimarc has budgeted [*]. Costs required in excess of this amount may require an adjustment to [*] and/or Statement of Work. ____________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities Exchange Commission. -2- SCHEDULE"K-1" [*] LICENSE AGREEMENT - [*] This [*] LICENSE AGREEMENT (the "Agreement") is made BETWEEN (name and address of [*]) ("[*]") - AND - DIGIMARC CORPORATION, a corporation incorporated under the laws of Oregon and having its head office at One Centerpointe Drive, Suite 500, Lake Oswego, Oregon. U.S.A. 97035-8615 ("Digimarc") RECITALS - -------- Digimarc has expertise in, and owns extensive intellectual property, including patents, patent applications, copyrights and trade secrets related to digital watermarks, counterfeit deterrence, copyright protection, and device control (the "Digimarc IPR"); [*] possesses or will possess intellectual property rights related to the application of such intellectual property [*]; Digimarc and [*] have cooperated in the development of means, using such intellectual property, [*] (the "Counterfeit Deterrence System" or "CDS"); and [*] desires to obtain a license to certain components of the CDS so it can [*] which include the CDS [*]. In consideration of these premises, the covenants set out in this Agreement and other good and valuable consideration, the receipt and adequacy of which are acknowledged by each of the parties, the parties agree as follows: _______________ [*] Omitted Pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 I. DEFINITIONS AND PRINCIPLES OF INTERPRETATION 1.1 Definitions "Agreement" means these articles of agreement, including the Attachments, and those documents as specified or referenced in this Agreement as forming part of the Agreement, all as may be amended from time to time; "Arbitration Agreement" means the Arbitration Agreement entered into between the parties and others and effective 1 January 1999; "Attachment" means a document specified as being attached to this Agreement; [*] [*] [*] [*] the CDS; [*] "Business Day" means a day that both Digimarc and [*] are open for business at their respective addresses noted above; "Confidential Information" means information disclosed before or during the Term of this Agreement in any form which, if disclosed in tangible form, is or was labelled "Confidential", "Proprietary" or with a similar legend, or if disclosed orally, is or was information that by its nature would be understood to be confidential to the Discloser. For greater certainty, the Confidential Information of Digimarc includes the [*]; [*] "Counterfeit Deterrence System" (or "CDS" or "System") [*] "Digimarc IPR" means Intellectual Property Rights owned by Digimarc, now or during the Term of this Agreement, to the extent that same specifically relates to or forms part of the CDS; _______________ [*] Omitted Pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 2 "Digital Watermark" refers to markings (including texturing) that are detectable from data produced by visible light scanning of documents, which convey multiple bits of digital data and yet do not significantly detract from the aesthetics of the item or image marked thereby. Examples include, but are not limited to: 1. generally imperceptible changes to line density or placement in line art imagery; 2. texturing of a substrate, where the texturing feels substantially uniform to human touch; 3. slight localized changes to optical density or reflectance of a printed document; 4. slight changes to sampled data; or 5. visible background patterns of substantially uniform character. "Discloser" means a party which has disclosed or otherwise made available its Confidential Information to the other party; "DLA Contract Authority" means the individual appointed as such under the [*] License; [*] [*] [*] [*] "Effective Date" means the date on which this Agreement is last signed by the parties; [*] "Field of Use" means the field of [*] "Improvement" means an improvement provided to [*] under clause 2.14 of the [*] License; "Intellectual Property Rights" or "IPR" means all intellectual property rights existing now and in the future including, without limitation, trade secrets, copyright, database rights, know-how, topographies, patents and patent applications; [*] [*] _______________ [*] Omitted Pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 3 "[*] License" means Schedule L-1 to the [*] License; [*] "Recipient" means a party to which the Confidential Information of the other party has been disclosed or otherwise made available; "Services" means the Verification Tests and any other service performed by Digimarc under this Agreement; "Term" means the period commencing on the Effective Date and ending on the [*]; and "Verification Test" means a test or tests developed under the [*] License to determine [*] 1.2 Interpretation - In this Agreement: 1.2.1 unless otherwise specified, all references to money amounts are to the currency of the United States of America; 1.2.2 the use of words in the singular or plural, or with a particular gender, shall not limit the scope or exclude the application of any provision of this Agreement to such person or persons or circumstances as the context otherwise permits; 1.2.3 whenever a provision of this Agreement requires an approval or consent by a party to this Agreement and notice of such approval or consent is not delivered within the applicable time, then the party shall be conclusively deemed to have withheld the consent or approval; 1.2.4 unless otherwise specified, the number of days within or following which any payment is to be made or act is to be done shall be interpreted to be continuous and shall be calculated by excluding the day on which the period commences and including the day which ends the period and by extending the period to the next Business Day if the last day of the period is not a Business Day; 1.2.5 unless otherwise specified, the order of precedence for interpreting this Agreement shall be: (a) this Agreement, excluding Attachments, and _______________ [*] Omitted Pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 4 (b) the Attachments; 1.2.6 for greater certainty, a party or representative to which this Agreement grants the right to make a decision or determination in the sole discretion of the party or representative is not required to act reasonably in making the decision or determination and no such decision or determination may be challenged by the other party under the Arbitration Agreement or otherwise; 1.2.7 the words "includes" or "including" will be construed as meaning "included without limitation" and "including without limitation" as the case may be; and 1.2.8 a clause or Attachment, unless the context requires otherwise, is a reference to a clause to, an Attachment of, or a paragraph of an Attachment to, this Agreement, as amended from time to time in accordance with this Agreement. 1.3 Applicable Law - This Agreement shall be construed in accordance with the laws of England to the exclusion of its rules of conflicts of laws. 1.4 Attachments - The attachments to this Agreement, listed below, are an integral part of this Agreement: Attachment Description ------------------------------------------- Attachment "1" [*] Attachment "2" Problem Report Attachment "3" Payment for Services Attachment "4" [*] Attachment "5" [*] 2. GRANT OF RIGHTS AND SERVICES 2.1 Subject to the terms of this Agreement, Digimarc hereby grants to [*], a no charge, non-exclusive, non-transferable license under the Digimarc IPR and the [*] IPR, in the Field of Use only, [*] 2.2 [*] acknowledges and agrees that the Digimarc IPR, and any technology developed by Digimarc during the course of its work with [*], is the property of Digimarc and that [*] has no right to sublicense it. [*] acknowledges that [*] may not [*] 2.3 [*] acknowledges and agrees that the [*] IPR is the property of its owner and that [*] has _______________ [*] Omitted Pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 5 no right to sublicense it. 2.4 Nothing in this Agreement shall be construed to grant, by implication or otherwise, any broader rights than those specifically granted herein. 2.5 Commencing no later than ten (10) Business Days after every written request made during the Term by [*], Digimarc shall make an irrevocable offer, which offer shall remain open for acceptance within sixty (60) days of receipt [*] 2.6 Commencing no later than twenty (20) Business Days after every written request made by [*] during the Term, Digimarc shall conduct Verification Tests of specified [*] on a date or dates agreed between Digimarc and [*] for the charges specified in clause 3. 2.7 Digimarc shall obtain at its own expense all licenses or permits required to be obtained from the Government of the United States in order for Digimarc to comply with its obligations under this Agreement including, without limitation, to [*], and grant the foregoing license to [*]. _______________ [*] Omitted Pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 6 3. SERVICE FEES 3.1 [*] shall pay to Digimarc a fee for the Services as detailed below. The fee for Services provided: (a) [*], is as set out in Attachment 3; (b) [*], will be no greater than the fee then paid to Digimarc for similar services by Digimarc's most favoured customer. 3.2 Except as otherwise expressly provided in this Agreement, [*] shall pay Digimarc all sales, use, goods and services or other similar taxes levied by any government in the United States or the country of the [*]'s principal place of business which Digimarc is obliged to collect and remit to such government(s) in connection with any amount paid by [*] to Digimarc under this Agreement. 3.3 Digimarc is responsible for, and shall indemnify [*] against, and hold [*] harmless from, the payment of all taxes levied by any government on or in respect of Digimarc's income and any amounts required by law to be paid in respect of social benefits for Digimarc's employees relating to or arising out of the performance of the Services. If required by law, [*] shall deduct all such taxes and amounts from the amounts otherwise payable to Digimarc and remit them to the appropriate authorities. 4. NUMBER NOT USED 5. [*] RESPONSIBILITIES 5.1 [*] shall make every reasonable effort, including obtaining a legally binding commitment from all [*], to ensure that the [*] do not use the [*] IPR or the Digimarc IPR, or permit or suffer the [*] IPR or the Digimarc IPR to be used, for any purpose other than [*] 5.2 If [*] learns, or has reasonable cause to believe, that any [*] has used, or permitted or suffered to be used, or proposes to use or permit or suffer to be used, the [*] IPR or the Digimarc IPR except as expressly authorised herein, [*] shall immediately notify Digimarc and the DLA Contract Authority, and [*] shall use all reasonable efforts, at its own expense, to prevent any further such use including exercising whatever legal remedies (including, without limitation, an application for injunctive relief) are available to [*]. [*] shall, immediately on notice by Digimarc, assign to Digimarc any right of action which [*] may have to prevent any further such use. Following such assignment, [*] shall cooperate with Digimarc to achieve the successful _______________ [*] Omitted Pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 7 prosecution, or, if elected by Digimarc, settlement, of any such action. 5.3 [*] shall promptly report to Digimarc every instance which comes to its attention of: (i) [*] (ii) [*] 5.4 [*] shall inform Digimarc within thirty (30) days after the end of each calendar quarter during the Term of all improvements relating to (i) Digital Watermarks [*]; (ii) the technology for [*], and (iii) the technology for [*] and (iv) any other part of the CDS, which improvements [*] has made, or caused or permitted to be made, as a result of access to and use of the Digimarc Confidential Information. The first such information shall be provided to Digimarc within thirty (30) days after the first calendar quarter following said access, and shall cover improvements made from the date [*] first learned of the Digimarc Confidential Information. Following the provision of the information under this clause 5.4, [*] shall provide to Digimarc within a reasonable period of time following request, the Technical Information for those improvements requested by Digimarc in writing. 5.5 [*] hereby grants to Digimarc a royalty-free, non-exclusive, sub- licensable, worldwide license to use the improvements described in clause 5.4 and in any patents thereon owned or otherwise licenseable by [*]. 5.6 Such license shall continue until this Agreement expires or is terminated, or until [*] has no further rights to Digimarc IPR, whichever occurs last. 5.7 For greater certainty, the obligations set out in clauses 5.4, 5.5 and 5.6 shall not apply to any such improvement which the [*] can demonstrate would have been made irrespective of access to the Digimarc Confidential Information. 5.8 Not less frequently than twice in each calendar year of the Term, [*] (or Digimarc if [*] so designates), shall conduct Verification Tests on representative samples of [*]. A report detailing the results of the Tests shall be prepared and promptly provided to [*]. 5.9 If [*] designates Digimarc to conduct the tests: (i) [*], [*] shall pay Digimarc the fees set out in Attachment 3; (ii) [*], [*] shall pay Digimarc the fees then paid to Digimarc for similar services by Digimarc's most favoured customer . _______________ [*] Omitted Pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 8 5.10 In the event that said Tests do not indicate, to [*]'s satisfaction, that [*] standards detailed in the Verification Tests, [*] will require the [*] to immediately take whatever corrective action(s) [*] considers appropriate. 5.11 [*] shall advise Digimarc in writing in advance of any changes which [*] may, at its sole discretion, make from time to time to the information set forth in Attachments 4 and 5. 6. CONFIDENTIALITY 6.1 Except as otherwise expressly permitted by this Agreement, a Recipient shall not use, reproduce or disclose the Confidential Information of the Discloser for any purpose other than as reasonably necessary to comply with its obligations under this Agreement or to exercise any rights or licenses granted to it under or pursuant to this Agreement. 6.2 The Recipient shall protect the Confidential Information of the Discloser from disclosure by using the same degree of care, which shall be no less than a reasonable degree of care, as the Recipient uses to protect its own confidential information. 6.3 On written request from the Discloser, the Recipient shall return, or certify the destruction of, all originals and copies of the Discloser's Confidential Information in the Recipient's possession or control which the Recipient does not need to retain in order to perform any obligations imposed, or exercise any rights acquired, by this Agreement 6.4 A Recipient may, on a need to know basis, and only for the purposes described in clause 6.1, give the other party's Confidential Information to the Recipient's employees or authorized subcontractors provided that such employee or subcontractor shall have entered into a non-disclosure agreement in respect of such Confidential Information in favour of the Discloser on terms materially similar to the provisions of this clause 6. 6.5 The obligations set out in this clause 6 will not apply to any Confidential Information that: (a) is or becomes publicly available other than through the fault of the Recipient; (b) was known to the Recipient prior to disclosure as shown by documentation sufficient to establish such knowledge; (c) was or is lawfully disclosed to the Recipient by a third party who did not breach any. _______________ [*] Omitted Pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 9 obligation of confidence by such disclosure and who made the disclosure without restriction on further disclosure all of which is shown by documentation sufficient to establish same; or (d) is required by law to be disclosed provided, however, that the Recipient shall first give written notice to the Discloser before the disclosure so that the Discloser may seek an appropriate protective order. Notwithstanding the foregoing, the fact that Confidential Information, or any part thereof, can be linked together by a search of publications and other information, followed by a selection of a series of such items of knowledge from unconnected sources, and fitting together those items of knowledge so as to duplicate or recreate any item of Confidential Information, shall not be deemed to cause the Confidential Information, or any part thereof, to be included within exceptions (a), (b) or (c), above. 6.6 [*] shall not make any disclosure of Digimarc Confidential Information to [*] which is not licensed by Digimarc, except as expressly and previously authorized in writing by Digimarc. Disclosure to [*]shall only be made if and to the extent reasonably necessary for [*] to fulfill its obligations to [*]. 6.7 The obligations of the parties under this clause 6 will survive the Term or sooner termination of this Agreement and will remain in full force and effect regardless of the cause of any termination. 6.8 Nothing in this Agreement shall be construed to require [*] to disclose any information which is confidential to a third party including for greater certainty [*]. 7. INTELLECTUAL PROPERTY INDEMNIFICATION 7.1 [*] shall provide Digimarc with prompt written notice of any claim, demand or action against [*] based on an allegation that the Digimarc IPR or any part thereof, infringes any Intellectual Property Right of any person (referred to below as a "Claim"). 7.2 Subject to the limitations set out in clauses 7.3 to 7.7 inclusive Digimarc shall, at its own expense: (a) negotiate the resolution of any such Claim; (b) pay all costs associated with the Claim; and _______________ [*] Omitted Pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 10 (c) defend any action based on the Claim. 7.3 [*] shall, at Digimarc's expense, comply with all reasonable requests for assistance from [*] in connection with the settlement or defence of the Claim. 7.4 Notwithstanding any other provision of this Agreement to the contrary, but subject to the limitations in this clause 7, Digimarc shall indemnify [*] and all [*] against and save [*] and all the [*] harmless from all loss, costs, liabilities including an award of damages, and expenses, including legal fees, arising from each Claim first notified to Digimarc prior to [*]. The obligation set out in this clause 7 shall not apply in respect of any settlement made by [*] without the consent of Digimarc. 7.5 The liability of Digimarc under clause 7.4 of this Agreement and under the equivalent clause of every other licence agreement entered into between Digimarc and [*] pursuant to the provisions of the [*] License will not exceed the Indemnity Limit as defined in clause 7.6 below. 7.6 The Indemnity Limit shall be [*], or such higher amount as notified by Digimarc from time to time. 7.7 For the purposes of clauses 7.2 through 7.6 inclusive, "Claim" shall mean any Claim, other than a Claim for patent infringement which Digimarc can demonstrate occurred without Digimarc acting recklessly or negligently. 8. REPRESENTATIONS AND WARRANTIES OF DIGIMARC 8.1 General - Digimarc represents, warrants and undertakes to [*] that from and after the Effective Date: (a) the Services provided under this Agreement will be of professional quality conforming to generally accepted practices for like services and will be performed at all times in a timely and cost effective manner and, for greater certainty Digimarc shall employ the standard of care in performing the Services that would be expected of an expert [*] of the same or similar type as the [*] which comprises the [*]; (b) Digimarc is duly incorporated and organized and is validly subsisting under the laws of the State of Oregon, U.S.A. or some other state in the United States with full corporate power and authority to enter into this Agreement; _______________ [*] Omitted Pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 11 (c) to the best of its knowledge, neither this Agreement nor the Services will contravene, breach, or result in any default under any agreement, permit, by-law, or law or regulation to which Digimarc is subject or by which it is bound including, for greater certainty any laws or regulations in effect in the United States governing export; (d) this Agreement when executed and delivered by Digimarc shall constitute a valid and binding agreement with Digimarc enforceable against Digimarc according to its terms; and (e) Digimarc will at all material times have the right to grant the licenses to the Digimarc IPR as required by this Agreement. 8.2 Digimarc represents, warrants and undertakes to [*] that: (a) incorporated as part of its [*]; (b) [*] contain no lock, clock, timer, counter, copy protection feature, replication device or intentional defects (including but not limited to "viruses" or "worms" as such terms are commonly used in the computer industry), CPU serial number reference, or other device which might: (i) lock, disable or erase the [*] or any data which is loaded on the [*] so as to prevent full use of the [*] by authorized persons; or (ii) require action or intervention by Digimarc or any other person to allow properly trained and authorized persons to use the [*]; (c) the source code for the [*] will support the year 2000 and neither performance nor functionality will be affected by dates prior to, during and after the year 2000, and for greater certainty, the [*] will switch to 1 January 2000 on 1 January 2000, and the year 2000 will be recognized as a leap year. 9. REPRESENTATIONS AND WARRANTIES OF [*] 9.1 [*] represents and warrants to Digimarc that: (a) [*] has full power and authority to enter into this Agreement; and (b) this Agreement when executed and delivered by [*] shall constitute a valid, binding _______________ [*] Omitted Pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 12 enforceable obligation of [*]. 9.2 [*] makes no representations, warranties or undertakings that [*] has any right to grant the licenses required to be granted by clause 5.5 and Digimarc shall be solely responsible for determining that such improvements are suitable for the intended use and for the consequences of any use of the same whether by Digimarc or others, and [*] hereby disclaims all liability in connection therewith. 10. TERM AND TERMINATION 10.1 This Agreement will take effect on the Effective Date and will remain in force throughout the Term unless sooner terminated as provided herein. 10.2 Either party may terminate this Agreement if the other party breaches any of its obligations under this Agreement and fails to remedy such breach within thirty (30) days after receiving written notice of such breach from the other party. 10.3 Upon termination of this Agreement: (a) all rights granted to [*] under this Agreement will immediately terminate. No interest in any such rights will thereafter remain with [*], except that [*] that have already been produced will continue to be licensed, but no further production of [*] for [*] shall be permitted; and (b) each party shall return, or certify the destruction of, to the Discloser, all originals and copies of the Discloser's Confidential Information in the party's possession or control which the party does not need to retain in order to exercise any rights acquired by this Agreement. 10.4 No termination of this Agreement will in any manner release, or be construed as releasing, any party from any liability arising out of or in connection with that party's breach of or failure to perform any covenant, duty or obligation contained herein prior to the date of such termination. 10.5 Upon termination of the [*] License by Digimarc for cause, the rights of the [*] hereunder to use the Digimarc IPR shall be deemed to be restricted [*] as of the date of such termination. ___________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 13 11. DISPUTE RESOLUTION 11.1 Any Dispute (as defined in the Arbitration Agreement) shall be finally settled by arbitration in accordance with the Arbitration Agreement. 11.2 Unless otherwise agreed between the parties or unless the subject matter of the dispute resolution proceedings is a party's right to terminate this Agreement, the Services shall continue during the dispute resolution proceedings and payments due to Digimarc shall not be withheld on account of such proceedings unless that particular services or payment is the subject matter of the proceedings. Notwithstanding the foregoing, Licensee may in its sole discretion instruct Digimarc to continue to perform services which are the subject matter of the proceedings and Digimarc shall act in accordance with those instructions, subject to payment under clause 3.1. 12. MISCELLANEOUS PROVISIONS 12.1 Remedies Cumulative - Except as otherwise expressly set out in this Agreement: (a) each and every right, power and remedy of a party will be considered to be cumulative with and in addition to any other right, power and remedy which such party may have at law or in equity in the event of breach of any of the terms of this Agreement; (b) the exercise or partial exercise of any right, power or remedy will neither constitute the exclusive election thereof nor the waiver of any other right, power or remedy available to such party; and (c) a party terminating this Agreement in accordance with the provisions of the Termination clause will have no liability or obligation to the other as a result of or with respect to the termination. 12.2 Notices. All notices under this Agreement shall be delivered by fax or recognized international courier service. The notice shall be deemed effective as of the date of delivery to the address of the party specified below, as evidenced by a delivery receipt or the addressee's registry of incoming correspondence. Unless otherwise expressly set out in this Agreement, all notices to a party will be sent to the party's authorized representative identified below and all notices from a party will be sent by the party's authorized representative identified below. 12.3 Any notice to [*] shall be sent to both of, and any notice from [*] shall be sent by either: Name1 Name2 ___________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 14 Address1 Address2 12.4 Any notice to Digimarc shall be sent to both of, and any notice from Digimarc shall be sent by either: ___________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 15 Mr. Bruce Davis Mr. William Y. Conwell President and CEO Klarquist, Sparkman, Campbell, Digimarc Corporation Leigh & Whinston One Centerpointe Drive 121 SW Salmon Street Suite 500 Suite 1600 Lake Oswego, Oregon 97035 USA Portland, Oregon 97204 USA FAX: (503) 968-0219 FAX: (503) 228-9446 12.5 A copy of every notice sent by either party shall be sent to: [*]. 12.6 A party may change its address for notice by notice to the other party in accordance with the foregoing provisions. 12.7 Severability. If any part of this Agreement is held by an arbitral tribunal appointed pursuant to the Arbitration Agreement or other competent authority to be void or unenforceable, the parties agree that such determination will not result in the nullity or unenforceability of the remaining parts of this Agreement, which will continue in force to the fullest extent permitted by law. The parties further agree to replace such void or unenforceable part of this Agreement with a valid and enforceable provision that will achieve, to the extent legally permissible, the economic, business and other purposes of the void or unenforceable part. 12.8 Counterparts. This Agreement may be executed in separate counterparts, and by facsimile, each of which will be deemed an original, and when executed, separately or together, will constitute a single original instrument, effective in the same manner as if the parties had executed one and the same instrument. 12.9 Entire Agreement. This Agreement is intended by the parties to be the final expression of their agreement and constitutes and embodies the entire agreement and understanding between the parties hereto and constitutes a complete and exclusive statement of the terms and conditions thereof, and will supersede any and all prior correspondence, conversations, negotiations, agreements or understandings relating to the same subject matter. 12.10 Amendments. No change in, modification of or addition to the terms and conditions contained herein will be valid as between the parties unless set forth in a writing that is signed by an authorized representative of each of the parties and which specifically states that it constitutes an amendment to this Agreement. 12.11 Waiver. No waiver of any term, provision, or condition of this Agreement will be effective unless in a written document signed by the waiving party and no such waiver in any one ___________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 16 or more instances, will be deemed to be, or be construed as, a further or continuing waiver of that term, provision or condition or any other term, provision or condition of this Agreement. 12.12 Assignment and Successors. This Agreement may not be assigned by [*] without Digimarc's consent, which consent shall not be unreasonably withheld or delayed. This Agreement and all of its terms, conditions and covenants are intended to be fully effective and binding, to the extent permitted by law, on the successors and permitted assigns of the parties hereto. 12.13 Captions. Captions are provided in this Agreement for convenience only and they form no part, and are not to serve as a basis for interpretation or construction, of this Agreement, nor as evidence of the intention of the parties hereto. 12.14 Disclaimer of Agency. Nothing contained in this Agreement is intended or will be construed so as to constitute the parties to this Agreement as partners or joint venturers or as agents of each other. Neither party will have any express or implied right or authority to assume or create any obligations on behalf of or in the name of any other party or to bind any other party in any contract, agreement or undertaking with any third party. No employee of a party shall be deemed or considered to be an employee of the other party or of both parties. 12.15 Publicity. The parties agree that from time-to-time it will be beneficial to both parties to issue press releases and other public announcements concerning benefits arising from the CDS. Each party agrees to submit for approval by the other party any press release that involves the other party, which approval shall not unreasonably be withheld. 12.16 Effectiveness. This Agreement shall not be effective until it is signed by both of the parties. 12.17 Ambiguities. Each party and its counsel have participated fully in the review and revision of this Agreement. Any rule or construction to the effect that ambiguities are to be resolved against the drafting party shall not apply in interpreting this Agreement. 12.18 Survival. All clauses of this Agreement which expressly or by implication are intended to survive the termination of this Agreement will do so and, for greater certainty and notwithstanding any provision in this Agreement to the contrary, the provisions of clauses 3.2, 3.3, 5.1, 5.2, 5.5, 5.6, 6, 7,11, and 12 of this Agreement shall survive termination of this Agreement by either party for any reason. IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties ___________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 2 hereto as of the Effective Date. DIGIMARC CORPORATION ([*]) By: ________________ By: ________________ Name: ________________ Name: ________________ Title: ________________ Title: ________________ Date: ________________ Date: ________________ ___________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 3 ATTACHMENT 1 [*] [*] will cause the following [*] to take place: (a) [*] (b) [*] CDS [*] (c) [*] ___________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 4 ATTACHMENT 2 PROBLEM REPORT Each problem report will contain all information necessary to reproduce or demonstrate the occurrence of the problem. Problem reports will be in English and will be delivered electronically in a format to be provided by Digimarc. Problem reports will contain: . Date problem was encountered . Detailed description of the problem, including the frequency with which the problem occurs . Name and version number of the program / system component that exhibits the problem . Step by step instructions to reproduce the problem . All data files required to reproduce the problem . [*] . Manufacturer and Model . CPU type and speed . Amount of memory . Operating System and Version . Disk Configuration (number of drives, total space per drive, free space per drive) . Display Adapter Model, Resolution, Number of colors . Peripheral configuration (where applicable) . [*] . TWAIN driver and version number . [*] . Severity of problem . Contact information for person to contact for further information (name, phone number, FAX number, email address) Licensee agrees to work with Digimarc to provide reasonable additional information and perform reasonable additional tests, as requested by Digimarc, to assist Digimarc in resolution of the problem. ___________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 ATTACHMENT 3 PAYMENT FOR SERVICES Digimarc shall bill [*] for services in one hour increments at the following hourly rates: Technical/Design Consultant [*] Senior Engineer [*] R&D/Engineering Executive [*] Project Manager [*] Administrator/Scheduler [*] Fees for services will be invoiced on the earlier of 1) the last day of the month or 2) the completion of the Services. Invoices are due thirty (30) days from the date of receipt of a correct invoice. A late charge of 1.5% per month will be charged on any late payments. All fees are due and payable in US funds. [*] will reimburse Digimarc for all out-of-pocket expenses reasonably and necessarily incurred in providing the Verification Tests and other services. Expenses will be itemized and reported by category. Out-of-pocket expenses will not be "marked up" by Digimarc. Costs include, but are not limited to, reasonable travel and lodging expenses, telephone and fax charges, postage and overnight deliveries, and charges for rental equipment or materials purchased specifically to be used in providing the Verification Tests and other services. All invoices for out-of-pocket expenses will be issued monthly in arrears and are due thirty (30) days from the date of receipt of a correct invoice. Supporting receipts and vouchers will be available for review at Digimarc's offices. A late charge of 1.5% per month will be charged on any late payments. Payments will additionally include Value Added taxes and other tariffs and fees that may be imposed by any governments other than the United States of America. ___________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. ATTACHMENT 4 IDENTIFICATION OF [*] ATTACHMENT 5 [*] ___________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. SCHEDULE "K-2" [*] LICENSE AGREEMENT - [*] This [*] LICENSE AGREEMENT (the "Agreement") is made BETWEEN (name and address of [*]) ("[*]") - AND - DIGIMARC CORPORATION, a corporation incorporated under the laws of Oregon and having its head office at One Centerpointe Drive, Suite 500, Lake Oswego, Oregon. U.S.A. 97035-8615 ("Digimarc") RECITALS - -------- Digimarc has expertise in, and owns extensive intellectual property, including patents, patent applications, copyrights and trade secrets related to digital watermarks, counterfeit deterrence, copyright protection, and device control (the "Digimarc IPR"); [*] possesses or will possess intellectual property rights related to the application of such intellectual property to [*]; Digimarc and [*] have cooperated in the development of means, using such intellectual property, to [*] (the "Counterfeit Deterrence System" or "CDS"); and [*] desires to obtain a license to certain components of the CDS so it can [*] which include the CDS [*]. In consideration of these premises, the covenants set out in this Agreement and other good and valuable consideration, the receipt and adequacy of which are acknowledged by each of the parties, the parties agree as follows: __________________ [*] Omitted pursuant to confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 1. DEFINITIONS AND PRINCIPLES OF INTERPRETATION 1.1 Definitions "Agreement" means these articles of agreement, including the Attachments, and those documents as specified or referenced in this Agreement as forming part of the Agreement, all as may be amended from time to time; "Arbitration Agreement" means the Arbitration Agreement entered into between the parties and others effective 1 January 1999; "Attachment" means a document specified as being attached to this Agreement; [*]; [*]; [*]; [*] the CDS; [*] "Business Day" means a day that both Digimarc and [*] are open for business at their respective addresses noted above; "Confidential Information" means information disclosed before or during the Term of this Agreement in any form which, if disclosed in tangible form, is or was labelled "Confidential", "Proprietary" or with a similar legend, or if disclosed orally, is or was information that by its nature would be understood to be confidential to the Discloser. For greater certainty, the Confidential Information of Digimarc includes the Digimarc IPR and [*]; [*] "Counterfeit Deterrence System" (or "CDS" or "System") [*]; "Digimarc IPR" means Intellectual Property Rights owned by Digimarc, now or during the Term of this Agreement, to the extent that same specifically relates to or forms part of the CDS; _____________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 2 "Digital Watermark" refers to markings (including texturing) that are detectable from data produced by visible light scanning of documents, which convey multiple bits of digital data and yet do not significantly detract from the aesthetics of the item or image marked thereby. Examples include, but are not limited to: 1. generally imperceptible changes to line density or placement in line art imagery; 2. texturing of a substrate, where the texturing feels substantially uniform to human touch; 3. slight localized changes to optical density or reflectance of a printed document; 4. slight changes to sampled data; or 5. visible background patterns of substantially uniform character. "Discloser" means a party which has disclosed or otherwise made available its Confidential Information to the other party; "DLA Contract Authority" means the individual appointed as such under the [*] License; [*] [*] [*] [*] "Effective Date" means the date on which this Agreement is last signed by the parties; [*] "Field of Use" means the field of [*]; "Improvement" means an improvement provided to [*] under clause 2.14 of the [*] License; "Intellectual Property Rights" or "IPR" means all intellectual property rights existing now and in the future including, without limitation, trade secrets, copyright, database rights, know-how, topographies, patents and patent applications; [*] [*] ____________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 3 "[*] License" means Schedule L-2 to the [*] License; [*] "Recipient" means a party to which the Confidential Information of the other party has been disclosed or otherwise made available; "Services" means the Verification Tests and any other service performed by Digimarc under this Agreement; "Term" means the period commencing on the Effective Date and ending on the [*]; and "Verification Test" means a test or tests developed under the [*] License to determine if [*]. 1.2 Interpretation - In this Agreement: 1.2.1 unless otherwise specified, all references to money amounts are to the currency of the United States of America; 1.2.2 the use of words in the singular or plural, or with a particular gender, shall not limit the scope or exclude the application of any provision of this Agreement to such person or persons or circumstances as the context otherwise permits; 1.2.3 whenever a provision of this Agreement requires an approval or consent by a party to this Agreement and notice of such approval or consent is not delivered within the applicable time, then the party shall be conclusively deemed to have withheld the consent or approval; 1.2.4 unless otherwise specified, the number of days within or following which any payment is to be made or act is to be done shall be interpreted to be continuous and shall be calculated by excluding the day on which the period commences and including the day which ends the period and by extending the period to the next Business Day if the last day of the period is not a Business Day; 1.2.5 unless otherwise specified, the order of precedence for interpreting this Agreement shall be: (a) this Agreement, excluding Attachments, and _______________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 4 (b) the Attachments; 1.2.6 for greater certainty, a party or representative to which this Agreement grants the right to make a decision or determination in the sole discretion of the party or representative is not required to act reasonably in making the decision or determination and no such decision or determination may be challenged by the other party under the Arbitration Agreement or otherwise; 1.2.7 the words "includes" or "including" will be construed as meaning "included without limitation" and "including without limitation" as the case may be; and 1.2.8 a clause or Attachment, unless the context requires otherwise, is a reference to a clause to, an Attachment of, or a paragraph of an Attachment to, this Agreement, as amended from time to time in accordance with this Agreement. 1.3 Applicable Law - This Agreement shall be construed in accordance with the laws of England to the exclusion of its rules of conflicts of laws. 1.4 Attachments - The attachments to this Agreement, listed below, are an integral part of this Agreement: Attachment Description ---------- ----------- Attachment "1" [*] Attachment "2" Opinion of Counsel Attachment "3" Problem Report Attachment "4" Payment for Services Attachment "5" [*] Attachment "6" [*] 2. GRANT OF RIGHTS AND SERVICES 2.1 Subject to the terms of this Agreement, Digimarc hereby grants to [*], a no charge, non-exclusive, non-transferable license under the Digimarc IPR and the [*] IPR, in the Field of Use only, to [*]. 2.2 [*] acknowledges and agrees that the Digimarc IPR, and any technology developed by Digimarc during the course of its work with [*], is the property of Digimarc and that [*] has no right to sublicense it. [*] acknowledges that [*] may not [*]. ___________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 5 2.3 [*] acknowledges and agrees that the [*] IPR is the property of its owner and that [*] has no right to sublicense it. 2.4 Nothing in this Agreement shall be construed to grant, by implication or otherwise, any broader rights than those specifically granted herein. 2.5 Commencing no later than ten (10) Business Days after every written request made during the Term by [*], Digimarc shall make an irrevocable offer, which offer shall remain open for acceptance within sixty (60) days of receipt by [*]. 2.6 Commencing no later than twenty (20) Business Days after every written request made by [*] during the Term, Digimarc shall conduct Verification Tests of specified [*] on a date or dates agreed between Digimarc and [*] for the charges specified in clause 3. 2.7 Digimarc shall obtain at its own expense all licenses or permits required to be obtained from the Government of the United States in order for Digimarc to comply with its obligations under this Agreement including, without limitation, to [*], and grant the foregoing license to [*]. 3. SERVICE FEES 3.1 [*] shall pay to Digimarc a fee for the Services as detailed below. The fee for Services provided: (a) [*], is as set out in Attachment 4; (b) [*], will be no greater than the fee then paid to Digimarc for similar services by Digimarc's most favoured customer. 3.2 Except as otherwise expressly provided in this Agreement, [*] shall pay Digimarc all sales, use, goods and services or other similar taxes levied by any government in the United States or the country of the [*]'s principal place of business which Digimarc is obliged to collect and remit to such government(s) in connection with any amount paid by [*] to Digimarc under this Agreement. 3.3 Digimarc is responsible for, and shall indemnify [*] against, and hold [*] harmless from, the payment of all taxes levied by any government on or in respect of Digimarc's income and any amounts required by law to be paid in respect of social benefits for Digimarc's employees ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 6 relating to or arising out of the performance of the Services. If required by law, [*] shall deduct all such taxes and amounts from the amounts otherwise payable to Digimarc and remit them to the appropriate authorities. 4. OPINION OF COUNSEL 4.1 Before introducing [*], [*] shall obtain and forward to Digimarc a written opinion of counsel substantially in the form attached as Attachment 2 that confirms: (a) the validity and enforceability of the terms of this Agreement, under the laws of the jurisdiction where [*] resides; and (b) the legality of each [*] under the laws of the jurisdiction where [*] resides. 4.2 Digimarc shall not unreasonably withhold its consent to any qualifications which [*]'s counsel may require to be made to such opinion. 5. [*] RESPONSIBILITIES 5.1 [*] shall make every reasonable effort, including obtaining a legally binding commitment from all [*], to ensure that the [*] do not use the [*] IPR or the Digimarc IPR, or permit or suffer the [*] IPR or the Digimarc IPR to be used, for any purpose other than [*]. 5.2 If [*] learns, or has reasonable cause to believe, that any [*] has used, or permitted or suffered to be used, or proposes to use or permit or suffer to be used, the [*] IPR or the Digimarc IPR except as expressly authorised herein, [*] shall immediately notify Digimarc and the DLA Contract Authority, and [*] shall use all reasonable efforts, at its own expense, to prevent any further such use including exercising whatever legal remedies (including, without limitation, an application for injunctive relief) are available to [*]. [*] shall, immediately on notice by Digimarc, assign to Digimarc any right of action which [*] may have to prevent any further such use. Following such assignment, [*] shall cooperate with Digimarc to achieve the successful prosecution, or, if elected by Digimarc, settlement, of any such action. 5.3 [*] shall promptly report to Digimarc every instance which comes to its attention of: (i) [*] (ii) [*] _________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 7 5.4 [*] shall inform Digimarc within thirty (30) days after the end of each calendar quarter during the Term of all improvements relating to (i) Digital Watermarks [*]; (ii) the technology for [*], and (iii) the technology for [*] and (iv) any other part of the CDS which improvements [*] has made, or caused or permitted to be made, as a result of access to and use of the Digimarc Confidential Information. The first such information shall be provided to Digimarc within thirty (30) days after the first calendar quarter following said access, and shall cover improvements made from the date [*] first learned of the Digimarc Confidential Information. Following the provision of the information under this clause 5.4, [*] shall provide to Digimarc within a reasonable period of time following request, the Technical Information for those improvements requested by Digimarc in writing. 5.5 [*] hereby grants to Digimarc a royalty-free, non-exclusive, sub-licensable, worldwide license to use the improvements described in clause 5.4 and in any patents thereon owned or otherwise licenseable by [*]. 5.6 Such license shall continue until this Agreement expires or is terminated, or until [*] has no further rights to Digimarc IPR, whichever occurs last. 5.7 For greater certainty, the obligations set out in clauses 5.4, 5.5 and 5.6 shall not apply to any such improvement which the [*] can demonstrate would have been made irrespective of access to the Digimarc Confidential Information. 5.8 Not less frequently than twice in each calendar year of the Term, [*] (or Digimarc if [*] so designates), shall conduct Verification Tests on representative samples [*]. A report detailing the results of the Tests shall be prepared and promptly provided to [*]. 5.9 If [*] designates Digimarc to conduct the tests: (i) [*], [*] shall pay Digimarc the fees set out in Attachment 4 ; (ii) [*], [*] shall pay Digimarc the fees then paid to Digimarc for similar services by Digimarc's most favoured customer. 5.10 In the event that said Tests do not indicate, to [*]'s satisfaction, that [*] standards detailed in the Verification Tests, [*] will require the [*] to immediately take whatever corrective action(s) [*] considers appropriate. 5.11 [*] shall advise Digimarc in writing in advance of any changes which [*] may, at its sole discretion, make from time to time to the information set forth in Attachments 5 and 6. _________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 8 6. CONFIDENTIALITY 6.1 Except as otherwise expressly permitted by this Agreement, a Recipient shall not use, reproduce or disclose the Confidential Information of the Discloser for any purpose other than as reasonably necessary to comply with its obligations under this Agreement or to exercise any rights or licenses granted to it under or pursuant to this Agreement. 6.2 The Recipient shall protect the Confidential Information of the Discloser from disclosure by using the same degree of care, which shall be no less than a reasonable degree of care, as the Recipient uses to protect its own confidential information. 6.3 On written request from the Discloser, the Recipient shall return, or certify the destruction of, all originals and copies of the Discloser's Confidential Information in the Recipient's possession or control which the Recipient does not need to retain in order to perform any obligations imposed, or exercise any rights acquired, by this Agreement. 6.4 A Recipient may, on a need to know basis, and only for the purposes described in clause 6.1, give the other party's Confidential Information to the Recipient's employees or authorized subcontractors provided that such employee or subcontractor shall have entered into a non-disclosure agreement in respect of such Confidential Information in favour of the Discloser on terms materially similar to the provisions of this clause 6. 6.5 The obligations set out in this clause 6 will not apply to any Confidential Information that: (a) is or becomes publicly available other than through the fault of the Recipient; (b) was known to the Recipient prior to disclosure as shown by documentation sufficient to establish such knowledge; (c) was or is lawfully disclosed to the Recipient by a third party who did not breach any obligation of confidence by such disclosure and who made the disclosure without restriction on further disclosure all of which is shown by documentation sufficient to establish same; or (d) is required by law to be disclosed provided, however, that the Recipient shall first give written notice to the Discloser before the disclosure so that the Discloser may seek an appropriate protective order. Notwithstanding the foregoing, the fact that Confidential Information, or any part thereof, can be _______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 9 linked together by a search of publications and other information, followed by a selection of a series of such items of knowledge from unconnected sources, and fitting together those items of knowledge so as to duplicate or recreate any item of Confidential Information, shall not be deemed to cause the Confidential Information, or any part thereof, to be included within exceptions (a), (b) or (c), above. 6.6 [*] shall not make any disclosure of Digimarc Confidential Information to [*] which is not licensed by Digimarc, except as expressly and previously authorized in writing by Digimarc. Disclosure to [*] shall only be made if and to the extent reasonably necessary [*] to fulfill its obligations to [*]. 6.7 The obligations of the parties under this clause 6 will survive the Term or sooner termination of this Agreement and will remain in full force and effect regardless of the cause of any termination. 6.8 Nothing in this Agreement shall be construed to require [*] to disclose any information which is confidential to a third party including for greater certainty a [*]. 7. INTELLECTUAL PROPERTY INDEMNIFICATION NOTE - THIS PROTECTION IS AVAILABLE UPON PAYMENT OF A FEE BY [*] TO BE NEGOTIATED BETWEEN [*] AND DIGIMARC 7.1 [*] shall provide Digimarc with prompt written notice of any claim, demand or action against [*] based on an allegation that the Digimarc IPR or any part thereof, infringes any Intellectual Property Right of any person (referred to below as a "Claim"). 7.2 Subject to the limitations set out in clauses 7.3 to 7.7 inclusive Digimarc shall, at its own expense: (a) negotiate the resolution of any such Claim; (b) pay all costs associated with the Claim; and (c) defend any action based on the Claim. 7.3 [*] shall, at Digimarc's expense, comply with all reasonable requests for assistance from [*] in connection with the settlement or defence of the Claim. ________________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 10 7.4 Notwithstanding any other provision of this Agreement to the contrary, but subject to the limitations in this clause 7, Digimarc shall indemnify [*] and all of [*] against and save [*] and all [*] harmless from all loss, costs, liabilities including an award of damages, and expenses, including legal fees, arising from each Claim first notified to Digimarc prior to [*]. The obligation set out in this clause 7 shall not apply in respect of any settlement made by [*] without the consent of Digimarc. 7.5 The liability of Digimarc under clause 7.4 of this Agreement and under the equivalent clause of every other licence agreement entered into between Digimarc and [*] pursuant to the provisions of the [*] License will not exceed the Indemnity Limit as defined in clause 7.6 below. 7.6 The Indemnity Limit shall be [*], or such higher amount as notified by Digimarc from time to time. 7.7 For the purposes of clauses 7.2 through 7.6 inclusive, "Claim" shall mean any Claim, other than a Claim for patent infringement which Digimarc can demonstrate occurred without Digimarc acting recklessly or negligently. 8. REPRESENTATIONS AND WARRANTIES OF DIGIMARC 8.1 General - Digimarc represents, warrants and undertakes to [*] that from and after the Effective Date: (a) the Services provided under this Agreement will be of professional quality conforming to generally accepted practices for like services and will be performed at all times in a timely and cost effective manner and, for greater certainty Digimarc shall employ the standard of care in performing the Services that would be expected of an expert [*] of the same or similar type as the [*] which comprises the [*]; (b) Digimarc is duly incorporated and organized and is validly subsisting under the laws of the State of Oregon, U.S.A. or some other state in the United States with full corporate power and authority to enter into this Agreement; (c) to the best of its knowledge, neither this Agreement nor the Services will contravene, breach, or result in any default under any agreement, permit, by-law, or law or regulation to which Digimarc is subject or by which it is bound including, for greater certainty any laws or regulations in effect in the United States governing export; _________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 11 (d) this Agreement when executed and delivered by Digimarc shall constitute a valid and binding agreement with Digimarc enforceable against Digimarc according to its terms; and (e) Digimarc will at all material times have the right to grant the licenses to the Digimarc IPR as required by this Agreement. 8.2 Digimarc represents, warrants and undertakes to [*] that: (a) incorporated as part of [*]; (b) [*] shall contain no lock, clock, timer, counter, copy protection feature, replication device or intentional defects (including but not limited to "viruses" or "worms" as such terms are commonly used in the computer industry), CPU serial number reference, or other device which might: (i) lock, disable or erase [*] or any data which is loaded on the [*] so as to prevent full use of the [*] by authorized persons; or (ii) require action or intervention by Digimarc or any other person to allow properly trained and authorized persons to use the [*]; (c) the source code for the [*] will support the year 2000 and neither performance nor functionality will be affected by dates prior to, during and after the year 2000, and for greater certainty, the [*] will switch to 1 January 2000 on 1 January 2000, and the year 2000 will be recognized as a leap year. 9. REPRESENTATIONS AND WARRANTIES OF [*] 9.1 [*] represents and warrants to Digimarc that: (a) [*] has full power and authority to enter into this Agreement; and (b) this Agreement when executed and delivered by [*] shall constitute a valid, binding and enforceable obligation of [*]. 9.2 [*] makes no representations, warranties or undertakings that [*] has any right to grant the licenses required to be granted by clause 5.5 and Digimarc shall be solely responsible for determining that such improvements are suitable for the intended use and for the consequences of _________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 12 any use of the same whether by Digimarc or others, and [*] hereby disclaims all liability in connection therewith. 10. TERM AND TERMINATION 10.1 This Agreement will take effect on the Effective Date and will remain in force throughout the Term unless sooner terminated as provided herein. 10.2 Either party may terminate this Agreement if the other party breaches any of its obligations under this Agreement and fails to remedy such breach within thirty (30) days after receiving written notice of such breach from the other party. 10.3 Upon termination of this Agreement: (a) all rights granted to [*] under this Agreement will immediately terminate. No interest in any such rights will thereafter remain with [*], except that [*] that have already been produced will continue to be licensed, but no further production of [*] for [*] shall be permitted; and (b) each party shall return, or certify the destruction of, to the Discloser, all originals and copies of the Discloser's Confidential Information in the party's possession or control which the party does not need to retain in order to exercise any rights acquired by this Agreement. 10.4 No termination of this Agreement will in any manner release, or be construed as releasing, any party from any liability arising out of or in connection with that party's breach of or failure to perform any covenant, duty or obligation contained herein prior to the date of such termination. 10.5 Upon termination of the [*] License by Digimarc for cause, the rights of the [*] hereunder to use the Digimarc IPR shall be deemed to be restricted to [*] as of the date of such termination. 11. DISPUTE RESOLUTION 11.1 Any Dispute (as defined in the Arbitration Agreement) shall be finally settled by arbitration in accordance with the Arbitration Agreement. 11.2 Unless otherwise agreed between the parties or unless the subject matter of the dispute resolution proceedings is a party's right to terminate this Agreement, the Services shall continue _________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 13 during the dispute resolution proceedings and payments due to Digimarc shall not be withheld on account of such proceedings unless that particular services or payment is the subject matter of the proceedings. Notwithstanding the foregoing, [*] may in its sole discretion instruct Digimarc to continue to perform services which are the subject matter of the proceedings and Digimarc shall act in accordance with those instructions, subject to payment under clause 3.1. 12. MISCELLANEOUS PROVISIONS 12.1 Remedies Cumulative - Except as otherwise expressly set out in this Agreement: (a) each and every right, power and remedy of a party will be considered to be cumulative with and in addition to any other right, power and remedy which such party may have at law or in equity in the event of breach of any of the terms of this Agreement; (b) the exercise or partial exercise of any right, power or remedy will neither constitute the exclusive election thereof nor the waiver of any other right, power or remedy available to such party; and (c) a party terminating this Agreement in accordance with the provisions of the Termination clause will have no liability or obligation to the other as a result of or with respect to the termination. 12.2 Notices. All notices under this Agreement shall be delivered by fax or recognized international courier service. The notice shall be deemed effective as of the date of delivery to the address of the party specified below, as evidenced by a delivery receipt or the addressee's registry of incoming correspondence. Unless otherwise expressly set out in this Agreement, all notices to a party will be sent to the party's authorized representative identified below and all notices from a party will be sent by the party's authorized representative identified below. 12.3 Any notice to [*] shall be sent to both of, and any notice from [*] shall be sent by either: Name1 Name2 Address1 Address2 12.4 Any notice to Digimarc shall be sent to both of, and any notice from Digimarc shall be sent by either: Mr. Bruce Davis President and CEO _________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 14 Digimarc Corporation Mr. William Y. Conwell One Centerpointe Drive Klarquist, Sparkman, Campbell, Suite 500 Leigh & Whinston Lake Oswego, Oregon 97035 USA 121 SW Salmon Street FAX: (503) 968-0219 Suite 1600 Portland, Oregon 97204 USA FAX: (503) 228-9446 12.5 A copy of every notice sent by either party shall be sent to: [*] 12.6 A party may change its address for notice by notice to the other party in accordance with the foregoing provisions. 12.7 Severability. If any part of this Agreement is held by an arbitral tribunal appointed pursuant to the Arbitration Agreement or other competent authority to be void or unenforceable, the parties agree that such determination will not result in the nullity or unenforceability of the remaining parts of this Agreement, which will continue in force to the fullest extent permitted by law. The parties further agree to replace such void or unenforceable part of this Agreement with a valid and enforceable provision that will achieve, to the extent legally permissible, the economic, business and other purposes of the void or unenforceable part. 12.8 Counterparts. This Agreement may be executed in separate counterparts, and by facsimile, each of which will be deemed an original, and when executed, separately or together, will constitute a single original instrument, effective in the same manner as if the parties had executed one and the same instrument. 12.9 Entire Agreement. This Agreement is intended by the parties to be the final expression of their agreement and constitutes and embodies the entire agreement and understanding between the parties hereto and constitutes a complete and exclusive statement of the terms and conditions thereof, and will supersede any and all prior correspondence, conversations, negotiations, agreements or understandings relating to the same subject matter. 12.10 Amendments. No change in, modification of or addition to the terms and conditions contained herein will be valid as between the parties unless set forth in a writing that is signed by an authorized representative of each of the parties and which specifically states that it constitutes an amendment to this Agreement. 12.11 Waiver. No waiver of any term, provision, or condition of this Agreement will be effective unless in a written document signed by the waiving party and no such waiver in any one or more instances, will be deemed to be, or be construed as, a further or continuing waiver of that term, provision or condition or any other term, provision or condition of this Agreement. Schedule K2 June 28, 1999 12.12 Assignment and Successors. This Agreement may not be assigned by [*] without Digimarc's consent, which consent shall not be unreasonably withheld or delayed. This Agreement and all of its terms, conditions and covenants are intended to be fully effective and binding, to the extent permitted by law, on the successors and permitted assigns of the parties hereto. 12.13 Captions. Captions are provided in this Agreement for convenience only and they form no part, and are not to serve as a basis for interpretation or construction, of this Agreement, nor as evidence of the intention of the parties hereto. 12.14 Disclaimer of Agency. Nothing contained in this Agreement is intended or will be construed so as to constitute the parties to this Agreement as partners or joint venturers or as agents of each other. Neither party will have any express or implied right or authority to assume or create any obligations on behalf of or in the name of any other party or to bind any other party in any contract, agreement or undertaking with any third party. No employee of a party shall be deemed or considered to be an employee of the other party or of both parties. 12.15 Publicity. The parties agree that from time-to-time it will be beneficial to both parties to issue press releases and other public announcements concerning benefits arising from the CDS. Each party agrees to submit for approval by the other party any press release that involves the other party, which approval shall not unreasonably be withheld. 12.16 Effectiveness. This Agreement shall not be effective until it is signed by both of the parties. 12.17 Ambiguities. Each party and its counsel have participated fully in the review and revision of this Agreement. Any rule or construction to the effect that ambiguities are to be resolved against the drafting party shall not apply in interpreting this Agreement. 2.18 Survival. All clauses of this Agreement which expressly or by implication are intended to survive the termination of this Agreement will do so and, for greater certainty and notwithstanding any provision in this Agreement to the contrary, the provisions of clauses 3.2, 3.3, 5.1, 5.2, 5.5, 5.6, 6, 7,11, and 12 of this Agreement shall survive termination of this Agreement by either party for any reason. IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto as of the Effective Date. _________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. DIGIMARC CORPORATION ([*]) By: ___________________________ By: _________________________ Name: ___________________________ Name: _________________________ Title: ___________________________ Title: _________________________ Date: ___________________________ Date: _________________________ _________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. ATTACHMENT 1 [*] [*] will cause the following [*] to take place: (a) [*] (b) [*] CDS [*]. (c) [*] _________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 ATTACHMENT 2 DRAFT OPINION OF COUNSEL Digimarc Corporation One Centerpointe Drive Suite 500 Lake Oswego, Oregon, U.S.A. 97035-8615 Attention: Mr. Bruce Davis President and CEO Dear Mr. Davis: In connection with your proposal to grant a license to (name of [*]) to use the Counterfeit Deterrence System and for no other purpose, we confirm that: (b) each provision of this Agreement is valid and enforceable against (name of [*]) under the laws of (name of jurisdiction); and (b) none of the [*] described below, at the time of writing, contravenes any law, regulation, policy, principle, or doctrine in effect in the jurisdiction of the (principal place of business/head office) of (name of [*]). [*] Yours truly, _________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 ATTACHMENT 3 PROBLEM REPORT Each problem report will contain all information necessary to reproduce or demonstrate the occurrence of the problem. Problem reports will be in English and will be delivered electronically in a format to be provided by Digimarc. Problem reports will contain: [_] Date problem was encountered [_] Detailed description of the problem, including the frequency with which the problem occurs " Name and version number of the program / system component that exhibits the problem " Step by step instructions to reproduce the problem " All data files required to reproduce the problem " [*] " Manufacturer and Model " CPU type and speed " Amount of memory " Operating System and Version " Disk Configuration (number of drives, total space per drive, free space per drive) " Display Adapter Model, Resolution, Number of colors " Peripheral configuration (where applicable) " [*] " TWAIN driver and version number " [*] " Severity of problem " Contact information for person to contact for further information (name, phone number, FAX number, email address) Licensee agrees to work with Digimarc to provide reasonable additional information and perform reasonable additional tests, as requested by Digimarc, to assist Digimarc in resolution of the problem. _________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. ATTACHMENT 4 PAYMENT FOR SERVICES Digimarc shall bill [*] for services in one hour increments at the following hourly rates: Technical/Design Consultant [*] Senior Engineer [*] R&D/Engineering Executive [*] Project Manager [*] Administrator/Scheduler [*] Fees for services will be invoiced on the earlier of 1) the last day of the month or 2) the completion of the Services. Invoices are due thirty (30) days from the date of receipt of a correct invoice. A late charge of 1.5% per month will be charged on any late payments. All fees are due and payable in US funds. [*] will reimburse Digimarc for all out-of-pocket expenses reasonably and necessarily incurred in providing the Verification Tests and other services. Expenses will be itemized and reported by category. Out-of-pocket expenses will not be "marked up" by Digimarc. Costs include, but are not limited to, reasonable travel and lodging expenses, telephone and fax charges, postage and overnight deliveries, and charges for rental equipment or materials purchased specifically to be used in providing the Verification Tests and other services. All invoices for out-of-pocket expenses will be issued monthly in arrears and are due thirty (30) days from the date of receipt of a correct invoice. Supporting receipts and vouchers will be available for review at Digimarc's offices. A late charge of 1.5% per month will be charged on any late payments. Payments will additionally include Value Added taxes and other tariffs and fees that may be imposed by any governments other than the United States of America. _________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 ATTACHMENT 5 IDENTIFICATION OF [*] ATTACHMENT 6 [*] _________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 SCHEDULE "L-1" [*] LICENSE AGREEMENT - [*] This [*] LICENSE AGREEMENT (the "Agreement") is made BETWEEN (name and address of Licensee) ("Licensee") - AND - DIGIMARC CORPORATION, a corporation incorporated under the laws of Oregon and having its head office at One Centerpointe Drive, Suite 500, Lake Oswego, Oregon. U.S.A. 97035-8615 ("Digimarc") "[*]" ........... ........... RECITALS Digimarc has expertise in, and owns extensive intellectual property, including patents, patent applications, copyrights and trade secrets related to digital watermarks, counterfeit deterrence, copyright protection, and device control; [*] possesses or will possess intellectual property rights related to the application of such intellectual property [*] and Digimarc and [*] have cooperated in the development of means, using such intellectual property, [*] and [*] (the "Counterfeit Deterrence System" or "CDS"); [*] Digimarc is licensing its CDS [*] authorized by a duly licensed [*], and Licensee, having been authorized by a duly licensed [*], desires access to such technology so that Licensee can include Digimarc's [*] and ______________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 In consideration of these premises, the covenants set out in this Agreement and for other good and valuable consideration, the receipt and adequacy of which are acknowledged by each of the parties, the parties agree as follows: 1. DEFINITIONS AND PRINCIPLES OF INTERPRETATION In this Agreement: "Agreement" means these articles of agreement, including the Attachments, and those documents as specified or referenced in this Agreement as forming part of the Agreement, all as may be amended from time to time; "Arbitration Agreement" means the Arbitration Agreement entered into between the parties and others effective 1 January 1999; "Attachment" means a document specified as being attached to this Agreement; [*] [*] [*] [*] the CDS; "Business Day" means a day on which both Digimarc and Licensee are open for business at their respective addresses noted above; "Confidential Information" means information disclosed before or during the Term of this Agreement in any form which, if disclosed in tangible form, is or was labeled "Confidential", "Proprietary" or with a similar legend, or if disclosed orally is or was information that by its nature would be understood to be confidential to the Discloser. For greater certainty, the Confidential Information of Digimarc includes the Digimarc IPR and [*]; [*] "Counterfeit Deterrence System" ("CDS" or "System") [*]; "Consulting Services" means the Integration Support and all other services that Digimarc ______________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 2 provides to Licensee regarding [*] and such other matters as Licensee may request and Digimarc agrees to provide, pursuant to this Agreement; "Digimarc IPR" means Intellectual Property Rights owned by Digimarc, now or during the Term of this Agreement, to the extent that same specifically relates to or forms part of the CDS; "Digital Watermark" refers to markings (including texturing) that are detectable from data produced by visible light scanning of documents, which convey multiple bits of digital data and yet do not significantly detract from the aesthetics of the item or image marked thereby. Examples include, but are not limited to: 1. generally imperceptible changes to line density or placement in line art imagery; 2. texturing of a substrate where the texturing feels substantially uniform to human touch; 3. slight localized changes to optical density or reflectance of a printed document; 4. slight changes to sampled data; or 5. visible background patterns of substantially uniform character; "Discloser" means a party that has disclosed or otherwise made available its Confidential Information to the other party; [*] "Effective Date" means the later of the date on which this Agreement is last signed by the parties and the date on which Digimarc receives written notice from the [*] that the Licensee is authorized [*]; [*] [*] "Field of Use" means the field of [*] "Improvement" means an improvement provided to [*] under clause 2.14 of the [*] Agreement; "Integration Support" means the consulting and programming services to be provided by Digimarc to Licensee to assist Licensee to [*] "Intellectual Property Rights" or "IPR" means all intellectual property rights existing now and in the future including, without limitation, trade secrets, copyright, database rights, know-how, ______________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 3 topographies, patents and patent applications; "[*]" means the [*] named above; [*] "Recipient" means the party to which the Confidential Information of the other party has been disclosed or otherwise made available; "Services" means the Verification Tests, the Training, and the Consulting Services, or any of them; "Term" means the period commencing on the Effective Date and ending on [*] "Training" means the training in the use of the [*] described in Attachment 6; and "Verification Test" means a test or tests developed under the [*] Agreement to [*] 1.2 Interpretation - In this Agreement: 1.2.1 unless otherwise specified, all references to money amounts are to the currency of the United States of America; 1.2.2 the use of words in the singular or plural, or with a particular gender, shall not limit the scope or exclude the application of any provision of this Agreement to such person or persons or circumstances as the context otherwise permits; 1.2.3 whenever a provision of this Agreement requires an approval or consent by a party to this Agreement and notice of such approval or consent is not delivered within the applicable time, then, the party shall be conclusively deemed to have withheld the consent or approval; 1.2.4 unless otherwise specified, the number of days within or following which any payment is to be made or act is to be done shall be interpreted to be continuous and shall be calculated by excluding the day on which the period commences and including the day which ends the period and by extending the period to the next Business Day if the last day of the period is not a Business Day; 1.2.5 unless otherwise specified, the order of precedence for interpreting this Agreement shall be: ______________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 4 (a) this Agreement, excluding Attachments, and (b) the Attachments; 1.2.6 for greater certainty, a party or representative to which this Agreement grants the right to make a decision or determination in the sole discretion of the party or representative is not required to act reasonably in making the decision or determination and no such decision or determination may be challenged by the other party under the Arbitration Agreement or otherwise; 1.2.7 the words "includes" or "including" will be construed as meaning "included without limitation" and "including without limitation" as the case may be; and 1.2.8 a clause or Attachment, unless the context requires otherwise, is a reference to a clause to, an Attachment of, or a paragraph of an Attachment to, this Agreement, as amended from time to time in accordance with this Agreement. 1.3 Applicable Law - This Agreement shall be construed in accordance with the laws of England to the exclusion of its rules of conflicts of laws. 1.4 Attachments - The attachments to this Agreement, listed below, are an integral part of this Agreement: Attachment Description Attachment "1" [*] Attachment "2" Problem Report Attachment "3" Payment for Services Attachment "4" [*] Attachment "5" [*] Attachment "6" Training 2. GRANT OF RIGHTS 2.1 Subject to the terms of this Agreement, Digimarc hereby grants to Licensee a no charge non-exclusive, non - transferable license in the Field of Use to use the [*] the Digimarc IPR and the [*] IPR at the Facilities to: ______________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 5 (a) [*] (b) [*] (c) [*] and (d) [*] to [*]. 2.2 For greater certainty, the foregoing license applies [*] 2.3 Licensee shall not use [*] the Digimarc IPR or the [*] IPR at, or transfer the Digimarc IPR or [*] IPR to, any place other than the Facilities. 2.4 Licensee acknowledges and agrees that the Digimarc IPR, and any technology developed by Digimarc during the course of its work with Licensee under this Agreement is the property of Digimarc and that, except as otherwise expressly set out in this Agreement, Licensee has no right to sublicense it. Licensee acknowledges that it may [*] [*] unless and until, and only during such period, that [*] is licensed therefor by Digimarc. 2.5 Licensee acknowledges and agrees that the [*] IPR is the property of its owner and that Licensee has no right to sublicense it. 2.6 Nothing in this Agreement shall be construed to grant, by implication or otherwise, any broader rights than those specifically granted herein. 2.7 Digimarc shall obtain at its own expense all licenses or permits required to be obtained from the Government of the United States in order for Digimarc to comply with its obligations under this Agreement including, without limitation, to deliver [*] and grant the associated licenses to Licensee. 2.8 Digimarc shall inform Licensee within thirty (30) days after the end of each calendar quarter during the Term of all improvements relating to [*] which improvements Digimarc has made, or caused or permitted to be made, during the course of its work with Licensee under this Agreement. Following the provision of the information under this clause 2.8, Digimarc shall provide to Licensee within a reasonable period of time following request, the Technical Information for those improvements requested by Licensee in writing. 2.9 Digimarc hereby grants to Licensee a royalty-free, non-exclusive, sub-licenseable worldwide license to use the improvements described in clause 2.8 and in any patents thereon ______________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 6 owned or otherwise licenseable by Digimarc. Such license shall continue until this Agreement expires or is terminated or until Licensee has no further rights to Digimarc IPR, whichever occurs last. 2.10 For greater certainty, the obligations set out in clauses 2.8 and 2.9 shall not apply to any such improvements which Digimarc can demonstrate would have been made irrespective of Digimarc's work with Licensee under this Agreement. 3. SERVICES 3.1 Digimarc shall provide the Training to Licensee within ten (10) days after the Effective Date or at such other time as the parties may agree. 3.2 No later than sixty (60) Business Days after every written request made by Licensee during the Term, Digimarc shall provide Integration Support to Licensee on a date or dates agreed between Digimarc and the Licensee for the fees described in clause 4 provided that in 1999 the sixty (60) Business Day limit shall apply only [*] licensed by Digimarc to use the CDS which require such Integration Support. 3.3 Commencing no later than twenty (20) Business Days after every written request made by Licensee during the Term, Digimarc shall conduct Verification Tests of [*] on a date or dates agreed between Digimarc and Licensee for the fees described in clause 4. 3.4 Commencing no later than five (5) Business Days after every written request therefore made by Licensee during the Term, Digimarc shall schedule Consulting Services, which Services shall commence not less than thirty (30) Business Days after the written request or at such other time agreed between Digimarc and Licensee. 3.5 Digimarc shall periodically apprise Licensee of improvements which Digimarc makes to [*]. Rights to employ such improvements shall automatically be granted to Licensee pursuant to the terms of clause 2 at no additional charge to Licensee. 4. FEES 4.1 Licensee shall pay to Digimarc a fee for the Services as detailed below. The fee for Services provided: (a) [*], is as set out in Attachment 3; ______________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 7 (b) [*] will be no greater than the fee then paid to Digimarc for similar services by Digimarc's most favoured customer. 4.2 Except as otherwise expressly provided in this Agreement, Licensee shall pay Digimarc all sales, use, goods and services or other similar taxes levied by any government in the United States or the country of the Licensee's principal place of business which Digimarc is obliged to collect and remit to such government(s) in connection with any amount paid by Licensee to Digimarc under this Agreement. 4.3 Digimarc is responsible for, and shall indemnify Licensee against, and hold Licensee harmless from, the payment of all taxes levied by any government on or in respect of Digimarc's income and any amounts required by law to be paid in respect of social benefits for Digimarc's employees relating to or arising out of the performance of the Services. If required by law, Licensee shall deduct all such taxes and amounts from the amounts otherwise payable to Digimarc and remit them to the appropriate authorities. 5. NUMBER NOT USED 6. LICENSEE RESPONSIBILITIES 6.1 Licensee shall promptly report to Digimarc every instance which comes to its attention of: (i) [*] to meet the specifications established under the [*] Agreement in the form of the Problem Report attached as Attachment 2; (ii) unauthorised access to [*] in the possession of Licensee; or (iii) [*] 6.2 Licensee shall inform Digimarc within thirty (30) days after the end of each calendar quarter during the Term of all improvements relating to (i) Digital Watermarks [*]; (ii) [*], (iii) [*] and (iv) any other part of the CDS, which improvements Licensee has made, or caused or permitted to be made, as a result of knowledge of Digimarc Confidential Information. The first such information shall be provided to Digimarc within thirty (30) days after the Effective Date and shall cover improvements made from the date Licensee first learned of the Digimarc Confidential Information. Following the provision of the information under this clause 6.2, Licensee shall provide to Digimarc within a reasonable period of time following request, the Technical Information for those improvements requested by Digimarc in writing. __________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 8 6.3 Licensee hereby grants to Digimarc a royalty-free, non-exclusive, sub- licenseable worldwide license to use the improvements described in clause 6.2 and in any patents thereon owned or otherwise licenseable by Licensee. 6.4 Such license shall continue until this Agreement expires or is terminated, or until Licensee has no further rights to Digimarc IPR, whichever occurs last. 6.5 For greater certainty, the obligations set out in clauses 6.2, 6.3, and 6.4 shall not apply to any such improvement which the Licensee can demonstrate would have been made irrespective of knowledge of the Digimarc Confidential Information. 6.6 Licensee shall, as directed by [*], cooperate fully with [*] and/or Digimarc in all matters [*] to confirm that they pass the Verification Tests. 7. REPRESENTATIONS AND WARRANTIES OF DIGIMARC. 7.1 General - Digimarc represents, warrants and undertakes to Licensee that from and after the Effective Date: (a) the Services provided under this Agreement will be of professional quality conforming to generally accepted practices for like services and will be performed at all times in a timely and cost effective manner and, for greater certainty Digimarc shall employ the standard of care in performing the Services that would be expected of an expert [*] of the same or similar type as the [*] which comprises the [*]; (b) Digimarc is duly incorporated and organized and is validly subsisting under the laws of the State of Oregon, U.S.A. or some other state in the United States with full corporate power and authority to enter into this Agreement; (c) to the best of its knowledge, neither this Agreement nor the Services will contravene, breach, or result in any default under any agreement, permit, by-law, or law or regulation to which Digimarc is subject or by which it is bound including, for greater certainty any laws or regulations in effect in the United States governing export; (d) this Agreement when executed and delivered by Digimarc shall constitute a valid and binding agreement with Digimarc enforceable against Digimarc according to its terms; and (e) Digimarc will at all material times have the right to grant the licenses to the Digimarc __________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 9 IPR as required by this Agreement. 7.2 Digimarc represents, warrants and undertakes to Licensee that: (a) [*] provided to Licensee hereunder will, for a period of one hundred eighty (180) days following the date on which the production of the [*] first commences, meet the Specifications for that version of [*] accepted by [*]; (b) until the last day of the Term, [*] and (c) incorporated as part of its installation and integration practices and procedures are those measures and security procedures commercially and reasonably available on the date for delivery of a component of [*] to search for, detect and eliminate software viruses in [*] that could interfere with the use of [*] or corrupt, interfere with or damage any data; (d) [*] shall contain no lock, clock, timer, counter, copy protection feature, replication device or intentional defects (including but not limited to "viruses" or "worms" as such terms are commonly used in the computer industry), CPU serial number reference, or other device which might: (i) lock, disable or erase [*] or any data which is loaded on [*] so as to prevent full use of [*] by authorized persons; or (ii) require action or intervention by Digimarc or any other person to allow properly trained and authorized persons to use [*] (e) the source code for [*] will support the year 2000 and neither performance nor functionality will be affected by dates prior to, during and after the year 2000, and, for greater certainty, [*] will switch to 1 January 2000 on 1 January 2000, and the year 2000 will be recognized as a leap year. 7.3 If [*] fails to meet the relevant Specifications then Digimarc shall, within thirty (30) days after receipt of written notice of the failure from Licensee, on the form attached as Attachment 2, rectify the failure and provide a [*] to Licensee. 8. REPRESENTATIONS AND WARRANTIES OF LICENSEE 8.1 Licensee represents and warrants to Digimarc that: __________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 10 (a) Licensee has full power and authority to enter into this Agreement; and (b) this Agreement when executed and delivered by Licensee shall constitute a valid, binding and enforceable obligation of Licensee. 8.2 Licensee makes no representations, warranties or undertakings that Licensee has any right to grant the licenses required to be granted by clause 6.3 and Digimarc shall be solely responsible for determining that such improvements are suitable for the intended use and for the consequences of any use of the same whether by Digimarc or others, and Licensee and hereby disclaims all liability in connection therewith. 9. CONFIDENTIALITY 9.1 Except as otherwise expressly permitted by this Agreement, a Recipient shall not use, reproduce or disclose the Confidential Information of the Discloser for any purpose other than as reasonably necessary to comply with its obligations under this Agreement or to exercise any rights or licenses granted to it under or pursuant to this Agreement. 9.2 The Recipient shall protect the Confidential Information of the Discloser from disclosure by using the same degree of care, which shall be no less than a reasonable degree of care, as the Recipient uses to protect its own confidential information. 9.3 On written request from the Discloser, the Recipient shall return, or certify the destruction of, all originals and copies of the Discloser's Confidential Information in the Recipient's possession or control which the Recipient does not need to retain in order to perform any obligations imposed, or exercise any rights acquired, by this Agreement. 9.4 A Recipient may, on a need to know basis, and only for the purposes described in clause 9.1, give the other party's Confidential Information to the Recipient's employees or authorized subcontractors provided that such employee or subcontractor shall have entered into a non-disclosure agreement in respect of such Confidential Information in favour of the Discloser on terms materially similar to the provisions of this clause 9. 9.5 The obligations set out in this clause 9 will not apply to any Confidential Information that: (a) is or becomes publicly available other than through the fault of the Recipient; (b) was known to the Recipient prior to disclosure as shown by documentation sufficient to __________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 11 establish such knowledge; (c) was or is lawfully disclosed to the Recipient by a third party who did not breach any obligation of confidence by such disclosure and who made the disclosure without restriction on further disclosure all of which is shown by documentation sufficient to establish same; or (d) is required by law to be disclosed provided, however, that the Recipient shall first give written notice to the Discloser before the disclosure so that the Discloser may seek an appropriate protective order. Notwithstanding the foregoing, the fact that Confidential Information, or any part thereof, can be linked together by a search of publications and other information, followed by a selection of a series of such items of knowledge from unconnected sources, and fitting together those items of knowledge so as to duplicate or recreate any item of Confidential Information, shall not be deemed to cause the Confidential Information, or any part thereof, to be included within exceptions (a), (b) or (c), above. 9.6 The obligations of the parties under this clause 9 will survive the Term or sooner termination of this Agreement and will remain in full force and effect regardless of the cause of any termination. 9.7 Nothing in this Agreement shall be construed to require Licensee to disclose any information which is confidential to a third party including for greater certainty a Licensed [*] 10. INTELLECTUAL PROPERTY INDEMNIFICATION 10.1 Licensee shall provide Digimarc with prompt written notice of any claim, demand or action against [*] based on an allegation that the Digimarc IPR or any part thereof, infringes any Intellectual Property Right of any person (referred to below as a "Claim"). 10.2 Subject to the limitations set out in clauses 10.3 to 10.7 inclusive, Digimarc shall, at its own expense: (a) negotiate the resolution of any such Claim; (b) pay all costs associated with the Claim; and (c) defend any action based on the Claim. __________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 12 10.3 Licensee shall, at Digimarc's expense, comply with all reasonable requests for assistance from [*] in connection with the settlement or defence of the Claim. 10.4 Notwithstanding any other provision of this Agreement to the contrary, but subject to the limitations in this clause 10, Digimarc shall indemnify Licensee against and save Licensee harmless from all loss, costs, liabilities including an award of damages, and expenses, including legal fees, arising from each Claim first notified to Digimarc prior to [*]. The obligation set out in this clause 10 shall not apply in respect of any settlement made by Licensee without the consent of Digimarc. 10.5 The liability of Digimarc under clause 10.4 of this Agreement and under the equivalent clause of every other licence agreement entered into between Digimarc and [*] pursuant to the provisions of the [*] Agreement will not exceed the Indemnity Limit as defined in clause 10.6 below. 10.6 The Indemnity Limit shall be [*], or such higher amount as notified by Digimarc from time to time. 10.7 For the purposes of clauses 10.2 through 10.6 inclusive, "Claim" shall mean any Claim, other than a Claim for patent infringement which Digimarc can demonstrate occurred without Digimarc acting recklessly or negligently. 10. TERM AND TERMINATION 11.1 This Agreement will take effect on the Effective Date and will remain in force throughout the Term unless sooner terminated as provided herein. 11.2 Either party may terminate this Agreement if the other party breaches any of its obligations under this Agreement and fails to remedy such breach within thirty (30) days after receiving written notice of such breach from the other party. 11.3 Upon termination of this Agreement: (a) all rights granted to Licensee under this Agreement will immediately terminate. No interest in any such rights will thereafter remain with Licensee, [*] and (b) each party shall return, or certify the destruction of, to the Discloser, all originals and copies of the Discloser's Confidential Information in the party's possession or control __________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 13 which the party does not need to retain in order to exercise any rights acquired by this Agreement. 11.4 No termination of this Agreement will in any manner release, or be construed as releasing, any party from any liability arising out of or in connection with that party's breach of or failure to perform any covenant, duty or obligation contained herein prior to the date of such termination. 11.5 Upon termination of the [*] Agreement by Digimarc for cause, the rights of Licensee hereunder to use the Digimarc IPR shall be deemed to be restricted to [*] as of the date of such termination. 11.6 Termination of the license between Digimarc and [*] shall automatically act to terminate this Agreement. 12. DISPUTE RESOLUTION 12.1 Any Dispute (as defined in the Arbitration Agreement) shall be finally settled by arbitration in accordance with the Arbitration Agreement. 12.2 Unless otherwise agreed between the parties or unless the subject matter of the dispute resolution proceedings is a party's right to terminate this Agreement, the Services shall continue during the dispute resolution proceedings and payments due to Digimarc shall not be withheld on account of such proceedings unless that particular services or payment is the subject matter of the proceedings. Notwithstanding the foregoing, Licensee may in its sole discretion instruct Digimarc to continue to perform such services which are the subject matter of the proceedings and Digimarc shall act in accordance with those instructions, subject to payment under clause 4.1. 13. MISCELLANEOUS PROVISIONS 13.1 Remedies Cumulative - Except as otherwise expressly set out in this Agreement: (a) each and every right, power and remedy of a party will be considered to be cumulative with and in addition to any other right, power and remedy which such party may have at law or in equity in the event of breach of any of the terms of this Agreement; (b) the exercise or partial exercise of any right, power or remedy will neither constitute the exclusive election thereof nor the waiver of any other right, power or remedy available to __________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 14 such party; and (c) a party terminating this Agreement in accordance with the provisions of the Termination clause will have no liability or obligation to the other as a result of or with respect to the termination. 13.2 All notices under this Agreement shall be delivered by fax, or recognized international courier service. The notice shall be deemed effective as of the date of delivery to the address of the party specified below as evidenced by a delivery receipt or the addressee's registry of incoming correspondence. Unless otherwise expressly set out in this Agreement, all notices to a party will be sent to the party's authorized representative identified below and all notices from a party will be sent by the party's authorized representative identified below. 13.3 Any notice to Licensee shall be sent to both of, and any notice from Licensee shall be sent by either: Name1 Name2 Address1 Address2 13.4 Any notice to Digimarc shall be sent to both of, and any notice from Digimarc shall be sent by either: Mr. Bruce Davis and Mr. William Y. Conwell President and CEO Klarquist, Sparkman, Campbell Digimarc Corporation Leigh & Whinston One Centrepoint Drive 121 SW Salmon Street Suite 500 Suite 1600 Lake Oswego, Oregon 97035 USA Portland, Oregon 97204 USA Fax: (503)968-0219 Fax: (503)228-9446 13.5 A copy of every notice sent by either party shall be sent to: [*]. 13.6 A party may change its address for notice by notice to the other party in accordance with the foregoing provisions. 13.7 Severability. If any part of this Agreement is held by an arbitral tribunal appointed pursuant to the Arbitration Agreement or other competent authority to be void or unenforceable, the parties agree that such determination will not result in the nullity or unenforceability of the remaining parts of this Agreement, which will continue in force to the fullest extent permitted by __________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 15 law. The parties further agree to replace such void or unenforceable part of this Agreement with a valid and enforceable provision that will achieve, to the extent legally permissible, the economic, business and other purposes of the void or unenforceable part. 13.8 Counterparts. This Agreement may be executed in separate counterparts, and by facsimile, each of which will be deemed an original, and when executed, separately or together, will constitute a single original instrument, effective in the same manner as if the parties had executed one and the same instrument. 13.9 Entire Agreement. This Agreement is intended by the parties to be the final expression of their agreement and constitutes and embodies the entire agreement and understanding between the parties hereto and constitutes a complete and exclusive statement of the terms and conditions thereof, and will supersede any and all prior correspondence, conversations, negotiations, agreements or understandings relating to the same subject matter. 13.10 Amendments. No change in, modification of or addition to the terms and conditions contained herein will be valid as between the parties unless set forth in a writing that is signed by an authorized representative of each of the parties and which specifically states that it constitutes an amendment to this Agreement. 13.11 Waiver. No waiver of any term, provision, or condition of this Agreement, will be effective unless in a written document signed by the waiving party and no such waiver in any one or more instances, will be deemed to be, or be construed as, a further or continuing waiver of that term, provision or condition or any other term, provision or condition of this Agreement. 13.12 Assignment and Successors. This Agreement may not be assigned by Licensee without Digimarc's consent, which consent shall not be unreasonably withheld or delayed. This Agreement and all of its terms, conditions and covenants are intended to be fully effective and binding, to the extent permitted by law, on the successors and permitted assigns of the parties hereto. 13.13 Captions. Captions are provided in this Agreement for convenience only and they form no part, and are not to serve as a basis for interpretation or construction, of this Agreement, nor as evidence of the intention of the parties hereto. 13.14 Disclaimer of Agency. Nothing contained in this Agreement is intended or will be construed so as to constitute the parties to this Agreement as partners or joint venturers or as agents of each other. Neither party will have any express or implied right or authority to assume or create any obligations on behalf of or in the name of the other party or to bind any other party in any contract, agreement or undertaking with any third party. No employee of a party shall be __________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 16 deemed or considered to be an employee of the other party or of both parties. 13.15 Publicity. The parties agree that from time-to-time it will be beneficial to both parties to issue press releases and other public announcements concerning benefits arising from the CDS. Each party agrees to submit for approval by the other party any press release that involves the other party, which approval shall not unreasonably be withheld. 13.16 Effectiveness. This Agreement shall not be effective until it is signed by both of the parties. 13.17 Ambiguities. Each party and its counsel have participated fully in the review and revision of this Agreement. Any rule or construction to the effect that ambiguities are to be resolved against the drafting party shall not apply in interpreting this Agreement. 13.18 Survival. All clauses of this Agreement which expressly or by implication are intended to survive the termination of this Agreement will do so and, for greater certainty and notwithstanding any provision in this Agreement to the contrary, the provisions of clause 4.2, 4.3, 6.1, 6.3, 6.4, 7.2(b), 9, 10, 12 and 13 of this Agreement shall survive termination of this Agreement by either party for any reason. IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto as of the Effective Date. DIGIMARC CORPORATION (Licensee) By: ____________________________ By:____________________________ Name: ____________________________ Name:__________________________ Title: ____________________________ Title:_________________________ Date: ____________________________ Date:__________________________ __________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 17 ATTACHMENT 1 [*] [*] will cause the following [*] to take place: (a) [*] (b) [*] CDS [*] (c) [*] __________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 ATTACHMENT 2 PROBLEM REPORT Each problem report will contain all information necessary to reproduce or demonstrate the occurrence of the problem. Problem reports will be in English and will be delivered electronically in a format to be provided by Digimarc. Problem reports will contain: " Date problem was encountered " Detailed description of the problem, including the frequency with which the problem occurs " Name and version number of the program / system component that exhibits the problem " Step by step instructions to reproduce the problem " All data files required to reproduce the problem " [*] " Manufacturer and Model " CPU type and speed " Amount of memory " Operating System and Version " Disk Configuration (number of drives, total space per drive, free space per drive) " Display Adapter Model, Resolution, Number of colors " Peripheral configuration (where applicable) " [*] " TWAIN driver and version number " [*] " Severity of problem " Contact information for person to contact for further information (name, phone number, FAX number, email address) Licensee agrees to work with Digimarc to provide reasonable additional information and perform reasonable additional tests, as requested by Digimarc, to assist Digimarc in resolution of the problem. __________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 ATTACHMENT 3 PAYMENT FOR SERVICES Digimarc shall bill Licensee for Services in one hour increments at the following hourly rates: Technical/Design Consultant $[*] Senior Engineer $[*] R&D/Engineering Executive $[*] Project Manager $[*] Administrator/Scheduler $[*] Fees for Services will be invoiced on the earlier of 1) the last day of the month or 2) the completion of the Services. Invoices are due thirty (30) days from the date of receipt of a correct invoice. A late charge of 1.5% per month will be charged on any late payments. All fees are due and payable in US funds. Licensee will reimburse Digimarc for all out-of-pocket expenses reasonably and necessarily incurred in providing the Services. Expenses will be itemized and reported by category. Out-of-pocket expenses will not be "marked up" by Digimarc. Costs include, but are not limited to, reasonable travel and lodging expenses, telephone and fax charges, postage and overnight deliveries, and charges for rental equipment or materials purchased specifically to be used in providing the Service. All invoices for out-of-pocket expenses will be issued monthly in arrears and are due thirty (30) days from the date of receipt of a correct invoice. Supporting receipts and vouchers will be available for review at Digimarc's offices. A late charge of 1.5% per month will be charged on any late payments. Payments will additionally include Value Added taxes and other tariffs and fees that may be imposed by any government other than the United States of America. __________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 ATTACHMENT 4 [*] ATTACHMENT 5 IDENTIFICATION OF [*] __________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 ATTACHMENT 6 TRAINING 1.0 As part of [*], Digimarc shall develop a program of training acceptable to the DLA Project Manager in the [*]. 2.0 Digimarc shall deliver the Training as follows: 2.1 Digimarc shall provide the Training to up to two (2) people simultaneously. The trainees will be experienced in digital design system operation. 2.2 Digimarc shall conduct the Training at the facilities of Licensee or, at the request of Licensee, at Digimarc's facilities or at some other place agreed between Digimarc and Licensee. 2.3 Digimarc shall give Licensee reasonable notice concerning the equipment which Digimarc will require in order to conduct the Training. Licensee shall provide all such equipment at its own expense. If the parties are unable to agree on the equipment to be provided either party may refer the matter for decision to the DLA Contract Authority. 2.4 Digimarc shall conduct the Training using the [*]. 2.5 Digimarc shall provide a training manual in English to every trainee. Any translation or interpretation which the trainees may require will be provided by Licensee at its own expense. 2.6 Digimarc shall provide each trainee with a certificate of training at the completion of the Training session. 2.7 Digimarc shall conduct the Training in English. __________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 SCHEDULE "L-2" [*] LICENSE AGREEMENT - [*] This [*] LICENSE AGREEMENT (the "Agreement") is made BETWEEN (name and address of Licensee) ("Licensee") - AND - DIGIMARC CORPORATION, a corporation incorporated under the laws of Oregon and having its head office at One Centerpointe Drive, Suite 500, Lake Oswego, Oregon. U.S.A. 97035-8615 ("Digimarc") "[*]" .................. .................. RECITALS Digimarc has expertise in, and owns extensive intellectual property, including patents, patent applications, copyrights and trade secrets related to digital watermarks, counterfeit deterrence, copyright protection, and device control; [*] possesses or will possess intellectual property rights related to the application of such intellectual property to [*] and Digimarc and [*] have cooperated in the development of means, using such intellectual property, [*] (the "Counterfeit Deterrence System" or "CDS"); and Digimarc is licensing its CDS [*] authorized by a duly licensed [*], and [*] Licensee, having been authorized by a duly licensed [*], desires access to such technology so that Licensee can include Digimarc's [*] and In consideration of these premises, the covenants set out in this Agreement and for ______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 other good and valuable consideration, the receipt and adequacy of which are acknowledged by each of the parties, the parties agree as follows: 1. DEFINITIONS AND PRINCIPLES OF INTERPRETATION In this Agreement: "Agreement" means these articles of agreement, including the Attachments, and those documents as specified or referenced in this Agreement as forming part of the Agreement, all as may be amended from time to time; "Arbitration Agreement" means the Arbitration Agreement entered into between the parties and others effective 1 January 1999; "Attachment" means a document specified as being attached to this Agreement; [*] [*] [*] [*] CDS; "Business Day" means a day on which both Digimarc and Licensee are open for business at their respective addresses noted above; [*] "Confidential Information" means information disclosed before or during the Term of this Agreement in any form which, if disclosed in tangible form, is or was labeled "Confidential", "Proprietary" or with a similar legend, or if disclosed orally is or was information that by its nature would be understood to be confidential to the Discloser. For greater certainty, the Confidential Information of Digimarc includes the Digimarc IPR and [*]; "Counterfeit Deterrence System" ("CDS" or "System") [*]; "Consulting Services" means the Integration Support and all other services that Digimarc ______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 2 provides to Licensee regarding [*] and such other matters as Licensee may request and Digimarc agrees to provide, pursuant to this Agreement; "Digimarc IPR" means Intellectual Property Rights owned by Digimarc, now or during the Term of this Agreement, to the extent that same specifically relates to or forms part of the CDS; "Digital Watermark" refers to markings (including texturing) that are detectable from data produced by visible light scanning of documents, which convey multiple bits of digital data and yet do not significantly detract from the aesthetics of the item or image marked thereby. Examples include, but are not limited to: 1. generally imperceptible changes to line density or placement in line art imagery; 2. texturing of a substrate where the texturing feels substantially uniform to human touch; 3. slight localized changes to optical density or reflectance of a printed document; 4. slight changes to sampled data; or 5. visible background patterns of substantially uniform character; "Discloser" means a party that has disclosed or otherwise made available its Confidential Information to the other party; [*] "Effective Date" means the later of the date on which this Agreement is last signed by the parties and the date on which Digimarc receives written notice from the [*] that the Licensee is authorized [*]; [*] "Field of Use" means the field of [*]; "Improvement" means an improvement provided to [*] under clause 2.14 of the [*] Agreement; "Integration Support" means the consulting and programming services to be provided by Digimarc to Licensee to assist Licensee [*]; "Intellectual Property Rights" or "IPR" means all intellectual property rights existing now and in the future including, without limitation, trade secrets, copyright, database rights, know-how, ______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 3 topographies, patents and patent applications; "[*]" means the [*] named above; [*] "Recipient" means the party to which the Confidential Information of the other party has been disclosed or otherwise made available; "Services" means the Verification Tests, the Training, and the Consulting Services, or any of them; "Term" means the period commencing on the Effective Date and ending on [*]; "Training" means the training in the use of [*] described in Attachment 7; and "Verification Test" means a test or tests developed under the [*] Agreement to [*]. 1.2 Interpretation - In this Agreement: 1.2.1 unless otherwise specified, all references to money amounts are to the currency of the United States of America; 1.2.2 the use of words in the singular or plural, or with a particular gender, shall not limit the scope or exclude the application of any provision of this Agreement to such person or persons or circumstances as the context otherwise permits; 1.2.3 whenever a provision of this Agreement requires an approval or consent by a party to this Agreement and notice of such approval or consent is not delivered within the applicable time, then, the party shall be conclusively deemed to have withheld the consent or approval; 1.2.4 unless otherwise specified, the number of days within or following which any payment is to be made or act is to be done shall be interpreted to be continuous and shall be calculated by excluding the day on which the period commences and including the day which ends the period and by extending the period to the next Business Day if the last day of the period is not a Business Day; ______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 4 1.2.5 unless otherwise specified, the order of precedence for interpreting this Agreement shall be: (a) this Agreement, excluding Attachments, and (b) the Attachments; 1.2.6 for greater certainty, a party or representative to which this Agreement grants the right to make a decision or determination in the sole discretion of the party or representative is not required to act reasonably in making the decision or determination and no such decision or determination may be challenged by the other party under the Arbitration Agreement or otherwise; 1.2.7 the words "includes" or "including" will be construed as meaning "included without limitation" and "including without limitation" as the case may be; and 1.2.8 a clause or Attachment, unless the context requires otherwise, is a reference to a clause to, an Attachment of, or a paragraph of an Attachment to, this Agreement, as amended from time to time in accordance with this Agreement. 1.3 Applicable Law - This Agreement shall be construed in accordance with the laws of England to the exclusion of its rules of conflicts of laws. 1.4 Attachments - The attachments to this Agreement, listed below, are an integral part of this Agreement: Attachment Description Attachment "1" [*] Attachment "2" Opinion of Counsel Attachment "3" Problem Report Attachment "4" Payment for Services Attachment "5" [*] Attachment "6" [*] Attachment "7" Training 2. GRANT OF RIGHTS ______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 5 2.1 Subject to the terms of this Agreement, Digimarc hereby grants to Licensee a no charge non-exclusive, non-transferable license in the Field of Use to use [*], the Digimarc IPR and the [*] IPR at the Facilities to: (a) [*] (b) [*] (c) [*] and (d) [*] to [*]. 2.2 For greater certainty, the foregoing license applies [*] 2.3 Licensee shall not use [*], the Digimarc IPR or the [*] IPR at, or transfer the Digimarc IPR or [*] IPR to, any place other than the Facilities. 2.4 Licensee acknowledges and agrees that the Digimarc IPR, and any technology developed by Digimarc during the course of its work with Licensee under this Agreement is the property of Digimarc and that, except as otherwise expressly set out in this Agreement, Licensee has no right to sublicense it. Licensee acknowledges that it may [*] [*] unless and until, and only during such period, that [*] is licensed therefor by Digimarc. 2.5 Licensee acknowledges and agrees that the [*] IPR is the property of its owner and that Licensee has no right to sublicense it. 2.6 Nothing in this Agreement shall be construed to grant, by implication or otherwise, any broader rights than those specifically granted herein. 2.7 Digimarc shall obtain at its own expense all licenses or permits required to be obtained from the Government of the United States in order for Digimarc to comply with its obligations under this Agreement including, without limitation, to deliver [*], and grant the foregoing licenses to Licensee. 2.8 Digimarc shall inform Licensee within thirty (30) days after the end of each calendar quarter during the Term of all improvements relating to [*] which improvements Digimarc has made, or caused or permitted to be made, during the course of its work with Licensee under this ______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 6 Agreement. Following the provision of the information under this clause 2.8, Digimarc shall provide to Licensee within a reasonable period of time following request, the Technical Information for those improvements requested by Licensee in writing. 2.9 Digimarc hereby grants to Licensee a royalty-free, non-exclusive, sub- licenseable worldwide license to use the improvements described in clause 2.8 and in any patents thereon owned or otherwise licenseable by Digimarc. Such license shall continue until this Agreement expires or is terminated or until Licensee has no further rights to Digimarc IPR, whichever occurs last. 2.10 For greater certainty, the obligations set out in clauses 2.8 and 2.9 shall not apply to any such improvements which Digimarc can demonstrate would have been made irrespective of Digimarc's work with Licensee under this Agreement. 3. SERVICES 3.1 Digimarc shall provide the Training to Licensee within ten (10) days after the Effective Date or at such other time as the parties may agree. 3.2 No later than sixty (60) Business Days after every written request made by Licensee during the Term, Digimarc shall provide Integration Support to Licensee on a date or dates agreed between Digimarc and Licensee for the fees described in clause 4 provided that in 1999 the sixty (60) Business Day limit shall apply [*] licensed by Digimarc to use the CDS which require such Integration Support. 3.3 Commencing no later than twenty (20) Business Days after every written request made by Licensee during the Term, Digimarc shall conduct Verification Tests of [*] on a date or dates agreed between Digimarc and Licensee for the fees described in clause 4. 3.4 Commencing no later than five (5) Business Days after every written request made by Licensee during the Term, Digimarc shall schedule Consulting Services, which Services shall commence not less than thirty (30) Business Days after the written request or at such other time agreed between Digimarc and Licensee. 3.5 Digimarc shall periodically apprise Licensee of improvements which Digimarc makes to [*]. Rights to employ such improvements shall automatically be granted to Licensee pursuant to the terms of clause 2 at no additional charge to Licensee. ______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 7 4. FEES 4.1 Licensee shall pay to Digimarc a fee for the Services as detailed below. The fee for Services provided: (a) [*] is as set out in Attachment 4; (b) [*] will be no greater than the fee then paid to Digimarc for similar services by Digimarc's most favoured customer. 4.2 Except as otherwise expressly provided in this Agreement, Licensee shall pay Digimarc all sales, use, goods and services or other similar taxes levied by any government in the United States or the country of the Licensee's principal place of business which Digimarc is obliged to collect and remit to such government(s) in connection with any amount paid by Licensee to Digimarc under this Agreement. 4.3 Digimarc is responsible for, and shall indemnify Licensee against, and hold Licensee harmless from, the payment of all taxes levied by any government on or in respect of Digimarc's income and any amounts required by law to be paid in respect of social benefits for Digimarc's employees relating to or arising out of the performance of the Services. If required by law, Licensee shall deduct all such taxes and amounts from the amounts otherwise payable to Digimarc and remit them to the appropriate authorities. 5. OPINION OF COUNSEL 5.1 [*] Licensee shall obtain and forward to Digimarc a written opinion of counsel substantially in the form attached as Attachment 2 that confirms: (a) the validity and enforceability of the terms of this Agreement under the laws of the jurisdiction of Licensee's principal place of business; and (b) the legality of each of the [*] under the laws of the jurisdiction of Licensee's principal place of business. 5.2 Digimarc shall not unreasonably withhold its consent to any qualifications which Licensee's counsel may require to be made to such opinion. ______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 8 6. LICENSEE RESPONSIBILITIES 6.1 Licensee shall promptly report to Digimarc every instance which comes to its attention of: (i) [*] to meet the specifications established under the [*] Agreement in the [*] of the Problem Report attached as Attachment 3; (ii) unauthorised access to the [*] in the possession of Licensee; or (iii) [*] 6.2 Licensee shall inform Digimarc within thirty (30) days after the end of each calendar quarter during the Term of all improvements relating to (i) Digital Watermarks [*]; (ii) [*], (iii) [*] and (iv) any other part of the CDS, which improvements Licensee has made, or caused or permitted to be made, as a result of knowledge of Digimarc Confidential Information. The first such information shall be provided to Digimarc within thirty (30) days after the Effective Date and shall cover improvements made from the date Licensee first learned of the Digimarc Confidential Information. Following the provision of the information under this clause 6.2, Licensee shall provide to Digimarc within a reasonable period of time following request, the Technical Information for those improvements requested by Digimarc in writing. 6.3 Licensee hereby grants to Digimarc a royalty-free, non-exclusive, sub- licenseable worldwide license to use the improvements described in clause 6.2 and in any patents thereon owned or otherwise licenseable by Licensee. 6.4 Such license shall continue until this Agreement expires or is terminated, or until Licensee has no further rights to Digimarc IPR, whichever occurs last. 6.5 For greater certainty, the obligations set out in clauses 6.2, 6.3, and 6.4 shall not apply to any such improvement which the Licensee can demonstrate would have been made irrespective of knowledge of the Digimarc Confidential Information. 6.6 Licensee shall, as directed by [*], cooperate fully with [*] and/or Digimarc in all matters [*] to confirm that they pass the Verification Tests. ______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 9 7. REPRESENTATIONS AND WARRANTIES OF DIGIMARC. 7.1 General - Digimarc represents, warrants and undertakes to Licensee that from and after the Effective Date: (a) the Services provided under this Agreement will be of professional quality conforming to generally accepted practices for like services and will be performed at all times in a timely and cost effective manner and, for greater certainty Digimarc shall employ the standard of care in performing the Services that would be expected of [*] of the same or similar type as the [*] which comprises the [*]; (b) Digimarc is duly incorporated and organized and is validly subsisting under the laws of the State of Oregon, U.S.A. or some other state in the United States with full corporate power and authority to enter into this Agreement; (c) to the best of its knowledge, neither this Agreement nor the Services will contravene, breach, or result in any default under any agreement, permit, by-law, or law or regulation to which Digimarc is subject or by which it is bound including, for greater certainty any laws or regulations in effect in the United States governing export; (d) this Agreement when executed and delivered by Digimarc shall constitute a valid and binding agreement with Digimarc enforceable against Digimarc according to its terms; and (e) Digimarc will at all material times have the right to grant the licenses to the Digimarc IPR as required by this Agreement. 7.2 Digimarc represents, warrants and undertakes to Licensee that: (a) [*] provided to Licensee hereunder will, for a period of one hundred eighty (180) days following the date on which the production of [*] first commences, meet the Specifications for that version of [*] accepted by [*]; (b) until the last day of the Term, [*] (c) incorporated as part of its installation and integration practices and procedures are those measures and security procedures commercially and reasonably available on the date for ______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 10 delivery of a component of [*] to search for, detect and eliminate software viruses in [*] that could interfere with the use of [*] or corrupt, interfere with or damage any data; (d) [*] shall contain no lock, clock, timer, counter, copy protection feature, replication device or intentional defects (including but not limited to "viruses" or "worms" as such terms are commonly used in the computer industry), CPU serial number reference, or other device which might: (i) lock, disable or erase [*] or any data which is loaded on [*] so as to prevent full use of [*] by authorized persons; or (ii) require action or intervention by Digimarc or any other person to allow properly trained and authorized persons to use [*]; (e) the source code for [*] will support the year 2000 and neither performance nor functionality will be affected by dates prior to, during and after the year 2000, and, for greater certainty, [*] will switch to 1 January 2000 on 1 January 2000, and the year 2000 will be recognized as a leap year. 7.3 If [*] fails to meet the relevant Specifications then Digimarc shall, within thirty (30) days after receipt of written notice of the failure from Licensee, on the form attached as Attachment 3, rectify the failure and provide a corrected [*] to Licensee. 8. REPRESENTATIONS AND WARRANTIES OF LICENSEE 8.1 Licensee represents and warrants to Digimarc that: (a) Licensee has full power and authority to enter into this Agreement; and (b) this Agreement when executed and delivered by Licensee shall constitute a valid, binding and enforceable obligation of Licensee. 8.2 Licensee makes no representations, warranties or undertakings that Licensee has any right to grant the licenses required to be granted by clause 6.3 and Digimarc shall be solely responsible for determining that such improvements are suitable for the intended use and for the consequences of any use of the same whether by Digimarc or others, and Licensee and hereby disclaims all liability in connection therewith. ______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 11 9. CONFIDENTIALITY 9.1 Except as otherwise expressly permitted by this Agreement, a Recipient shall not use, reproduce or disclose the Confidential Information of the Discloser for any purpose other than as reasonably necessary to comply with its obligations under this Agreement or to exercise any rights or licenses granted to it under or pursuant to this Agreement. 9.2 The Recipient shall protect the Confidential Information of the Discloser from disclosure by using the same degree of care, which shall be no less than a reasonable degree of care, as the Recipient uses to protect its own confidential information. 9.3 On written request from the Discloser, the Recipient shall return, or certify the destruction of, all originals and copies of the Discloser's Confidential Information in the Recipient's possession or control which the Recipient does not need to retain in order to perform any obligations imposed, or exercise any rights acquired, by this Agreement. 9.4 A Recipient may, on a need to know basis, and only for the purposes described in clause 9.1, give the other party's Confidential Information to the Recipient's employees or authorized subcontractors provided that such employee or subcontractor shall have entered into a non-disclosure agreement in respect of such Confidential Information in favour of the Discloser on terms materially similar to the provisions of this clause 9. 9.5 The obligations set out in this clause 9 will not apply to any Confidential Information that: (a) is or becomes publicly available other than through the fault of the Recipient; (b) was known to the Recipient prior to disclosure as shown by documentation sufficient to establish such knowledge; (c) was or is lawfully disclosed to the Recipient by a third party who did not breach any obligation of confidence by such disclosure and who made the disclosure without restriction on further disclosure all of which is shown by documentation sufficient to establish same; or ______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 12 (d) is required by law to be disclosed provided, however, that the Recipient shall first give written notice to the Discloser before the disclosure so that the Discloser may seek an appropriate protective order. Notwithstanding the foregoing, the fact that Confidential Information, or any part thereof, can be linked together by a search of publications and other information, followed by a selection of a series of such items of knowledge from unconnected sources, and fitting together those items of knowledge so as to duplicate or recreate any item of Confidential Information, shall not be deemed to cause the Confidential Information, or any part thereof, to be included within exceptions (a), (b) or (c), above. 9.6 The obligations of the parties under this clause 9 will survive the Term or sooner termination of this Agreement and will remain in full force and effect regardless of the cause of any termination. 9.7 Nothing in this Agreement shall be construed to require Licensee to disclose any information which is confidential to a third party including for greater certainty a Licensed [*]. 10. INTELLECTUAL PROPERTY INDEMNIFICATION NOTE - THIS PROTECTION IS AVAILABLE UPON PAYMENT OF A FEE BY LICENSEE TO BE NEGOTIATED BETWEEN [*] AND DIGIMARC 10.1 Licensee shall provide Digimarc with prompt written notice of any claim, demand or action against [*] based on an allegation that the Digimarc IPR or any part thereof, infringes any Intellectual Property Right of any person (referred to below as a "Claim"). 10.2 Subject to the limitations set out in clauses 10.3 to 10.7 inclusive, Digimarc shall, at its own expense: (a) negotiate the resolution of any such Claim; (b) pay all costs associated with the Claim; and (c) defend any action based on the Claim. 10.3 Licensee shall, at Digimarc's expense, comply with all reasonable requests for assistance ______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 13 from [*] in connection with the settlement or defence of the Claim. 10.4 Notwithstanding any other provision of this Agreement to the contrary, but subject to the limitations in this clause 10, Digimarc shall indemnify Licensee against and save Licensee harmless from all loss, costs, liabilities including an award of damages, and expenses, including legal fees, arising from each Claim first notified to Digimarc prior to [*]. The obligation set out in this clause 10 shall not apply in respect of any settlement made by Licensee without the consent of Digimarc. 10.5 The liability of Digimarc under clause 10.4 of this Agreement and under the equivalent clause of every other licence agreement entered into between Digimarc and [*] pursuant to the provisions of the [*] Agreement will not exceed the Indemnity Limit as defined in clause 10.6 below. 10.6 The Indemnity Limit shall be [*], or such higher amount as notified by Digimarc from time to time. 10.7 For the purposes of clauses 10.2 through 10.6 inclusive, "Claim" shall mean any Claim, other than a Claim for patent infringement which Digimarc can demonstrate occurred without Digimarc acting recklessly or negligently. 10. TERM AND TERMINATION 11.1 This Agreement will take effect on the Effective Date and will remain in force throughout the Term unless sooner terminated as provided herein. 11.2 Either party may terminate this Agreement if the other party breaches any of its obligations under this Agreement and fails to remedy such breach within thirty (30) days after receiving written notice of such breach from the other party. 11.3 Upon termination of this Agreement: (a) all rights granted to Licensee under this Agreement will immediately terminate. No interest in any such rights will thereafter remain with Licensee, [*]; and (b) each party shall return, or certify the destruction of, to the Discloser, all originals and copies of the Discloser's Confidential Information in the party's possession or control ______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 14 which the party does not need to retain in order to exercise any rights acquired by this Agreement. 11.4 No termination of this Agreement will in any manner release, or be construed as releasing, any party from any liability arising out of or in connection with that party's breach of or failure to perform any covenant, duty or obligation contained herein prior to the date of such termination. 11.5 Upon termination of the [*] Agreement by Digimarc for cause, the rights of Licensee hereunder to use the Digimarc IPR shall be deemed to be restricted to [*] as of the date of such termination. 11.6 Termination of the license between Digimarc and [*] shall automatically act to terminate this Agreement. 12. DISPUTE RESOLUTION 12.1 Any Dispute (as defined in the Arbitration Agreement) shall be finally settled by arbitration in accordance with the Arbitration Agreement. 12.2 Unless otherwise agreed between the parties or unless the subject matter of the dispute resolution proceedings is a party's right to terminate this Agreement, the Services shall continue during the dispute resolution proceedings and payments due to Digimarc shall not be withheld on account of such proceedings unless that particular services or payment is the subject matter of the proceedings. Notwithstanding the foregoing, Licensee may in its sole discretion instruct Digimarc to continue to perform such services which are the subject matter of the proceedings and Digimarc shall act in accordance with those instructions, subject to payment under clause 4.1. 13. MISCELLANEOUS PROVISIONS 13.1 Remedies Cumulative - Except as otherwise expressly set out in this Agreement: (a) each and every right, power and remedy of a party will be considered to be cumulative with and in addition to any other right, power and remedy which such party may have at law or in equity in the event of breach of any of the terms of this Agreement; ______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 15 (b) the exercise or partial exercise of any right, power or remedy will neither constitute the exclusive election thereof nor the waiver of any other right, power or remedy available to such party; and (c) a party terminating this Agreement in accordance with the provisions of the Termination clause will have no liability or obligation to the other as a result of or with respect to the termination. 13.2 All notices under this Agreement shall be delivered by fax, or recognized international courier service. The notice shall be deemed effective as of the date of delivery to the address of the party specified below as evidenced by a delivery receipt or the addressee's registry of incoming correspondence. Unless otherwise expressly set out in this Agreement, all notices to a party will be sent to the party's authorized representative identified below and all notices from a party will be sent by the party's authorized representative identified below. 13.3 Any notice to Licensee shall be sent to both of, and any notice from Licensee shall be sent by either: Name1 Name2 Address1 Address2 13.4 Any notice to Digimarc shall be sent to both of, and any notice from Digimarc shall be sent by either: Mr. Bruce Davis and Mr. William Y. Conwell President and CEO Klarquist, Sparkman, Campbell Digimarc Corporation Leigh & Whinston One Centrepoint Drive 121 SW Salmon Street Suite 500 Suite 1600 Lake Oswego, Oregon 97035 USA Portland, Oregon 97204 USA Fax: (503)968-0219 Fax: (503)228-9446 13.5 A copy of every notice sent by either party shall be sent to: [*]. 13.6 A party may change its address for notice by notice to the other party in accordance with the foregoing provisions. ______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 16 13.7 Severability. If any part of this Agreement is held by an arbitral tribunal appointed pursuant to the Arbitration Agreement or other competent authority to be void or unenforceable, the parties agree that such determination will not result in the nullity or unenforceability of the remaining parts of this Agreement, which will continue in force to the fullest extent permitted by law. The parties further agree to replace such void or unenforceable part of this Agreement with a valid and enforceable provision that will achieve, to the extent legally permissible, the economic, business and other purposes of the void or unenforceable part. 13.8 Counterparts. This Agreement may be executed in separate counterparts, and by facsimile, each of which will be deemed an original, and when executed, separately or together, will constitute a single original instrument, effective in the same manner as if the parties had executed one and the same instrument. 13.9 Entire Agreement. This Agreement is intended by the parties to be the final expression of their agreement and constitutes and embodies the entire agreement and understanding between the parties hereto and constitutes a complete and exclusive statement of the terms and conditions thereof, and will supersede any and all prior correspondence, conversations, negotiations, agreements or understandings relating to the same subject matter. 13.10 Amendments. No change in, modification of or addition to the terms and conditions contained herein will be valid as between the parties unless set forth in a writing that is signed by an authorized representative of each of the parties and which specifically states that it constitutes an amendment to this Agreement. 13.11 Waiver. No waiver of any term, provision, or condition of this Agreement, will be effective unless in a written document signed by the waiving party and no such waiver in any one or more instances, will be deemed to be, or be construed as, a further or continuing waiver of that term, provision or condition or any other term, provision or condition of this Agreement. 13.12 Assignment and Successors. This Agreement may not be assigned by Licensee without Digimarc's consent, which consent shall not be unreasonably withheld or delayed. This Agreement and all of its terms, conditions and covenants are intended to be fully effective and binding, to the extent permitted by law, on the successors and permitted assigns of the parties hereto. 13.13 Captions. Captions are provided in this Agreement for convenience only and they form no part, and are not to serve as a basis for interpretation or construction, of this Agreement, nor ______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 17 as evidence of the intention of the parties hereto. 13.14 Disclaimer of Agency. Nothing contained in this Agreement is intended or will be construed so as to constitute the parties to this Agreement as partners or joint venturers or as agents of each other. Neither party will have any express or implied right or authority to assume or create any obligations on behalf of or in the name of the other party or to bind any other party in any contract, agreement or undertaking with any third party. No employee of a party shall be deemed or considered to be an employee of the other party or of both parties. 13.15 Publicity. The parties agree that from time-to-time it will be beneficial to both parties to issue press releases and other public announcements concerning benefits arising from the CDS. Each party agrees to submit for approval by the other party any press release that involves the other party, which approval shall not unreasonably be withheld. 13.16 Effectiveness. This Agreement shall not be effective until it is signed by both of the parties. 13.17 Ambiguities. Each party and its counsel have participated fully in the review and revision of this Agreement. Any rule or construction to the effect that ambiguities are to be resolved against the drafting party shall not apply in interpreting this Agreement. 13.18 Survival. All clauses of this Agreement which expressly or by implication are intended to survive the termination of this Agreement will do so and, for greater certainty and notwithstanding any provision in this Agreement to the contrary, the provisions of clause 4.2, 4.3, 6.1, 6.3, 6.4, 7.2(b), 9, 10, 12 and 13 of this Agreement shall survive termination of this Agreement by either party for any reason. IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto as of the Effective Date. DIGIMARC CORPORATION By: ______________________ By: ______________________ Name: ______________________ Name: ______________________ Title: ______________________ Title: ______________________ Date: ______________________ Date: ______________________ ______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 18 ______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 19 ATTACHMENT 1 [*] [*] will cause the following [*] to take place: (a) [*] (b) [*] CDS [*]. (c) [*] ATTACHMENT 2 DRAFT OPINION OF COUNSEL Digimarc Corporation One Centerpointe Drive Suite 500 Lake Oswego, Oregon, U.S.A. 97035-8615 Attention: Mr. Bruce Davis President and CEO Dear Mr. Davis: In connection with your proposal to grant a license to (name of Licensee) to use the Counterfeit Deterrence System and for no other purpose, we confirm that: (a) each provision of this Agreement is valid and enforceable against (name of Licensee) under the laws of (name of jurisdiction); and (b) none of the [*] described below, at the time of writing, contravenes any law, regulation, policy, principle, or doctrine in effect in the jurisdiction of the (principal place of business/head office) of (name of Licensee ). ______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 [*] Yours truly, ______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 2 ATTACHMENT 3 PROBLEM REPORT Each problem report will contain all information necessary to reproduce or demonstrate the occurrence of the problem. Problem reports will be in English and will be delivered electronically in a format to be provided by Digimarc. Problem reports will contain: " Date problem was encountered " Detailed description of the problem, including the frequency with which the problem occurs " Name and version number of the program / system component that exhibits the problem " Step by step instructions to reproduce the problem " All data files required to reproduce the problem " [*] " Manufacturer and Model " CPU type and speed " Amount of memory " Operating System and Version " Disk Configuration (number of drives, total space per drive, free space per drive) " Display Adapter Model, Resolution, Number of colors " Peripheral configuration (where applicable) " [*] " TWAIN driver and version number " [*] " Severity of problem " Contact information for person to contact for further information (name, phone number, FAX number, email address) Licensee agrees to work with Digimarc to provide reasonable additional information and perform reasonable additional tests, as requested by Digimarc, to assist Digimarc in resolution of the problem. ______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 3 ATTACHMENT 4 PAYMENT FOR SERVICES Digimarc shall bill Licensee for Services in one hour increments at the following hourly rates: Technical/Design Consultant $[*] Senior Engineer $[*] R&D/Engineering Executive $[*] Project Manager $[*] Administrator/Scheduler $[*] Fees for Services will be invoiced on the earlier of 1) the last day of the month or 2) the completion of the Services. Invoices are due thirty (30) days from the date of receipt of a correct invoice. A late charge of 1.5% per month will be charged on any late payments. All fees are due and payable in US funds. Licensee will reimburse Digimarc for all out-of-pocket expenses reasonably and necessarily incurred in providing the Services. Expenses will be itemized and reported by category. Out-of-pocket expenses will not be "marked up" by Digimarc. Costs include, but are not limited to, reasonable travel and lodging expenses, telephone and fax charges, postage and overnight deliveries, and charges for rental equipment or materials purchased specifically to be used in providing the Service. All invoices for out-of-pocket expenses will be issued monthly in arrears and are due thirty (30) days from the date of receipt of a correct invoice. Supporting receipts and vouchers will be available for review at Digimarc's offices. A late charge of 1.5% per month will be charged on any late payments. Payments will additionally include Value Added taxes and other tariffs and fees that may be imposed by any government other than the United States of America. ______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 ATTACHMENT 5 [*] ATTACHMENT 6 IDENTIFICATION OF [*] ______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 ATTACHMENT 7 TRAINING 1.0 As part of [*], Digimarc shall develop a program of training acceptable to the DLA Project Manager in the [*]. 2.0 Digimarc shall deliver the Training as follows: 2.1 Digimarc shall provide the Training to up to two (2) people simultaneously. The trainees will be experienced in digital design system operation. 2.2 Digimarc shall conduct the Training at the facilities of Licensee or, at the request of Licensee , at Digimarc's facilities or at some other place agreed between Digimarc and Licensee. 2.3 Digimarc shall give Licensee reasonable notice concerning the equipment which Digimarc will require in order to conduct the Training. Licensee shall provide all such equipment at its own expense. If the parties are unable to agree on the equipment to be provided either party may refer the matter for decision to the DLA Contract Authority. 2.4 Digimarc shall conduct the Training using the [*]. 2.5 Digimarc shall provide a training manual in English to every trainee. Any translation or interpretation which the trainees may require will be provided by Licensee at its own expense. 2.6 Digimarc shall provide each trainee with a certificate of training at the completion of the Training session. 2.7 Digimarc shall conduct the Training in English. ______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 SCHEDULE M ESCROW AGREEMENT DATED: Between: (1) DIGIMARC CORPORATION whose head office is at One Centerpointe Drive, Suite 500, Lake Oswego, Oregon. U.S.A. 97035-8615 ("Digimarc"); (2) [*] (3) [*] whose registered office is at [*]. Each of the parties to this Agreement acknowledges that the considerations for their respective undertakings given under it are the undertakings given under it by each of the other parties. It is agreed that: 1. Definitions In this Agreement the following terms shall have the following meanings: 1.1 "Arbitration Agreement" means the Arbitration Agreement entered into between the parties and others effective 1 January 1999. 1.2 "Business Day" means a day on which each of [*], Digimarc, and [*] is open for business at their respective addresses noted above; 1.3 "Intellectual Property Rights" means copyright, trade secret, patent, and all other rights of a similar nature; 1.4 "Licence Agreement" means the Counterfeit Deterrence System Development and License Agreement entered into between Digimarc and [*], effective 1 January 1999. 1.5 "Material" means the "Escrowed Materials" as that term is defined in the Licence Agreement; and _________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. -1- 1.6 "Technology" means the CDS Technology as defined in the Licence Agreement. 2. Owner's Duties and Warranties 2.1 Digimarc shall: 2.1.1 deliver a copy of the Material to [*] within thirty (30) days of the date of this Agreement; 2.1.2 make available to [*] at Digimarc's premises a copy of the Material in accordance with its obligations under Clause 8.8 of the Licence Agreement; and 2.1.3 deliver to [*] a replacement copy of the Material within twenty (20) Business Days of receipt of a notice served upon it by [*] under the provisions of Clause 4.1.5. 2.2 Digimarc warrants to [*] that Digimarc has sufficient rights in the Intellectual Property Rights in the Material to enter into this Agreement, and that it has authority to enter into this Agreement. 3. [*] Responsibilities It shall be the responsibility of [*] to notify [*] of any change to the Technology that necessitates a replacement deposit of the Material. 4. [*]'s Duties 4.1 [*] shall: 4.1.1 hold the Material in a safe and secure environment; 4.1.2 notify Digimarc and [*] of the receipt of any copy of the Material; 4.1.3 in accordance with the terms of Clause 9 perform the Verification Process from time to time; 4.1.4 at all times retain a copy of the latest verified deposit of the Material; 4.1.5 notify Digimarc and [*] if it becomes aware at any time during the term of this Agreement that the copy of the Material held by it has been lost, damaged or destroyed; _________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. -2- and 4.1.6 upon receipt and verification of a new version of the Material, return all prior versions of the Material to Digimarc with ten (10) Business Days. 4.2 [*] shall not be responsible for procuring the delivery of the Material in the event of failure by Digimarc to deliver it. 5. Payment [*]'s fees are payable in accordance with Schedule 1. 6. Release Events 6.1 For the purposes of this Agreement any of the following events shall be considered to be a "Release Event": (a) the date on which the license referred to in Clause 8.4 of the Licence Agreement takes effect in accordance with Clause 8.5 of that Agreement; (b) the date on which the license referred to in Clause 8.6 of the Licence Agreement takes effect. 6.2 [*] must notify [*] of the occurrence of a Release Event by delivering to [*] a statutory or notarized declaration ("the Declaration") made by an officer of [*] attesting that such event has occurred and that the Licence Agreement was still valid and effective up to the occurrence of such event and exhibiting: 6.2.1 such documentation in support of the Declaration as [*] shall reasonably require; and 6.2.2 a copy of the Licence Agreement. 6.3 Upon receipt of a Declaration from [*] claiming a Release Event under Clause 6.1: 6.3.1 [*] shall send a copy of the Declaration to Digimarc by courier and fax; and 6.3.2 unless within fourteen (14) days after the date of delivery Digimarc delivers to [*] a counter-notice signed by a duly authorized officer of Digimarc stating that no such _________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. -3- Release Event has occurred then [*] will release the Material to an authorized officer of [*] upon receipt of the release fee stated in Schedule 1. 6.4 Where there is any dispute as to the occurrence of any of the events set out in Clause 6.1, such dispute will be referred at the request of either Digimarc or [*] to the Managing Director for the time being of [*] (or the equivalent officer of any new custodian appointed pursuant to Clause 11.2 or 11.3) for the appointment of an expert who shall give a decision on the matter within fourteen (14) days of the date of referral or as soon as practicable thereafter. The expert's decision shall be final and binding as between Digimarc and [*] except in the case of manifest error. 6.5 If the expert's decision is that a Release Event has occurred, [*] shall immediately release the Material to an authorized officer of [*] upon receipt of the release fee stated in Schedule 1. 7. Confidentiality 7.1 The Material shall remain the confidential property of Digimarc and in the event that [*] provides a copy of the Material to [*], [*] shall be permitted to use and sublicence the Material only in accordance with the terms set forth in the License Agreement. 7.2 [*] agrees to maintain all information and/or documentation coming into its possession or to its knowledge under this Agreement in strictest confidence and secrecy. [*] further agrees not to make use of such information and/or documentation other than for the purposes of this Agreement and will not disclose or release it other than in accordance with the terms of this Agreement. 7.3 Termination of this Agreement will not relieve [*] or its employees, or [*] or its employees, from the obligations of confidentiality contained in this Clause 7. 8. Intellectual Property Rights The release of the Material to [*] will not act as an assignment or license of any Intellectual Property Rights that Digimarc possesses in the Material except as specifically provided in the Licence Agreement. 9. Verification _________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. -4- 9.1 Subject to the provisions of Clauses 9.2 and 9.3, [*] shall bear no obligation or responsibility to any person, firm, company or entity whatsoever to determine the existence, relevance, completeness, accuracy, effectiveness or any other aspect of the Material. 9.2 Upon the Material being lodged with [*] from time to time under Clause 2.1, [*] shall perform tests in accordance with its standard verification service applying from time to time and shall provide a copy of the test report to [*] and Digimarc. Additionally, at [*]' request and expense, [*] shall perform the Verification Process detailed in clause 9.3 below. 9.3 Verification Process. [*] shall inspect, audit and verify any or all of the Material for accuracy, completeness and sufficiency. Such verification process may include, at [*]'s option, assembling and/or compiling the source code into executable object code. Digimarc agrees to make reasonably available, at its standard consulting rates as in effect from time to time, technical and support personnel reasonably necessary for [*] to perform verification of the Material, and further agrees to give [*] reasonable access to Digimarc's facilities, including its computer systems, for the purpose of such verification at no additional charge. Digimarc hereby grants [*] permission to release to [*] directory lists and/or tables of contents of computer media, manuals, and other materials comprising the Material. Digimarc and [*] shall be entitled to have a representative present at all times to observe such verification by [*]. Any report prepared by [*] shall be provided to all parties hereto. 10. [*]'s Liability 10.1 [*] shall not be liable for any loss caused to Digimarc or [*] either jointly or severally except for loss of or damage to the Material to the extent that such loss or damage is caused by the negligent acts or omissions of [*], its employees, agents or sub-contractors and in such event [*]'s total liability in respect of all claims arising under or by virtue of this Agreement shall not (except in the case of claims for personal injury or death) exceed the sum of five hundred thousand pounds ((Pounds)500,000). 10.2 [*] shall in no circumstances be liable to Digimarc or [*] for indirect or consequential loss of any nature whatsoever whether for loss of profit, loss of business or otherwise. 10.3 [*] shall be protected in acting upon any written request, waiver, consent, receipt or other document furnished to it pursuant to this Agreement, not only in assuming its due execution and the validity and effectiveness of its provisions but also as to the truth and acceptability of any information contained in it, which [*] in good faith believes to be genuine and what it purports to be. _________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. -5- 11. Termination 11.1 [*] may terminate this Agreement after failure by [*] to comply with a 30 day written notice from [*] to pay any outstanding fee. 11.2 [*] may terminate this Agreement by giving sixty (60) days written notice to Digimarc and [*]. In that event Digimarc and [*] shall appoint a mutually acceptable new custodian on terms similar to those contained in this Agreement. 11.3 If a new custodian is not appointed within 30 days of delivery of any notice issued by [*] in accordance with the provisions of Clause 11.2, Digimarc or [*] shall be entitled to request the President for the time being of the British Computer Society to appoint a suitable new custodian upon such terms and conditions as he shall require. Such appointment shall be final and binding on all parties. 11.4 If the rights of all parties to use the Technology under or pursuant to the Licence Agreement have expired or have been lawfully terminated this Agreement will automatically terminate on the same date. 11.5 [*] may terminate this Agreement at any time by giving written notice to Digimarc and [*]. 11.6 Digimarc may only terminate this Agreement with the written consent of [*]. 11.7 This Agreement shall terminate upon release of the Material to [*] in accordance with Clause 6. 11.8 Upon termination under the provisions of Clauses 11.4, 11.5 or 11.6 [*] will deliver the Material to Digimarc. If [*] is unable to trace Digimarc, [*] will destroy the Material. Upon termination under the provisions of Clause 11.2 [*] will deliver the Material to the new custodian agreed under Clause 11.2 or appointed under Clause 11.3. 11.9 Upon termination under the provisions of Clause 11.1 the Material will be available for collection by Digimarc from [*] for thirty (30) days from the date of termination. After such thirty (30) day period [*] will destroy the Material. 12. General 12.1 This Agreement shall be governed by and construed in accordance with the laws of _________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. -6- England to the exclusion of its rules of conflicts of laws. 12.2 This Agreement represents the whole agreement relating to the escrow arrangements between the parties for the Material and supersedes all prior arrangements, negotiations and undertakings. 12.3 Except as otherwise provided, all notices to be given to the parties under this Agreement shall be served by hand, by internationally-recognized courier service, or by registered post (return receipt requested), addressed to the signatories hereto at the addresses given above or, for companies based in the UK, at the registered office. Facsimile may not be used except as a supplement to one of the foregoing. Notices shall be deemed to have been duly given or made when delivered, as evidenced by delivery receipt or customary courier delivery notification. 12.4 Any "Dispute", as the term is defined in the Arbitration Agreement, shall be finally settled by arbitration in accordance with the Arbitration Agreement. Signed on behalf of [*] Signature Name: Title: (Authorized Signatory) Date Signature Name: Title: (Authorized Signatory) Date DIGIMARC CORPORATION Signature _________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. -7- Name: Bruce Davis Title: President & CEO (Authorized Signatory) Date: [*] ESCROW INTERNATIONAL LIMITED Signature Name: Title: (Authorized Signatory) Date: _________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. -8- SCHEDULE 1 [*]'s Fees (St(Pounds))
DESCRIPTION FEE DIGIMARC [*] - ----------- --- -------- --- 1 Initial Fee (Pounds)700 NIL 100% 2 Annual Fee (payable on completion of this Agreement and on each anniversary thereafter) (Pounds)385 NIL 100% 3 Update Fee (per update after the first 4 updates per annum) (Pounds)100 NIL 100% 4 Storage Fee (an additional annual fee may be payable for deposits in excess of one cubic foot) TBA NIL 100% 5 Liability Fee ((Pounds)100 per (Pounds)500,000 of liability exceeding (Pounds)500,000, per annum) Not Applicable NIL Not Applicable 6 Release Fee (plus [*]'s reasonable expenses) (Pounds)500 NIL 100% 7. Verification Fee (Pounds)700 per day NIL 100% (plus [*]'s reasonable expenses)
1. All fees are subject to VAT where applicable[*] 2. All fees are reviewed by [*] from time to time [*] only applicable to countries within the EU. _________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 SCHEDULE "N" PROGRESS REPORTS AND PROJECT REVIEWS 1. TASK STATUS Within ten (10) Business Days after the end of every calendar month [*], Digimarc shall deliver a report to the DLA Project Manager describing progress to date. The report will be formatted according to major task and will reference the status provided in the previous report. The report will declare whether a major task or Deliverable is ahead of, behind, or on schedule as of the reporting date. The report will also forecast whether the task will complete on time. 2. SCHEDULE UPDATE Included with the report will be an updated Gantt schedule prepared according to Digimarc's format. 3. PROBLEM REPORT Digimarc shall report to the DLA Project Manager on problems that impact technical or schedule performance in the report. Each problem will be reported in a Problem List that includes the following information: Problem title Date reported Tasks affected Task impact Proposed corrective action Current status Date closed Red Flag reports (see paragraph 8) will be included on the problem list. A problem will remain on the list until closed or otherwise resolved. 4. PROGRESS REVIEWS [*] and Digimarc shall hold progress review meetings once every three (3) months on _______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 average throughout the period [*] are being performed at a mutually agreeable date and location. At least half of the reviews will be held at Digimarc's facilities. The objective of each meeting is to review the: Status of each major task; Status of deliverable items; Contractual and administrative matters; Contract changes and amendments, as necessary; Technical reports or data; Market and user factors and marketing activities; and other topics as necessary and relevant. Each meeting will last no more than 2 days unless otherwise agreed upon in advance. Attendees will include management, technical and administrative representatives from Digimarc and [*], including the parties' respective Project Managers or suitable designees. To ensure meeting effectiveness, [*] will be limited to ten (10) or fewer persons including any outside vendors or consultants deemed necessary by agreement of the parties' respective Project Managers to be necessary to ensure an effective meeting. In between the quarterly meetings described above, the technical representatives of Digimarc and [*] shall meet every six (6) weeks on average to review technical matters. Each such meeting will last no more than 2 days unless otherwise agreed upon in advance and will be held at a mutually agreeable date and location. At least half of the reviews will be held at Digimarc's facilities. 5. AGENDA An agenda will be prepared by Digimarc and sent to [*] fifteen (15) days in advance of each meeting for review and comment or approval. 6. MEETING MATERIALS Meeting materials will consist of viewgraph presentations, technical data, marketing white papers, studies, technical specifications analyses and other reports. 7. REPORT Within five (5) Business Days after the review meeting, Digimarc shall prepare and deliver to [*] a report summarizing the essential topics discussed including the action items assigned during the meeting. Meeting Materials will be appended to the report. 8. RED FLAG REPORT _______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 2 Digimarc shall prepare and deliver to the DLA Project Manager a "Red Flag" report when a problem requiring the immediate attention of [*] is required. The report will contain a description of the problem and the proposed action to correct the problem. Red Flag reports may be informative; e.g., a report about a vendor delinquency that will impact a critical version release date. They may also report on problems whose correction requires immediate consideration or action from [*] or another organization external to Digimarc. _______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 3 SCHEDULE "O" THIS SYSTEM SUPPORT SERVICES AGREEMENT (the "Agreement") is made BETWEEN (name and address of licensee) ("Licensee") - AND - DIGIMARC CORPORATION, a corporation incorporated under the laws of Oregon and having its head office at One Centerpointe, Suite 500 Drive, Lake Oswego, Oregon. U.S.A. 97035-8615 ("Digimarc") Licensee entered into one or more license agreements with Digimarc for the license of the [*] a counterfeit deterrence system (the "CDS"); Licensee now wishes to engage Digimarc to maintain and support [*]; In consideration of these premises, the covenants set out in this Agreement and for other good and valuable consideration, the receipt and adequacy of which are acknowledged by each of the parties, the parties agree as follows: 1. DEFINITIONS AND PRINCIPLES OF INTERPRETATION 1.1 Definitions - Whenever used in this Agreement, the following words and ----------- terms shall have the meanings set out below: "Arbitration Agreement" means the Arbitration Agreement entered into between the parties and others effective 1 January 1999; "Agreement" means these articles of agreement, including the Attachments, and those documents as specified or referenced in this Agreement as forming part of the Agreement, all as may be amended from time to time; "[*] Agreement" means Counterfeit Deterrence System Development and License Agreement entered into between [*] and Digimarc effective 1 January 1999; "Business Day" means a day on which both Licensee and Digimarc are open for ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 business at their respective addresses noted above; "Confidential Information" means information disclosed during the Term of this Agreement in any form which, if disclosed in tangible form, is labelled "Confidential", "Proprietary" or with a similar legend, or if disclosed orally is information that by its nature would be understood to be confidential to the Discloser; "Core Hours" means 7:00 a.m. to 7:00 p.m. Monday through Friday, United States Pacific time zone, excluding statutory holidays observed by Licensee at its Site; "Discloser" means a party which has disclosed or otherwise made available its Confidential Information to the other party; "Effective Date" means the date on which this Agreement is last signed, or the Effective Date of the License Agreement, whichever is later; [*] "Hot-line" means a single dedicated telephone line provided by Digimarc to Licensee for the reporting of problems with [*]; "License Agreement" means, collectively, all license agreements entered into between the parties pursuant to which Licensee acquired a license to use [*]; "Person" means any individual or other legal entity, including without limitation sole proprietorship, partnership, unincorporated association, unincorporated syndicate, unincorporated organization, trust, body corporate, or a natural person in the capacity of trustee, executor, administrator or other legal representative; "Recipient" means a party to which the Confidential Information of the other party has been disclosed or otherwise made available; "Services" means the services described in clauses 2 and 3 below, or any of them; "Severity Level One Software Problem" means a Software Problem which causes the [*] to cease operating or which causes the computer system running [*] to crash; "Severity Level Two Software Problem" means a Software Problem which causes the [*] to cease operation in accordance with its Specifications or which produces substantially incorrect data; ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 2 "Severity Level Three Software Problem" means a Software Problem which is not a Severity Level Two Problem or a Severity Level One Problem; "Site" means the [*] of Licensee at which a Software Problem is encountered; "Software Problem" means a circumstance where [*] does not function in accordance with its Specifications, produces substantially incorrect data, or causes a computer running [*] to crash, or other problem with [*] and which can be reproduced by Digimarc, at Digimarc's facility, based on information provided to Digimarc by Licensee in a Software Problem Report; "Software Problem Report" means a written report in the form attached as Attachment 1; "Specifications" has the meaning given to it by the [*] Agreement; "System Documentation" means the documentation for [*] provided by Digimarc to Licensee under a License Agreement; "Training Manual" means the training manual which relates to the use of [*] provided by Digimarc to Licensee under a License Agreement; and "Work" means the tasks that are required to be performed by Digimarc in order to comply with its obligations under this Agreement. 1.2 Interpretation - In this Agreement: -------------- 1.2.1 unless otherwise specified, all references to money amounts are to the currency of the United States of America; 1.2.2 the use of words in the singular or plural, or with a particular gender, shall not limit the scope or exclude the application of any provision of this Agreement to such Person or Persons or circumstances as the context otherwise permits; 1.2.3 whenever a provision of this Agreement requires an approval or consent by a party to this Agreement and notice of such approval or consent is not delivered within the applicable time, then the party shall be conclusively deemed to have withheld the consent or approval; ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 3 1.2.4 unless otherwise specified, the number of days within or following which any payment is to be made or act is to be done shall be interpreted to be continuous and shall be calculated by excluding the day on which the period commences and including the day which ends the period and by extending the period to the next Business Day if the last day of the period is not a Business Day; 1.2.5 unless otherwise specified, the order of precedence for interpreting this Agreement shall be: (a) this Agreement, excluding the Attachments, (b) the Attachments; If this Agreement conflicts in substance with a License Agreement entered into between the parties, the License Agreement shall control; 1.2.6 for greater certainty, a party or representative to which this Agreement grants the right to make a decision or determination in the sole discretion of the party or representative is not required to act reasonably in making the decision or determination and no such decision or determination may be challenged by the other party under the Arbitration Agreement or otherwise; 1.2.7 the words "includes" or "including" will be construed without limitation to the generality of the preceding words; 1.2.8 a clause, Schedule or Attachment unless the context requires otherwise, is a reference to a clause, a Schedule or Attachment of, or a paragraph of a Schedule or Attachment of, this Agreement, as amended from time to time in accordance with this Agreement; and 1.2.9 any due date or time period prescribed by this Agreement may be changed by written agreement between the parties' respective representatives identified in clauses 5.1 and 5.2. 1.3 Applicable Law - This Agreement shall be construed in accordance with the -------------- laws of England to the exclusion of its rules of conflicts of laws. 1.4 Attachments - The attachment to this Agreement, listed below, is an ----------- integral part of this Agreement: ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 4 Attachment 1 Software Problem Report 2. SCOPE OF THE WORK 2.1 Digimarc shall provide the Services described in this clause 2 as required to ensure that [*] will conform to and operate in accordance with the Specifications. 2.2 Problem Resolution. Digimarc shall resolve every Software Problem in [*] ------------------- reported by Licensee as follows: 2.2.1 Digimarc shall provide and maintain in effect throughout the Term: (a) a Hot-line which Licensee representative shall use to report Software Problems, and; (b) a paging service by which Licensee can communicate with Digimarc when Licensee is unable to communicate with Digimarc using the Hot-line. Licensee will follow-up each such communication with a Software Problem Report. 2.2.2 Both Digimarc and Licensee shall log each Software Problem reported by Licensee. 2.2.3 Upon receipt by Digimarc of a report from Licensee of a Software Problem, Digimarc shall respond as provided below in accordance with the level of severity of the Software Problem identified by Licensee. Digimarc may respond to the report of a Software Problem by telephone or in writing. 2.2.4 Digimarc shall file a "Resolution Report" with Licensee for each Software Problem reported by Licensee which will include a description of the cause of the Software Problem and the means by which the Software Problem was resolved. 2.2.5 Digimarc shall use its best efforts to respond to a Software Problem Report of a Severity Level One Software Problem made during Core Hours and resolve the identified Software Problem within two (2) Business Days of receipt of the Software Problem Report. The resolution of the Software Problem may include a work-around to the Software Problem acceptable to Licensee in the form of an amendment to [*] on an interim basis if a permanent resolution is provided within a further twenty (20) Business Days. If: ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 5 (a) Digimarc fails to provide a permanent resolution of the Software Problem within twenty (20) Business Days after Digimarc provides the work-around, or (b) Digimarc fails to provide a work-around to the Software Problem within two (2) Business Days after receipt of a report from Licensee of the Software Problem, Licensee may, at its option, reduce the monthly charge for the Services by [*] for each Business Day after the first Business Day which elapses until Digimarc provides the required temporary or permanent resolution to that Software Problem. 2.2.6 Digimarc shall use commercially reasonable efforts to respond to a Software Problem Report of a Severity Level Two Software Problem within ten (10) Business Days of receipt and resolve the identified Software Problem within a further ten (10) Business Days of receipt. If Digimarc fails to resolve the Software Problem within the twenty (20) Business Day period, Licensee may, at its option, designate the Software Problem as a Severity Level One Software Problem. 2.2.7 Digimarc will accept reports for Severity Level Three Software Problems and will consider them for resolution in a future release. 2.2.8 The period for resolution of any Software Problem identified under Clause 2.2.5 and 2.2.6 shall commence with the receipt by Digimarc of the information necessary to reproduce the reported Software Problem if the resolution of that Problem requires such reproduction. 2.3 Application Support. Digimarc shall, using the Hotline, answer questions ------------------- from Licensee related to the use of [*] and resolve problems with [*] which do not require changes to [*]. 2.4 Documentation Updating. Digimarc shall update both the hard copy and the ---------------------- electronic versions of the Training Manuals as required to reflect changes in [*] which result from the provision by Digimarc of the Services. 2.5 Digimarc shall provide the Services during the Core Hours. If Licensee notifies Digimarc that the provision of the Services during Core Hours will have a noticeable impact on Licensee's normal operations, Digimarc shall provide the Services outside of Core Hours at a time or times and for the charges to be agreed with Licensee. 2.6 Changes to [*] other than changes to redress a Software Problem shall be made by Digimarc only at the direction of the DLA Contracting Authority, pursuant to the terms of the [*] ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 6 Agreement. 2.7 All Services required to be provided as a result of: (a) use by Licensee of [*] other than in accordance with the Training Manual supplied by Digimarc under a License Agreement; or (b) failure of the computer system on which [*] is installed to operate in accordance with the applicable manufacturer's specifications; will be for the account of Licensee. 3. [*] UPDATES 3.1 No Licensee shall be compelled to incorporate [*]. 3.2 Digimarc shall continue to provide the Services to Licensee for the two (2) versions of [*] which immediately preceded the then current version of [*] or for all versions of [*] released within twenty-four (24) months of the date of issue of the [*], whichever is the greater, at no additional cost to Licensee. 4. PURCHASE PRICE AND PAYMENT 4.1 The fee for the Services is [*] for each year during the Term. Licensee shall pay the fee in equal monthly installments on or before the first day of the calendar month. 4.2 Except as otherwise expressly provided in this Agreement, Licensee shall pay Digimarc all sales, use, goods and services or other similar taxes levied by any government in the United States or the country of Licensee's principal place of business which Digimarc is obliged to collect and remit to such government(s) in connection with any amount paid by Licensee to Digimarc under this Agreement. 4.3 Digimarc is responsible for, and shall indemnify Licensee against, and hold Licensee harmless from, the payment of all taxes levied by any government on or in respect of Digimarc's income and any amounts required by law to be paid in respect of social benefits for Digimarc's employees relating to or arising out of the services performed under this Agreement by Digimarc. If required by law, Licensee shall deduct all such taxes and amounts from the amounts otherwise payable to Digimarc and remit them to the appropriate authorities. 4.4 Licensee may set off against any amount which Licensee owes Digimarc under or in ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 7 connection with this Agreement any amount which Digimarc owes Licensee under or in connection with this Agreement, and vice versa. 5. SERVICES COORDINATION 5.1 Digimarc shall designate a responsible individual with adequate authority and competence as a services representative whose responsibilities, in addition to those expressly set out in this Agreement, shall be to serve as primary interface with Licensee. 5.2 Licensee shall designate a responsible individual with adequate authority and competence to serve as primary interface with Digimarc. 5.3 Either party's representative may from time to time appoint one or more Persons to represent him or her on prior written notice to the other party's representative. 5.4 Digimarc shall replace within a reasonable time under the circumstances any of its employees or authorized subcontractors engaged in fulfilling its obligations under this Agreement, including its services representative, whose removal is required by Licensee, provided that Licensee specifies reasonable cause for such removal in writing. 5.5 Digimarc represents that all personnel assigned to do the Work will be employees of Digimarc. Digimarc shall not engage any subcontractor to do any part of the work without first obtaining the prior written consent of Licensee, which consent will not unreasonably be withheld. 6. LICENSEE'S RESPONSIBILITIES 6.1 Unless otherwise expressly set out in this Agreement, Licensee shall respond in writing within ten (10) Business Days to every written request for consent required by this Agreement received from Digimarc. 6.2 If Licensee is delayed in complying with any of its obligations under clause 6.1 for any reason not attributable to Digimarc, and such delay is the cause of a delay in the compliance by Digimarc with any of its obligations under this Agreement, then the time for completion and the deadlines dependent thereon will be extended automatically by one day for each day of delay by Licensee or such other period as may be agreed in writing between the parties' respective representatives. If Digimarc reasonably incurs any costs as a result of the delay, other than a delay due to a force majeure event, such costs will, at Digimarc's option, be borne by Licensee. If the delay is due to a force majeure event, such costs shall be borne equally by Licensee and Digimarc. This clause 6.2 sets forth Digimarc's only remedy for a delay by Licensee in ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 8 complying with such obligation. 7. INTELLECTUAL PROPERTY MATTERS 7.1 Licensee acknowledges that Digimarc is the owner of all changes to [*] made by Digimarc under this Agreement and all such changes shall be considered for all purposes of a License Agreement as forming part of [*] licensed thereunder. 8. REPRESENTATIONS AND WARRANTIES OF DIGIMARC 8.1 General - Digimarc represents, warrants and undertakes to Licensee that ------- from and after the Effective Date: (a) the Services will be of professional quality conforming to generally accepted software product development practices and will be performed at all times in a timely and cost effective manner and, for greater certainty Digimarc shall employ the standard of care in performing the work that would be expected of [*] of the same or similar type as the [*] which comprises the CDS Technology; (b) Digimarc is duly incorporated and organized and is validly subsisting under the laws of the State of Oregon, U.S.A. or some other state in the United States with full corporate power and authority to enter into this Agreement; (c) to the best of its knowledge, neither this Agreement nor the Services will contravene, breach, or result in any default under any agreement, permit, by-law, or law or regulation to which Digimarc is subject or by which it is bound including, for greater certainty any laws or regulations in effect in the United States governing export; and (d) this Agreement when executed and delivered by Digimarc shall constitute a valid and binding agreement with Digimarc enforceable against Digimarc according to its terms. 9. REPRESENTATIONS AND WARRANTIES OF LICENSEE 9.1 Licensee represents and warrants to Digimarc that: (a) Licensee has full power and authority to enter into this Agreement; and (b) this Agreement when executed and delivered by Licensee shall constitute a valid, binding and enforceable obligation of Licensee. ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 9 10. CONFIDENTIALITY 10.1 Except as otherwise expressly permitted by this Agreement, a Recipient shall not use, reproduce or disclose the Confidential Information of the Discloser for any purpose other than as reasonably necessary to comply with its obligations under this Agreement or to exercise any rights or licenses granted to it under or pursuant to this Agreement. 10.2 The Recipient shall protect the Confidential Information of the Discloser from disclosure by using the same degree of care, which shall be no less than a reasonable degree of care, as the Recipient uses to protect its own confidential information. 10.3 On written request from the Discloser, the Recipient shall return, or certify the destruction of, all originals and copies of the Discloser's Confidential Information in the Recipient's possession or control which the Recipient does not need to retain in order to perform any obligations imposed, or exercise any rights acquired, by this Agreement. 10.4 A Recipient may, on a need to know basis, and only for the purposes described in clause 10.1, give the other party's Confidential Information to the Recipient's employees, authorized subcontractors or representatives provided that such employee, subcontractor or representative shall have entered into a non-disclosure agreement in respect of such Confidential Information in favour of the Discloser on terms materially similar to the provisions of this clause 10. 10.5 The obligations set out in this clause 10 will not apply to any Confidential Information that: (a) is or becomes publicly available other than through the fault of the Recipient; (b) was known to the Recipient prior to disclosure as shown by documentation sufficient to establish such knowledge; (c) was or is lawfully disclosed to the Recipient by a third party who did not breach any obligation of confidence by such disclosure and who made the disclosure without restriction on further disclosure all of which is shown by documentation sufficient to establish same; or (d) is required by law to be disclosed provided, however, that the Recipient shall first give written notice to the Discloser before the disclosure so that the Discloser may seek an appropriate protective order. The fact that Confidential Information, or any part thereof, can be linked together by a search of ________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 10 publications and other information, followed by a selection of a series of such items of knowledge from unconnected sources, and fitting together those items of knowledge so as to duplicate or recreate any item of Confidential Information, shall not be deemed to cause the Confidential Information, or any part thereof, to be included within exceptions (a), (b) or (c), above. 10.6 Each party hereby consents to any court order sought by the other party to enjoin non-compliance, or to require compliance, by the party with any of the party's obligations under this clause 10. 10.7 Nothing in this Agreement shall be construed to require Licensee or any representative of Licensee to disclose any information which is confidential to a third party including for greater certainty an [*]. 11. DISPUTE RESOLUTION 11.1 Any Dispute as the term is defined in the Arbitration Agreement shall be finally settled by Arbitration in accordance with the Arbitration Agreement. 11.2 Unless otherwise agreed between the parties or unless the subject matter of the dispute resolution proceedings is a party's right to terminate this Agreement, the Services shall continue during the dispute resolution proceedings and payments due to Digimarc shall not be withheld on account of such proceedings unless that particular Services or payment is the subject matter of the proceedings. In the latter case, Digimarc may suspend continued provision of the disputed Services until the dispute resolution proceeding is concluded unless Licensee instructs Digimarc to continue the provision of the disputed Services, in which case Digimarc shall act in accordance with such instructions, subject to payment of the fees due for such Services. 12. TERM 12.1 This Agreement shall take effect on the Effective Date and shall remain in force for one (1) year thereafter (the "Term") unless sooner terminated as provided herein. [*], Licensee may in its sole discretion renew the Agreement for one (1) or more successive one (1) year Terms on no less than sixty (60) days notice prior to the last day of a Term. 12.2 Either party may terminate this Agreement if the other party breaches any of its obligations under this Agreement and fails to remedy such breach within thirty (30) days after receiving written notice of such breach from the other party. 12.3 Upon termination of this Agreement each party shall return or certify the destruction of, ___________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 11 to the Discloser, all originals and copies of the Discloser's Confidential Information in the party's possession or control which the party does not need to retain in order to exercise any rights acquired by this Agreement. 12.4 No termination of this Agreement will in any manner release, or be construed as releasing, any party from any liability arising out of or in connection with that party's breach of or failure to perform any covenant, duty or obligation contained herein prior to the date of such termination. 13. FORCE MAJEURE 13.1 If the performance by either party of any of its obligations under this Agreement is prevented or delayed by any circumstance of force majeure (which shall mean fire, flood, earthquakes, war, riots, or insurrection) the party shall immediately notify the other party. 13.2 The time period within which the party delayed is obliged to perform its obligations will be delayed during the period such circumstance exists. During the period of delay the party delayed shall use its best efforts to make alternate arrangements satisfactory to the other party to avoid delay or resume performance. 14. NOTICES 14.1 All notices under this Agreement shall be delivered by fax, certified mail, return receipt requested, or recognized international courier service. The notice shall be deemed effective as of the date of delivery to the address of the party specified below as evidenced by a delivery receipt or the addressee's registry of incoming correspondence. Unless otherwise expressly set out in this Agreement, all notices to a party will be sent to the party's authorized representative identified below and all notices from a party will be sent by the party's authorized representative identified below. 14.2 Any notice to DIGIMARC shall be sent to both of, and any notice from Digimarc shall be sent by either: Mr. Bruce Davis President and CEO Digimarc Corporation One Centerpointe Drive Suite 500 Lake Oswego, Oregon 97035 USA FAX: (503) 968-0219 ___________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 12 Mr. William Y. Conwell Klarquist, Sparkman, Campbell, Leigh & Whinston 121 SW Salmon Street Suite 1600 Portland, Oregon 97204 USA FAX: (503) 228-9446 14.3 Any notice to Licensee shall be sent to both of, and any notice from Licensee shall be sent by: TBD TBD 14.4 A party may change its address for notice by notice to the other party in accordance with the provisions of this clause 14. 14.5 A copy of every notice sent by either party shall be sent to: [*]. 15. MISCELLANEOUS PROVISIONS 15.1 Remedies Cumulative - Except as otherwise expressly set out in this Agreement: (a) each and every right, power and remedy of a party will be considered to be cumulative with and in addition to any other right, power and remedy which such party may have at law or in equity in the event of breach of any of the terms of this Agreement; (b) the exercise or partial exercise of any right, power or remedy will neither constitute the exclusive election thereof nor the waiver of any other right, power or remedy available to such party; and (c) a party terminating this Agreement in accordance with the provisions of the Termination clause will have no liability or obligation to the other as a result of or with respect to the termination. 15.2 Severability - If any part of this Agreement is held by an arbitral tribunal appointed pursuant to the Arbitration Agreement or by any other competent authority to be void or unenforceable, the parties agree that such determination will not result in the nullity or ___________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 13 unenforceability of the remaining parts of this Agreement, which will continue in force to the fullest extent permitted by law. The parties further agree to replace such void or unenforceable part of this Agreement with a valid and enforceable provision that will achieve, to the extent legally permissible, the economic, business and other purposes of the void or unenforceable part. 15.3 Counterparts. This Agreement may be executed in separate counterparts, and by facsimile, each of which will be deemed an original, and when executed, separately or together, will constitute a single original instrument, effective in the same manner as if the parties had executed one and the same instrument. 15.4 Entire Agreement. This Agreement is intended by the parties to be the final expression of their agreement and constitutes and embodies the entire agreement and understanding between the parties hereto and constitutes a complete and exclusive statement of the terms and conditions thereof, and will supersede any and all prior correspondence, conversations, negotiations, agreements or understandings between the parties relating to the same subject matter. 15.5 Amendments. No change in, modification of or addition to the terms and conditions contained herein will be valid as between the parties unless set forth in a writing that is signed by an authorized representative of each party and which specifically states that it constitutes an amendment to this Agreement. 15.6 Waiver. No waiver of any term, provision, or condition of this Agreement will be effective unless in a written document signed by the waiving party and no such waiver in any one or more instances will be deemed to be, or be construed as, a further or continuing waiver of that term, provision or condition or any other term, provision or condition of this Agreement. 15.7 Assignment and Successors. This Agreement may not be assigned by Licensee without the prior written consent of the Digimarc, which consent may be withheld or given, with or without conditions at Digimarc's sole discretion. This Agreement and all of its terms, conditions, and covenants are intended to be fully effective and binding, to the extent permitted by law, on the successors and permitted assigns of the parties hereto. 15.8 Captions. Captions are provided in this Agreement for convenience only and they form no part, and are not to serve as a basis for interpretation, of this Agreement, nor as evidence of the intention of the parties. 15.9 Disclaimer of Agency. Nothing contained in this Agreement is intended or will be interpreted so as to constitute the parties to this Agreement as partners or joint venturers or as agents of each other. Neither party will have any express or implied right or authority to assume or create any obligations on behalf of or in the name of any other party or to bind any other party in any contract, agreement or undertaking with any third party. No employee of a party shall be ___________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 14 deemed or considered to be an employee of the other party or of both parties. 15.10 Effectiveness. This Agreement shall be effective only after it is signed by both of the parties. 15.11 Ambiguities. Each party and its counsel have participated fully in the review and revision of this Agreement. Any rule or construction to the effect that ambiguities are to be resolved against the drafting party shall not apply in interpreting this Agreement. ___________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 15 15.12 Survival. All clauses of this Agreement which expressly or by implication are intended to survive the termination of this Agreement will do so and, for greater certainty and notwithstanding any provision in this Agreement to the contrary, the provisions of clauses 4.2, 4.3, 4.4, 10, 11, 14 and 15 of this Agreement shall survive termination of this Agreement by either party for any reason. IN WITNESS WHEREOF, this Agreement has been executed and delivered by the parties hereto as of the Effective Date. TBD Signature Name: Title: Date DIGIMARC CORPORATION Signature Name: Title: Date: ___________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 16 ATTACHMENT 1 SOFTWARE PROBLEM REPORT Each problem report will contain all information necessary to reproduce or demonstrate the occurrence of the problem. Problem reports will be in English and will be delivered electronically in a format to be provided by Digimarc. Problem reports will contain: Date problem was encountered Detailed description of the problem, including the frequency with which the problem occurs Name and version number of the program / system component that exhibits the problem Step by step instructions to reproduce the problem All data files required to reproduce the problem [*] Manufacturer and Model CPU type and speed Amount of memory Operating System and Version Disk Configuration (number of drives, total space per drive, free space per drive) Display Adapter Model, Resolution, Number of colors Peripheral configuration (where applicable) [*] TWAIN driver and version number [*] Severity of problem Contact information for person to contact for further information (name, phone number, FAX number, email address) Licensee agrees to work with Digimarc to provide reasonable additional information and perform reasonable additional tests, as requested by Digimarc, to assist Digimarc in resolution of the problem. ___________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 SCHEDULE "P" FEES FOR INTEGRATION SUPPORT AND VERIFICATION TESTING Digimarc shall bill [*] for Services in one hour increments at the following hourly rates: Technical/Design Consultant $[*] Senior Engineer $[*] R&D/Engineering Executive $[*] Project Manager $[*] Administrator/Scheduler $[*] Fees for Services will be invoiced on the earlier of 1) the last day of the month or 2) the completion of the Service. Invoices are due thirty (30) days from the date of receipt of a correct invoice. A late charge of 1.5% per month will be charged on any late payments. All fees are due and payable in US funds. The [*] will reimburse Digimarc for all out-of-pocket expenses reasonably and necessarily incurred in providing the Services. Expenses will be itemized and reported by category. Out-of-pocket expenses will not be "marked up" by Digimarc. Costs include, but are not limited to, reasonable travel and lodging expenses, telephone and fax charges, postage and overnight deliveries, and charges for rental equipment or materials purchased specifically to be used in providing the Services. All invoices for out-of-pocket expenses will be issued monthly in arrears and are due thirty (30) days from the date of receipt of a correct invoice. Supporting receipts and vouchers shall be available for review at Digimarc's offices. A late charge of 1.5% per month will be charged on any late payments. All out-of-pocket expenses will be billed and payable in US funds. Payments will additionally include Value Added taxes and other tariffs and fees that may be imposed by any government other than the United States. ___________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. SCHEDULE "Q" TRAINING 1.0 As part of [*], Digimarc shall develop a program of training acceptable to the DLA Project Manager in [*]. 2.0 Digimarc shall deliver the Training as follows: 2.1 Digimarc shall provide the Training to up to two (2) people simultaneously. The trainees will be experienced in digital design system operation. 2.2 Digimarc shall conduct the Training at the facilities of [*] or, at the request of the [*], at Digimarc's facilities or at some other place agreed between Digimarc and the [*]. 2.3 Digimarc shall give the [*] reasonable notice concerning the equipment which Digimarc will require in order to conduct the Training. The [*] shall provide all such equipment at its own expense. If the parties are unable to agree on the equipment to be provided either party may refer the matter for decision to the DLA Contract Authority. 2.4 Digimarc shall conduct the Training using the [*]. 2.5 Digimarc shall provide a training manual in English to every trainee. Any translation or interpretation which the trainees may require will be provided by [*] at its own expense. 2.6 Digimarc shall provide each trainee with a certificate of training at the completion of the Training session. 2.7 Digimarc shall conduct the training in English. __________________ [*] Omitted pursuant to a confidential treatment request. The material has been filled separately with the Securities and Exchange Commission. SCHEDULE "R" SOFTWARE PROBLEM REPORT Each problem report will contain all information necessary to reproduce or demonstrate the occurrence of the problem. Problem reports will be in English and will be delivered electronically in a format to be provided by Digimarc. Problem reports will contain: . Date problem was encountered . Detailed description of the problem, including the frequency with which the problem occurs . Name and version number of the program / system component that exhibits the problem . Step by step instructions to reproduce the problem . All data files required to reproduce the problem . PC configuration . Manufacturer and Model . CPU type and speed . Amount of memory . Operating System and Version . Disk Configuration (number of drives, total space per drive, free space per drive) . Display Adapter Model, Resolution, Number of colors . Peripheral configuration (where applicable) . Scanner Manufacturer and Model . TWAIN driver and version number . Scanning resolution . Severity of problem . Contact information for person to contact for further information (name, phone number, FAX number, email address) [*] agrees to work with Digimarc to provide reasonable additional information and perform reasonable additional tests, as requested by Digimarc, to assist Digimarc in resolution of the problem. ______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. SCHEDULE "S" PROFORMA INVOICE MONTH, YEAR COUNTERFEIT DETERRENT SYSTEM DIRECT COSTS Hours $ - CDS Development: Salaries (Name of Deliverables [*] Program Management - Travel time - Payroll Taxes and benefits - Recruitment - Business travel and external liaisons - Outside consultants [*] development - Specification development - Administrative costs - Security improvements - Legal counsel costs - Total CDS Development Costs - ALLOCATED INDIRECT COSTS Month Salaries - Payroll Taxes and benefits - Employee training/education - Business travel and external liaisons - Recruitment - Facilities - Office administrative costs - _____________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 Promotional activities - Marketing materials - Depreciation and amortization - Insurance - Outside professional services: Legal counsel costs - Accounting costs - Taxes and licenses - Interest expense - Total Indirect Costs - Total Direct Costs - All business - Total Direct Costs - CDS Development Allocation Factor 0.00% Allocable Indirect Costs - Total Allowable Costs - Month, Year Markup on Total Costs [*]%- Total Due - BALANCE DUE $- Wiring Instructions: [*], Payable to Digimarc Corporation, General Account NOTE: Expense categories listed above are not intended to be all inclusive. Certain allowable expenses could be incurred outside of these categories. _____________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 2 SCHEDULE "T" AGREED FORM DEED OF ADHERENCE THIS DEED is made on [ ] BY [NAME OF SUBSTITUTE] ("Substitute") of [INSERT ADDRESS] WHEREAS (A) At the request of [*], the Substitute is willing to become a party to the Counterfeit Deterrence System Development and License Agreement of [ ],1999 ("DLA") between the [*] and Digimarc Corporation ("Digimarc") in substitution for and to the exclusion of the [*]. (B) The Substitute is permitted so to become a party to the DLA pursuant to clause 19.8 of the DLA. NOW THIS DEED WITNESSES that with effect from (and including) the date of this Deed, the Substitute agrees with Digimarc to become a party to the DLA in substitution for and to the exclusion of the [*] so that the Substitute, and not the [*], shall have the benefit of, and be subject to the obligations of, the [*] under the DLA, whether arising before, on or after the date of this Deed. Executed as a deed and delivered on the date written at the start of this Deed by [Substitute] acting by [duly authorized signatory] [second duly authorised signatory (where necessary)] ___________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission. 1 SCHEDULE "U" COMFORT LETTER From: [*] To: Digimarc Corporation Dear Sirs: We refer to the Development and License Agreement ("DLA") entered into between us on ................................................, 1999. We hereby exercise our right of substitution under clause 19.8(a) of the DLA in favour of [Substitute]; and attach a Deed of Adherence in the form of Schedule "T" to the DLA duly executed by the Substitute. We are writing to confirm that [Substitute]: 1. Is lawfully organized and existing; 2. Is fully qualified, legally and otherwise, to assume the rights and obligations of [*] under the DLA, pursuant to the Deed of Adherence; and under the Escrow Agreement; and 3. Has access to and the benefit of all the facilities previously available to [*] for the exercise of its obligations under the DLA and the Escrow Agreement. Yours faithfully, [*] ______________________ [*] Omitted pursuant to a confidential treatment request. The material has been filed separately with the Securities and Exchange Commission -1- EX-23.2 11 CONSENT OF KPMG LLP EXHIBIT 23.2 CONSENT OF KPMG LLP, INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS The Board of Directors Digimarc Corporation: We consent to the use of our "Form of Independent Auditors' Report," dated March 9, 1999, except as to note 12(b) which is as of November , 1999, relating to the balance sheets of Digimarc Corporation as of December 31, 1997 and 1998, and the related statements of operations, stockholders' equity (deficit) and cash flows for each of the years in the three-year period ended December 31, 1998 which form of report is included in the Registration Statement and Prospectus, dated November 24, 1999, of Digimarc Corporation, and to the reference to our firm under the headings "Selected Financial Data" and "Experts" in the Prospectus. /s/ KPMG LLP Portland, Oregon November 24, 1999 -----END PRIVACY-ENHANCED MESSAGE-----