<PAGE>
As filed with the Securities and Exchange Commission on September 21, 1999
Registration No. 333-
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
---------------
DIGIMARC CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
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<S> <C> <C>
Oregon 7370 93-1170830
(State or Other Jurisdiction of (Primary Standard Industrial (I.R.S. Employer
Incorporation or Organization) Classification Code Number) Identification Number)
</TABLE>
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:
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<S> <C>
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
</TABLE>
---------------
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
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<CAPTION>
Proposed Maximum
Aggregate
Title of Each Class of Securities Offering Amount of
to be Registered Price(1)(2) Registration Fee
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<S> <C> <C>
Common Stock, $0.001 par value per share ..... $35,000,000 $9,730
</TABLE>
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(1) Includes shares of common stock which may be purchased by the underwriters
to cover over-allotments, if any.
(2) Estimated solely for the purpose of determining the registration fee in
accordance with Rule 457(o) under the Securities Act of 1933.
---------------
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.
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- -------------------------------------------------------------------------------
<PAGE>
++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++++
+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 SEPTEMBER 21, 1999
Digimarc Corporation
[LOGO]
Shares
Common Stock
Digimarc Corporation is offering shares of its common stock. This is
Digimarc's initial public offering and no public market currently exists for
its shares. We have applied to list our common stock on the Nasdaq National
Market under the symbol "DMRC." We anticipate that the initial public offering
price will be between $ and $ per share.
------------
Investing in our common stock involves risks.
See "Risk Factors" beginning on page 4.
------------
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<CAPTION>
Per
Share Total
----- -----
<S> <C> <C>
Public Offering Price............................................... $ $
Underwriting Discounts and Commissions.............................. $ $
Proceeds to Digimarc................................................ $ $
</TABLE>
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 shares of common stock to cover any over-allotments.
------------
BancBoston Robertson Stephens
Hambrecht & Quist
U.S. Bancorp Piper Jaffray
The date of this Prospectus is , 1999.
<PAGE>
[THE DIGIMARC CORPORATION LOGO WITH THE TEXT "DIGITAL WATERMARKING."]
<PAGE>
[OUR B'DOOP TRADEMARK WITH A PHOTOGRAPH OF AN INDIVIDUAL USING OUR B'DOOP
APPLICATION THAT INCLUDES THE FOLLOWING TEXT: "BRIDGING TRADITIONAL AND ONLINE
MARKETING," "PUBLISHED MATERIALS BECOME PORTALS TO THE INTERNET."]
<PAGE>
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. In this prospectus, references
to "Digimarc," "we," "our" and "us" refer to Digimarc Corporation.
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
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Page
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<S> <C>
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................................................................. 31
Management............................................................... 46
Related Party Transactions............................................... 56
Principal Stockholders................................................... 58
Description of Capital Stock............................................. 60
Shares Eligible for Future Sale.......................................... 64
Underwriting............................................................. 66
Legal Matters............................................................ 68
Experts.................................................................. 68
Where You Can Find Additional Information................................ 69
Index to Financial Statements............................................ F-1
</TABLE>
----------------
"Digimarc" and "MarcSpider" are registered trademarks, and "Paper-as-Portal,"
"MarcCentre" and "b'doop" are trademarks, of Digimarc Corporation. This
prospectus also contains other product names, trade names and trademarks of
Digimarc Corporation and of other organizations.
i
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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 traditional and digital
content, including movies, photographic or artistic images and valuable
documents such as financial instruments, passports and event tickets. Our
technologies enable new communications capabilities related to protecting
copyrights, deterring counterfeiting or piracy and, for the first time,
directly linking physical content with the Internet.
Digimarc has been awarded a multi-year contract by a consortium of leading
central banks to develop a system to deter the use of personal computers in the
counterfeiting of currency. We are also using our technologies to develop
products we call Paper-as-Portal applications, the first of which, named
b'doop, is planned for release in the second half of 2000. This application 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, 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 b'doop 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.
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 and 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. At the same time, the increasing volume
of Internet content and number of Web destinations has made 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.
Applications of Digimarc's technologies will address both the security and
the access problems that are increasingly arising as the world grows more
dependent on multimedia computing and the Internet. Our core goals are to
establish our technologies as basic components of industry standards for
controlling the use or consumption of visual content and to establish our
Paper-as-Portal applications as a leading means of Internet access and
navigation. We intend to achieve this objective by driving proliferation of our
reader technology as a resident application on personal computers and related
devices, and to this end we have executed letters of intent with leading PC
camera vendors such as 3Com and Logitech. We are simultaneously developing
other new applications for our digital watermarking technologies. We will focus
on expansion of our reader technology installed base as a means of driving
demand for our applications and, in a complementary fashion, will continue
developing compelling applications in order to push proliferation of our reader
technology. We
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intend to maintain our intellectual property leadership in digital watermarking
technologies 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 believe that our applications offer strong advantages over other image
commerce and secure documents approaches because our digital watermarks are
imperceptible, persistent and format-independent, allowing them to operate in
both analog and digital environments. Our applications are compatible with a
wide variety of Internet, computing and communications solutions because
virtually any visual content can contain our imperceptible digital watermarking
codes.
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 the
automatic conversion of all outstanding shares of preferred stock into
11,169,573 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
<PAGE>
The Offering
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Common stock offered............................ shares
Common stock to be outstanding after this
offering....................................... 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
</TABLE>
The number of shares of common stock to be outstanding after this offering is
based on the number of shares outstanding as of June 30, 1999 and excludes:
. 320,000 shares of common stock issuable upon conversion of our Series D-X
preferred stock;
. 21,565 shares of common stock issued subsequent to June 30, 1999 upon
exercise of options;
. 4,431,923 shares of common stock issuable upon exercise of options
outstanding as of September 20, 1999 at a weighted average exercise price
of $0.58 per share; and
. 4,624,213 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.
Summary Financial Data
(in thousands, except share and per share 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 $ from the sale of shares of our common stock
in this offering at an assumed initial public offering price of $ per share,
after deducting estimated underwriting discounts and commissions and estimated
offering expenses.
<TABLE>
<CAPTION>
Six Months Ended
Period from June 30,
January 3, 1995 Year Ended December 31, (unaudited)
(inception) to -------------------------------- ---------------------
December 31, 1995 1996 1997 1998 1998 1999
----------------- --------- --------- ---------- --------- ----------
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Total revenue........... $-- $ 236 $ 186 $ 984 $ 407 $2,055
Gross margin............ -- 229 60 (596) (122) 1,120
Total operating
expenses............... 840 1,900 3,999 2,890 1,519 1,669
Operating loss.......... (840) (1,671) (3,939) (3,486) (1,641) (549)
Net loss................ $ (874) $(1,578) $(3,979) $(3,442) $(1,609) $ (577)
Basic and diluted net
loss per share......... $(0.50) $ (0.35) $ (0.94) $ (0.75) $ (0.35) $ (0.12)
Weighted average shares
used in basic and
diluted net loss per
share.................. 1,738,956 4,453,038 4,240,955 4,576,884 4,564,061 4,657,874
Pro forma basic and
diluted net loss per
share.................. $ (0.27) $ (0.04)
Weighted average shares
used in pro forma basic
and diluted net loss
per share.............. 12,894,457 13,003,580
</TABLE>
<TABLE>
<CAPTION>
June 30, 1999
(unaudited)
------------------------------
Pro Forma
Actual Pro Forma As Adjusted
------- --------- -----------
<S> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents........................ $ 6,169 $6,169 $
Working capital.................................. 6,607 6,607
Total assets..................................... 8,623 8,623
Redeemable convertible preferred stock........... 16,476 --
Total stockholders' equity (deficit)............. (9,634) 6,842
</TABLE>
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<PAGE>
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 $577,000 in the six months ended June 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 June 30, 1999 was
approximately $10.6 million. We anticipate that we will increase our research
and development, sales and marketing, product development and general and
administrative expenses in 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.
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<PAGE>
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 b'doop,
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 b'doop, or for our other future applications, including the
proliferation of our reader technology. We must complete the development of
b'doop and obtain revenue from its commercial launch in order to meet our
revenue objectives. If we do not successfully develop, market and support
b'doop, it is likely that our future revenue would fall below our targeted
objectives. Any shortfall in revenue from b'doop or our other future
applications could reduce the trading price of our common stock. We believe
that it is too early to determine certain aspects of the revenue models that
would apply to these initiatives, and the revenue models that we develop may be
unsuccessful and 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 revenue models, they may not be
sustainable over time, and as a result, our operating results and financial
condition may be harmed.
Because we currently receive 91% 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 91% of our total revenue for the first half 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 b'doop.
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
termination of, or any other material change in, the agreement would seriously
harm our business, operating results and financial condition.
Our future growth will depend on the successful implementation of our solutions
by third-party providers
We are currently developing b'doop 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
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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 such 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 b'doop;
. 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 91% of our total revenue or any other significant customer;
. the market's acceptance of our products and services, including b'doop;
. 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, since 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 predictions regarding certain developments in
counterfeiting and piracy, and 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.
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
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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 which 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 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 such markets. In the United
States, the trademark "Digimark" and the domain name "Digimark.com" have been
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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 such 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
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 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.
8
<PAGE>
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 such 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 growth and expansion that may harm
our business
We expect to experience rapid growth. To manage the future growth we may
experience, our management must continue to improve our operational and
financial systems and expand, train, retain and manage our employee base. Any
additional growth will place a 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 additional personnel 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 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, new employees
generally require substantial training. This training 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
9
<PAGE>
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 such 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 which 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 industry standard for DVD copy
protection. 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;
10
<PAGE>
. 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 the
foregoing 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;
. Internet technologies--numerous existing and potential Internet access
and search methods will be potentially competitive with b'doop 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 b'doop 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.
11
<PAGE>
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
There has been no public market for our common stock prior to this offering
Although we have applied to list our common stock on the Nasdaq National
Market, a trading market for our common stock may not develop or, if a market
does develop, our common stock may still be difficult to trade. The initial
public offering price of our common stock will be determined through
negotiations between us and the representatives of the underwriters, based on
factors that may bear no relation to the price at which our common stock will
trade in the public market. We cannot assure you that you will be able to
resell your shares easily or that you will be able to resell your shares at or
above the initial public offering price.
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;
. announcements of significant contracts, acquisitions or capital
commitments;
. changes in financial estimates by securities analysts;
. failure to obtain patents or defend them successfully;
. failure to complete significant license transactions;
. additions or departures of key personnel; 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.
Additional shares held by existing stockholders 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
12
<PAGE>
sale of additional equity securities. After the closing of this offering, we
will have outstanding shares of common stock, assuming no exercise of
outstanding options or warrants after June 30, 1999 and no exercise of the
underwriters' over-allotment option. The shares of common stock sold in
this offering, which would be 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 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 certain 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 pursuant to 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 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 failure of our
management to apply these funds effectively could harm our business.
Anti-takeover provisions in our charter documents could negatively impact our
stockholders
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.
13
<PAGE>
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 certain 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
<PAGE>
USE OF PROCEEDS
We estimate that we will receive net proceeds of $ from the sale of the
shares of common stock in this offering, assuming an initial public
offering price of $ 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 $ .
We intend to use a portion of the net proceeds to repay in full principal of
and interest on unsecured notes payable to common stockholders, totaling
$305,000 at June 30, 1999, which is due upon the closing of this offering. We
expect to use the remainder of the net proceeds from this offering primarily
for working capital and general corporate purposes, including product
development, sales and marketing and capital expenditures made in the ordinary
course of business. Pending these uses, the net proceeds from this offering
will be invested in short-term, interest-bearing, investment grade,
instruments.
The principal purposes of this offering are:
. to obtain additional working capital;
. to create a public market for our common stock; and
. to facilitate future access by Digimarc to public equity markets.
The amounts we actually spend for these purposes may vary significantly and
will depend on a number of factors, including our future revenue and cash
generated by operations and the other factors described under "Risk Factors."
Therefore, we will have broad discretion in the way we use the net proceeds.
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.
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<PAGE>
DILUTION
As of June 30, 1999, our pro forma net tangible book value was approximately
$6.8 million or $0.44 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 shares of
common stock we are offering at an assumed initial public offering price of
$ , our pro forma net tangible book value as of June 30, 1999 would have
been $ million or $ per share of common stock. This represents an
immediate increase in net tangible book value of $ per share to existing
stockholders and an immediate dilution of $ per share to new investors.
The following table illustrates this per share dilution:
<TABLE>
<S> <C> <C>
Assumed initial public offering price per share..................... $
Pro forma net tangible book value per share as of June 30, 1999.... $0.44
Increase per share attributable to new investors...................
-----
Pro forma net tangible book value per share after this offering.....
-----
Dilution per share to new investors................................. $
=====
</TABLE>
The following table summarizes, on a pro forma basis as of June 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 $ per
share, before deducting estimated underwriting discounts and commissions, and
estimated offering expenses of this offering:
<TABLE>
<CAPTION>
Shares Purchased Total Consideration
------------------ ------------------- Average Price
Number Percent Amount Percent Per Share
---------- ------- ----------- ------- -------------
<S> <C> <C> <C> <C> <C>
Existing stockholders...... 15,624,947 % $17,563,000 % $1.12
New investors..............
---------- ------ ----------- ------
Total.................... 100.0% 100.0%
========== ====== =========== ======
</TABLE>
The information presented with respect to existing stockholders includes
8,720,573 shares of preferred stock, which will be automatically converted into
10,849,573 shares of common stock upon the closing of this offering. This
information is as of June 30, 1999 and excludes:
. 320,000 shares of common stock issuable upon conversion of our Series D-X
preferred stock;
. 21,565 shares of common stock issued subsequent to June 30, 1999 upon
exercise of options;
. 4,431,923 shares of common stock issuable upon exercise of options
outstanding as of September 20, 1999 at a weighted average exercise price
of $0.58 per share; and
. 4,624,213 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.
16
<PAGE>
CAPITALIZATION
The following table sets forth our capitalization as of June 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 shares of common stock offered in this
offering at an assumed initial public offering price of $ 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.
<TABLE>
<CAPTION>
June 30, 1999
(unaudited)
--------------------------------
Pro Forma
Actual Pro Forma As Adjusted
-------- --------- -----------
(dollars in thousands)
<S> <C> <C> <C>
Mandatorily redeemable preferred stock, $0.001
par value, 21,748,000 shares authorized,
8,395,573 shares issued and outstanding,
actual; no shares authorized, issued or
outstanding, pro forma and pro forma as
adjusted...................................... $ 16,476 $ -- $ --
Stockholders' equity (deficit):
Convertible preferred stock, $0.001 par
value; 650,000 shares authorized, 325,000
shares issued and outstanding, actual; no
shares issued and outstanding, pro forma and
pro forma as adjusted....................... -- -- --
Common stock, $0.001 par value; 25,000,000
shares authorized; 4,775,374 shares issued
and outstanding, actual; 15,624,947 shares
issued and outstanding, pro forma; and
shares issued and outstanding, pro
forma as adjusted........................... 2 13
Additional paid in capital................... 1,118 17,583
Deferred compensation........................ (202) (202) (202)
Accumulated deficit.......................... (10,552) (10,552) (10,552)
-------- -------- --------
Total stockholders' equity (deficit)....... (9,634) 6,842
-------- -------- --------
Total capitalization..................... $ 6,842 $ 6,842 $
======== ======== ========
</TABLE>
The number of shares of common stock to be outstanding after this offering is
based on the number of shares outstanding as of June 30, 1999 and excludes:
. 320,000 shares of common stock issuable upon conversion of our Series D-X
preferred stock;
. 21,565 shares of common stock issued subsequent to June 30, 1999 upon
exercise of options;
. 4,431,923 shares of common stock issuable upon exercise of options
outstanding as of September 20, 1999 at a weighted average exercise price
of $0.58 per share; and
. 4,624,213 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.
17
<PAGE>
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 six-month periods ended
June 30, 1998 and 1999, and the balance sheet data at June 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 such 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.
<TABLE>
<CAPTION>
Period from
January 3, 1995 Six Months Ended
(inception) June 30,
through Year Ended December 31, (unaudited)
December 31, ------------------------------- --------------------
1995 1996 1997 1998 1998 1999
--------------- --------- --------- --------- --------- ---------
(in thousands, except share and per share data)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Data:
Revenue:
License and
subscription......... $ -- $ 236 $ 161 $ 484 $ 282 $ 116
Service............... -- -- 25 500 125 1,939
--------- --------- --------- --------- --------- ---------
Total revenue........ -- 236 186 984 407 2,055
Cost of revenue:
License and
subscription......... -- 7 126 114 62 57
Service............... -- -- -- 1,466 467 878
--------- --------- --------- --------- --------- ---------
Total cost of
revenue............. -- 7 126 1,580 529 935
--------- --------- --------- --------- --------- ---------
Gross margin.......... -- 229 60 (596) (122) 1,120
Operating expenses:
Sales and marketing... 36 376 1,330 825 498 394
Research and
development.......... 327 690 1,387 658 415 247
General and
administrative....... 477 834 1,282 1,407 606 1,028
--------- --------- --------- --------- --------- ---------
Total operating
expenses............ 840 1,900 3,999 2,890 1,519 1,669
--------- --------- --------- --------- --------- ---------
Operating loss.......... (840) (1,671) (3,939) (3,486) (1,641) (549)
Other income (expense).. (34) 93 (40) 44 32 (28)
--------- --------- --------- --------- --------- ---------
Loss before income
taxes.................. (874) (1,578) (3,979) (3,442) (1,609) (577)
Provision for income
taxes.................. -- -- -- -- -- --
--------- --------- --------- --------- --------- ---------
Net loss.............. $ (874) $ (1,578) $ (3,979) $ (3,442) $ (1,609) $ (577)
========= ========= ========= ========= ========= =========
Basic and diluted net
loss per share......... $ (0.50) $ (0.35) $ (0.94) $ (0.75) $ (0.35) $ (0.12)
========= ========= ========= ========= ========= =========
Weighted average shares
outstanding used in
basic and diluted net
loss per share
calculation............ 1,738,956 4,453,038 4,240,955 4,576,884 4,564,061 4,657,874
</TABLE>
<TABLE>
<CAPTION>
June 30,
December 31, (unaudited)
-------------------------------- -----------
1995 1996 1997 1998 1999
----- ------- ------- ------- -----------
(in thousands)
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Cash and cash equivalents....... $ 46 $ 3,113 $ 5,638 $ 2,137 $ 6,169
Working capital................. (244) 2,782 4,631 1,196 6,607
Total assets.................... 63 3,376 6,168 2,978 8,623
Long-term debt, net of current
portion........................ 438 271 284 298 --
Redeemable convertible preferred
stock.......................... -- 4,441 10,185 10,185 16,476
Total stockholders' deficit..... (690) (1,885) (5,680) (9,095) (9,634)
</TABLE>
18
<PAGE>
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 an imperceptible digital code to be embedded in traditional and
digital content, including movies, magazines, photographic or artistic images
and valuable documents such as financial instruments, passports and event
tickets. Our technologies enable new communications capabilities for visual
content relating to copyright protection, counterfeiting and piracy deterrence
and, for the first time, the direct linking of physical content with the
Internet.
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 91% of our total revenue for the first six 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 b'doop,
the first of our Paper-as-Portal applications. Our efforts to develop and
introduce b'doop and related Paper-as-Portal applications will require
significant continuing investment. To date, we have not derived any revenue
from b'doop or any other Paper-as-Portal application. We expect to begin
marketing b'doop in the second half of 2000. Successful introduction and
marketing of b'doop and other Paper-as-Portal applications, if achieved, is
expected to expand the sources, change the mix and reduce the concentration of
our revenue.
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.
19
<PAGE>
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 b'doop 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 b'doop 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 b'doop 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 June 30,
1999, we had an accumulated deficit of approximately $10.6 million. We intend
to continue to expend significant financial and management resources on
developing additional 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
20
<PAGE>
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.
<TABLE>
<CAPTION>
Six Months
Ended June 30,
Year Ended December 31, (unaudited)
----------------------------- -----------------
1996 1997 1998 1998 1999
------- --------- ------- ------- -------
<S> <C> <C> <C> <C> <C>
Revenue:
License and subscription.. 100% 87% 49% 69% 6%
Service................... -- 13 51 31 94
------- --------- ------- ------- ------
Total revenue........... 100 100 100 100 100
------- --------- ------- ------- ------
Cost of revenue:
License and subscription.. 3 68 12 15 3
Service................... -- -- 149 115 43
------- --------- ------- ------- ------
Total cost of revenue... 3 68 161 130 46
------- --------- ------- ------- ------
Gross margin............ 97 32 (61) (30) 54
Operating expenses:
Sales and marketing....... 159 715 84 122 19
Research and development.. 292 746 67 102 12
General and
administrative........... 353 689 143 149 50
------- --------- ------- ------- ------
Total operating
expenses............... 804 2150 294 373 81
------- --------- ------- ------- ------
Operating loss............ (707) (2118) (355) (403) (27)
Other Income (Expense).... 39 (21) 5 8 (1)
------- --------- ------- ------- ------
Loss before income taxes.. (668) (2,139) (350) (395) (28)
Provision for income
taxes.................... -- -- -- -- --
------- --------- ------- ------- ------
Net loss................ (668)% (2,139)% (350)% (395)% (28)%
======= ========= ======= ======= ======
</TABLE>
Six Months Ended June 30, 1998 and 1999
Revenue
Total revenue was $407,000 and $2.1 million for the six months ended June 30,
1998 and 1999, respectively, representing an increase of $1.6 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. We
had one customer that accounted for approximately 31% of our total revenue for
the six months ended June 30, 1998, and another customer that accounted for
approximately 91% of our total revenue for the six months ended June 30, 1999.
Successful introduction and implementation of new products and services,
including self-authenticating documents, b'doop and other Paper-as-Portal
applications, if achieved, is expected to significantly change the mix and
concentration of our future revenue.
License and subscription. License and subscription revenue was $282,000 and
$116,000 for the six months ended June 30, 1998 and 1999, respectively,
representing a decrease of $166,000. This decrease was the result of an
increased use of our sales, marketing and research and
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<PAGE>
development personnel to provide education, outreach and product definition
services to our anti-counterfeiting system customer.
Service. Service revenue was $125,000 and $1.9 million for the six months
ended June 30, 1998 and 1999, respectively, representing an increase of $1.8
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 $62,000 and
$57,000 for the six months ended June 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 $467,000 and $878,000 for the six months ended June 30, 1998 and
1999, respectively, representing an increase of $411,000. This increase was the
result of an increased use of our sales and marketing personnel to provide
education, outreach and product definition services to our anti-counterfeiting
system customer. Cost of service revenue as a percentage of service revenue
decreased from 374% in the six months ended June 30, 1998 to 45% in the six
months ended June 30, 1999. This decrease resulted from our securing a
development contract with a consortium of leading central banks in 1999, where
in 1998 we performed a feasibility study for this customer which included
substantial research and development accounted for as cost of service.
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
$498,000 and $394,000 for the six months ended June 30, 1998 and 1999,
respectively, representing a decrease of $104,000. This decrease resulted
primarily from an increase in the number of sales and marketing personnel who
provide education, outreach and product definition services to our anti-
counterfeiting system customer, resulting in these expenses being allocated to
cost of service revenue. Sales and marketing employees totaled six and eleven
as of June 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 b'doop 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 $415,000 and $247,000 for the six months ended June
30, 1998 and 1999, respectively, representing a decrease of $168,000. This
decrease resulted primarily from an increased use of research and development
personnel to
22
<PAGE>
provide services to our anti-counterfeiting system customer, resulting in these
expenses being allocated to cost of service revenue. Research and development
personnel totaled 12 and 15 as of June 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 $606,000 and
$1.0 million for the six months ended June 30, 1998 and 1999, respectively,
representing an increase of $422,000. This increase was primarily 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 five as of June 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.
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.
The total unearned compensation recorded by us from inception to June 30, 1999
was $202,000. 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 an additional $2.3 million of total unearned
compensation for the third quarter ended September 30, 1999 related to stock
grants.
Years Ended December 31, 1996, 1997 and 1998
Revenue
Total revenue was $236,000, $186,000 and $984,000 in 1996, 1997 and 1998,
respectively, representing a decrease of $50,000 from 1996 to 1997 and an
increase of $798,000 from 1997 to 1998. The decrease in revenue was caused by
higher licensing fees in 1996, and the increase in revenue was caused by
increased service revenue in 1998. We had two customers that each accounted for
more than 10% of our revenue, representing in aggregate approximately 78% of
our total revenue, for the year ended December 31, 1996; two customers that
accounted for more than 10%, representing in aggregate approximately 30% of our
total revenue for the year ended December 31, 1997; and one customer that
accounted for more than 10%, representing approximately 51% of our total
revenue for the year ended December 31, 1998.
License and subscription. License and subscription revenue was $236,000,
$161,000 and $484,000 in 1996, 1997 and 1998, respectively, representing a
decrease of $75,000 from 1996 to 1997 and an increase of $323,000 from 1997 to
1998. The decrease from 1996 to 1997 was primarily the result of one-time
licensing fees received from Adobe Systems and Corel Corporation in 1996. The
increase from 1997 to 1998 was primarily the result of our introduction and the
market's acceptance of our subscription-based services designed to address the
needs of corporations that want to distribute and promote their image
collections on the Internet.
23
<PAGE>
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
$7,000, $126,000 and $114,000 in 1996, 1997 and 1998, respectively. The cost of
license and subscription revenue increased $119,000 from 1996 to 1997, and
decreased $12,000 from 1997 to 1998. The increase in cost of license and
subscription revenue from 1996 to 1997 was primarily 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. The decrease from
1997 to 1998 was primarily the result of cost savings associated with providing
customer technical support in-house, which had previously been provided by a
third party, and a reduction in database development costs.
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 $376,000, $1.3 million
and $825,000 in 1996, 1997 and 1998, respectively. This represents an increase
of $954,000 from 1996 to 1997, and a decrease of $505,000 from 1997 to 1998.
The increase from 1996 to 1997 resulted primarily from the hiring of sales
management and sales and marketing personnel, increased travel and enhanced
promotional programs. The decrease from 1997 to 1998 was the result of devoting
an increasing amount of sales and marketing personnel to provide education,
outreach and product definition services to our anti-counterfeiting system
customer. Sales and marketing employees totaled five, ten and eight at December
31, 1996, 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, b'doop and other Paper-as-
Portal applications.
Research and development. Research and development expenses were $690,000,
$1.4 million and $658,000 in 1996, 1997 and 1998, respectively. Research and
development expenses increased $697,000 from 1996 to 1997 and decreased
$729,000 from 1997 to 1998. The increase from 1996 to 1997 was primarily due to
increased hiring of software development and quality-assurance personnel and
the write-down of purchased technology, as those costs were determined to be
unrecoverable. The decrease from 1997 to 1998 resulted primarily from an
increased use of our research and development personnel to provide services to
our anti-counterfeiting system customer, resulting in these expenses being
allocated to cost of service revenue and the write-down of purchased technology
occurring in 1997. Research and development personnel totaled eight, ten and
fourteen for 1996, 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
24
<PAGE>
development of our new products such as self-authenticating documents, b'doop
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
$834,000, $1.3 million and $1.4 million in 1996, 1997 and 1998, respectively,
representing increases of $448,000 from 1996 to 1997 and $125,000 from 1997 to
1998. The increase in general and administrative expenses from 1996 to 1997 was
primarily the result of increased salary expense and related payroll taxes and
benefits from hiring new personnel. Increases in general and administrative
expenses from 1997 to 1998 were primarily the result of the implementation of
an incentive compensation program. General and administrative employees totaled
four, three and four at December 31, 1996, 1997 and 1998, respectively.
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.
25
<PAGE>
Quarterly Results of Operations
The following table presents certain unaudited statement of operations data
for the six quarters ended June 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.
<TABLE>
<CAPTION>
Quarter Ended
(unaudited)
------------------------------------------------------
Dec.
Mar. 31, June 30, Sept. 30, 31, Mar. 31, June 30,
1998 1998 1998 1998 1999 1999
-------- -------- --------- ------- -------- --------
(in thousands)
<S> <C> <C> <C> <C> <C> <C>
Statement of Operations
Revenue:
License and
subscription......... $ 161 $ 121 $ 97 $ 105 $ 74 $ 42
Service............... -- 125 187 188 985 954
----- ----- ----- ------- ----- -----
Total revenue....... 161 246 284 293 1,059 996
----- ----- ----- ------- ----- -----
Cost of revenue:
License and
subscription......... 31 31 31 21 21 36
Service............... 128 339 308 691 459 419
----- ----- ----- ------- ----- -----
Total cost of
revenue............ 159 370 339 712 480 455
----- ----- ----- ------- ----- -----
Gross margin........ 2 (124) (55) (419) 579 541
Operating expenses:
Sales and marketing... 294 204 244 83 131 263
Research and
development.......... 236 179 131 112 107 140
General and
administrative....... 275 331 307 494 459 569
----- ----- ----- ------- ----- -----
Total operating
expense............ 805 714 682 689 697 972
----- ----- ----- ------- ----- -----
Operating loss...... (803) (838) (737) (1,108) (118) (431)
Other income (expense).. 16 16 25 (13) (11) (17)
----- ----- ----- ------- ----- -----
Loss before provision
for income taxes..... (787) (822) (712) (1,121) (129) (448)
Provision for income
taxes.................. -- -- -- -- -- --
----- ----- ----- ------- ----- -----
Net loss............ $(787) $(822) $(712) $(1,121) $(129) $(448)
===== ===== ===== ======= ===== =====
</TABLE>
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.
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<PAGE>
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 June 30, 1999, we had raised
approximately $17.0 million through the sale of our preferred stock. In August
1999, we raised an additional $800,000 through the sale of preferred stock.
As of June 30, 1999, we had cash and cash equivalents of $6.2 million,
representing an increase of $4.1 million from $2.1 million at December 31,
1998. Our working capital at June 30, 1999 was $6.6 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 sale of our preferred stock
in June 1999 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 $1.3 million and
$1.9 million for the six months ended June 30, 1998 and 1999, respectively.
This $619,000 increase in operating cash outflows from the six months ended
June 30, 1998 to the six months ended June 30, 1999 was due primarily to an
increase in accounts receivable and a reduction in deferred revenue, offset by
improved operating results in the six months ended June 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 $49,000 and $72,000 for the six months
ended June 30, 1998 and 1999, respectively. 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 of a business. 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 $38,000 and provided cash of $6.0
million for the six months ended June 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 half 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 June 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 40 months. As of June 30,
1999, we had an outstanding balance of $341,000 of capital lease obligations.
We had unsecured notes payable to common stockholders totaling $305,000 at June
30, 1999 which bear interest at 7% per annum. The payments under these
27
<PAGE>
notes will be accelerated by this offering, and we intend to repay in full the
outstanding amounts 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 June 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 as we:
. enter new markets for our products and services;
. increase research and development spending;
. increase sales and marketing activities;
. develop new distribution channels;
. improve our operational and financial systems; and
. broaden our professional service capabilities.
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 cash 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."
28
<PAGE>
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.
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;
29
<PAGE>
. 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 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.
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BUSINESS
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 enable new communications capabilities related to protecting
copyrights, deterring counterfeiting or piracy and, for the first time,
directly linking physical content with the Internet.
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 or locate these properties across the
Internet, and thereby discourage their unauthorized distribution or 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 b'doop, is planned for
release in the second half of 2000. This application 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 b'doop 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.
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
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2002. The Internet represents a fundamental change in the way people conduct
business and access or distribute information and contributes to an
acceleration of content digitization. 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 conversion of
content to digital format 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 the
discontinuous method of search engines, or at best look for an advertiser's
Internet address within the fine print at the bottom of the page, to find their
intended destination. As a result, traditional 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. The 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
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.
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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 to engage in a multi-year digital watermarking specifications
program that is still underway. 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. Digital imaging has contributed to the $615 million lost by U.S.
banks each year due to fraudulent and counterfeit checks. 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.
According to the International Air Transport Association, airlines are fined in
excess of $100 million each year for allowing passengers to travel with forged
identity 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.
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
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over the Internet, but also do not convert to a non-digital format and do not
identify copyright ownership. Without communication of copyright, there can be
no foundation for the necessary image-commerce systems 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, robust and
format independent, 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 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.
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
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direct users to a specified Web destination, advertisers can expect higher
conversion rates and improved customer satisfaction and retention due to
less customer frustration with searches and complicated Web pages. We
intend to provide advertisers the flexibility to remotely redirect a
marketing campaign by altering the Web destination linked by the embedded
code in a particular advertisement. We believe businesses can lower the
internal costs of call and e-mail centers by establishing self-service Web
pages on maintenance or use that are linked to embedded content. Moreover,
imperceptible digital code can be embedded with no visible design changes
or 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. We intend to use our digital watermarking
technologies to provide issuers of high-value documents with the ability
both to deter illegal or prohibited reproduction and to verify
authenticity. We are forming partnerships with computer, software and
peripheral vendors with the aim of having such 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
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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 data 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 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 actively participate in a number of initiatives for establishing
industry standards, including the Copy Protection Technical Working Group for
video copy protection, the Secure Digital Music Initiative for secure music
delivery 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 watermarking
signal distinguishes it from most other security technologies because it
does not require a visible or audible change in content, thereby 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 through our
efforts to achieve broad proliferation of our reader technology as a resident
application on personal computers and related devices like digital cameras,
printers and scanners. Simultaneously, we are aggressively
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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.
Establish Paper-as-Portal as a Leading Internet Access and Navigation
Technology
We believe our b'doop 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 data 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, holding 15 U.S. issued patents, with at
least an additional 49 U.S. patent applications currently on file, of which 3
have received notices of allowance, 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.
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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 data in visual content. This embedded data is imperceptible during
normal use but detectable by our software or hardware. We believe that this
embedded data can be used to identify, authenticate, track, manage and enhance
content, as well as facilitate traditional and e-commerce.
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. Our image asset management applications allow customers to
use our digital watermarking 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 watermarking to the Tony Stone
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Web site, the online source for their premium images. National Geographic
Television began using our digital watermarking 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 watermarking
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 b'doop 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 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
data.
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 b'doop.
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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 codes 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 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 b'doop.
b'doop is an application we are developing based on our patented core
technology. b'doop will create new communications capabilities for visual
content that promote and enhance e-commerce. b'doop 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 b'doop 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.
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Technology and Intellectual Property
Digimarc's watermarking technologies embed digital codes 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 codes 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
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, while maintaining
backwards compatibility. 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 watermark, which allows our watermarks to be read
regardless of their orientation relative to the scanner or camera. Using this
orientation information, our 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 which 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 49 U.S. patent applications
currently on file, of which 3 have received notices of allowance, and at least
17 foreign patent applications pending, including Patent
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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 certain registered
trademarks in both the U.S. and other countries and have applied for other
trademarks and have licensed rights to certain 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, such 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.
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 thereby 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
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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. Under
this arrangement, we have agreed to develop with Macrovision a system to
control copying of DVD and play control video content for all forms of
distribution. 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 play 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 1,848,951 shares of
our common stock.
. 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 b'doop 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 b'doop.
. 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 b'doop 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 b'doop.
. 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 b'doop 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 b'doop 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
1,693,385 shares of our common stock.
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. 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 600,000 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.
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
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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 September 20, 1999, we had 51 full-time employees, including 12 in
sales and marketing, 27 in research and development and 12 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 October 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.
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MANAGEMENT
Officers and Directors
The following table sets forth certain information regarding our executive
officers, corporate officers and directors as of September 20, 1999:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
Executive Officers
Bruce Davis............. 47 President, Chief Executive Officer and Director
Geoffrey Rhoads......... 36 Chief Technology Officer, Secretary and Director
E. K. Ranjit............ 49 Chief Financial Officer
J. Scott Carr........... 37 Vice President and General Manager, Secure Documents
Corporate Officers
Burt W. Perry........... 44 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
</TABLE>
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.
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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. In addition to
his position as chairman of Digimarc, Mr. Monego is currently a director of
Women.com Networks. 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.
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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 is the Reuters board observer at Infoseek Corporation. 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 $100,000 during the years ended December 31, 1996, 1997 and 1998.
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The salary information shown for Messrs. Davis and Carr reflects compensation
paid to each in his principal position commencing on December 1997 and May
1996, respectively.
<TABLE>
<CAPTION>
Long-Term
Annual Compensation Compensation
-------------------- ------------
Securities
Name and Principal Underlying All Other
Position Year Salary ($) Bonus ($) Options (#) Compensation ($)
- ------------------ ---- ---------- --------- ------------ ----------------
<S> <C> <C> <C> <C> <C>
Bruce Davis(1) ........ 1998 208,124 75,000 -- 65,529
President and Chief
Executive Officer 1997 2,596 -- 800,000 --
1996 -- -- -- --
Geoffrey Rhoads(2) .... 1998 123,542 75,000 -- --
Chief Technology
Officer and Secretary 1997 90,101 -- -- --
1996 78,700 -- -- 302,505
J. Scott Carr ......... 1998 109,167 45,000 -- --
Vice President and
General Manager-- 1997 90,000 -- 100,000 --
Secure Documents 1996 55,625 -- 120,000 --
</TABLE>
- --------
(1) The $65,529 of other compensation represents reimbursement for relocation
expenses.
(2) In July 1996, Geoffrey Rhoads and his spouse granted us an option to
purchase a maximum of 1,403,260 shares of our common stock owned by them at
an exercise price of $0.01 per share for a one-time cash payment of
$217,505.30. 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 also repurchased 340,000
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 $0.25 per
share less the exercise price.
<TABLE>
<CAPTION>
Number of Securities Value of Unexercised
Underlying Options at In-the-Money Options at
Shares Fiscal Year-End (#) Fiscal Year-End ($)
Acquired on Value ------------------------- -------------------------
Name Exercise (#) Realized ($) Exercisable Unexercisable Exercisable Unexercisable
---- ----------- ------------ ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C> <C> <C>
Bruce Davis............. -- -- 200,000 600,000 0 0
Geoffrey Rhoads......... -- -- -- -- -- --
J. Scott Carr........... -- -- 133,328 86,672 17,500 3,500
</TABLE>
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.
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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 1,000,000 shares of
common stock were reserved for issuance under the 1995 plan. This reserve was
amended several times to reserve a total of 5,600,000 shares of common stock
for issuance under the plan. As of September 20, 1999, options to purchase
793,864 shares of common stock granted had been exercised, options to purchase
4,431,923 shares of common stock were outstanding, and options to purchase
374,213 shares of common stock remained available for grant. The outstanding
options were exercisable at a weighted average exercise price of $0.58 per
share. Outstanding options to purchase an aggregate of 1,161,923 shares were
held by employees and consultants who are not officers or directors of our
company.
All options granted under the 1995 plan that expire after the date of the
1995 plan amendment without having been exercised are cancelled and are no
longer available for grant under the 1995 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 such 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.
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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 completion of this offering.
1999 Stock Incentive Plan
Our 1999 Stock Incentive Plan was approved by our board of directors in
, 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 3,000,000 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, but not granted as of the date of the completion 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 1,250,000 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 3,000,000 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
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<PAGE>
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 85% 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
certain 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 such 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 pursuant 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 in 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 20,000 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 5,000 shares of
our common stock at an exercise price equal to the fair market value of our
common stock at the date of grant. Such options will vest and become fully
exercisable on the first anniversary of the grant date.
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<PAGE>
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 thereof.
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 pursuant thereto. Non-employee directors may also be granted
additional incentives, subject to the discretion of the board or such
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 , 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 1,250,000 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, 500,000 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 our initial public 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
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<PAGE>
periods of 24 months. The initial offer period begins on the effective date of
this prospectus, and ends on January 31, 2002. Additional offer periods will
commence each February 1 and August 1. Purchase periods are generally six-month
periods, with the initial purchase period commencing on the effective date of
this prospectus and ending on July 31, 2000. After the effective date of this
prospectus, purchase periods will commence each February 1 and August 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 10% 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 1,000 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
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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.
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
pursuant to 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.
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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 302,822 shares of Series A-1 preferred stock at $1.25 per
share in June 1996 to eight investors;
. an aggregate of 22,178 shares of Series A-1 preferred stock at $2.25 per
share in June 1996 to two investors;
. an aggregate of 1,804,000 shares of Series B-1 preferred stock at $2.50
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 4,059,573 shares of Series C-1 preferred stock at $1.43
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 2,532,000 shares of Series D preferred stock at $2.50 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 320,000 shares of Series D-X preferred stock at $2.50 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.
<TABLE>
<CAPTION>
Series C-
Series A-1 Series B-1 1 Series D Series D-X
Holders Preferred Preferred Preferred Preferred Preferred
- ------- ---------- ---------- --------- --------- ----------
<S> <C> <C> <C> <C> <C>
Macrovision Corporation.. -- -- 1,048,951 800,000 --
Reuters Group............ -- -- 1,398,601 400,000 --
AVI Capital L.P. and
affiliates.............. -- 504,000 467,098 300,000 --
Adobe Ventures L.P....... -- 500,000 463,385 230,000 --
Philip Monego, Sr........ 32,000 -- 69,930 100,000 80,000
Justsystem, Inc.......... -- 400,000 174,825 -- --
Softbank Ventures, Inc... -- 400,000 -- -- --
</TABLE>
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<PAGE>
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 340,000 shares of our common stock from Mr.
Rhoads for an aggregate purchase price of $85,000.
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 which 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 non-exclusive license to certain of
Adobe's intellectual property. Under the agreement, Adobe agreed to pay us a
one-time engineering fee of $100,000 for the development of the licensed
software and for support and maintenance fees.
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.
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PRINCIPAL STOCKHOLDERS
The following table sets forth the beneficial ownership of our common stock
as of September 20, 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 15,966,512 shares of our
common stock outstanding as of September 20, 1999 and 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 such person. Shares issuable upon the exercise of
options that are currently exercisable or become exercisable within sixty days
of September 20, 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.
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned
Number of -------------------------
Shares Beneficially Prior to After
Name and Address Owned the Offering the Offering
---------------- ------------------- ------------ ------------
<S> <C> <C> <C>
5% Stockholders
Macrovision Corporation ..... 1,848,951 11.6%
1341 Orleans Drive
Sunnyvale, California 94089
Reuters Ltd.(1).............. 1,798,601 11.3%
85 Fleet Street
London, EC4P 4AJ
England
AVI Capital L.P. and
affiliates(2)............... 1,775,098 11.1%
One First Street
Los Altos, California 94022
Adobe Ventures, L.P. ........ 1,693,385 10.6%
One Bush Street, 15th Floor
San Francisco, California
94104
Justsystem, Inc.............. 974,825 6.1%
2460 Sand Hill Road,
Suite 201
Menlo Park, California 94025
Softbank Ventures, Inc. ..... 800,000 5.0%
333 West San Carlos Avenue,
Suite 1225
San Jose, California 95110
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
Percentage of Shares
Beneficially Owned
Number of -------------------------
Shares Beneficially Prior to After
Name and Address Owned the Offering the Offering
---------------- ------------------- ------------ ------------
<S> <C> <C> <C>
Named Executive Officers
and Directors
Philip J. Monego, Sr.(3)... 493,930 3.1%
Bruce Davis(4)............. 350,000 2.2%
Geoffrey Rhoads(5)......... 1,508,560 9.4%
J. Scott Carr(6)........... 174,167 1.1%
Brian J. Grossi(7)......... 1,775,098 11.1%
John Taysom(8)............. 1,798,601 11.3%
All executive officers and
directors as a group (6
persons)(9)............... 6,100,356 36.8%
</TABLE>
- --------
* Less than 1%.
(1) Represents 1,398,601 shares held by Reuters, Ltd. and 400,000 shares held
by Reuters Holdings Switzerland, S.A., an affiliate of Reuters, Ltd.
(2) Represents 1,509,062 shares held by AVI Capital, L.P., 208,651 shares held
by Associated Venture Investors III, L.P., 42,904 shares held by AVI
Partners Growth Fund II, L.P. and 14,481 shares held by AVI Silicon Valley
Partners, L.P., entities affiliated with AVI Capital L.P.
(3) Includes options for 180,000 shares of common stock exercisable within 60
days of September 20, 1999.
(4) Includes options for 270,000 shares exercisable within 60 days of September
20, 1999 and 10,000 shares owned by Gary and Kimberly Davis, 10,000 shares
owned by Joseph and Barbara Davis, 10,000 shares owned by Thomas and Donna
Davis, 10,000 shares owned by George and Candace Richard, 10,000 shares
owned by John and Halene Richard, 10,000 shares owned by Robert Bradford,
Jr. and Grace Richard, 10,000 shares owned by Robert Bradford III and Darcy
Richard and 10,000 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.
(5) Includes 26,000 shares owned by Amanda Rhoads Trust, 26,000 shares owned by
Hudson Rhoads Trust, 2,100 shares owned by Craig and Laura Mikkelson,
20,420 shares owned by Barbara K. Rhoads, 1,700 shares owned by Bryan
Gurrie Rhoads, 1,900 shares owned by Cynthia Brooke Rhoads, 89,480 shares
owned by Gurrie and Alice Rhoads, 200 shares owned by Nicole Rhoads--
Trustee for the Children of Geoffrey and Nicole Rhoads, 26,000 shares owned
by Trevor Rhoads Trust, 1,500 shares owned by Mittie Hellmich, 1,500 shares
owned by Taylor James Pierce and 1,500 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.
(6) Represents options for 174,167 shares of common stock exercisable within 60
days of September 20, 1999.
(7) 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.
(8) Represents shares held by Reuters Group. Mr. Taysom disclaims beneficial
ownership of these shares.
(9) Includes options for 624,167 shares of common stock exercisable within 60
days of September 20, 1999.
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DESCRIPTION OF CAPITAL STOCK
Following the closing of this offering, our authorized capital stock will
consist of 60,000,000 shares of common stock and 10,000,000 shares of
undesignated preferred stock. The following description of our capital stock
does not purport to be complete and 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 September 20, 1999, there were 4,796,939 shares of common stock
outstanding that were held of record by approximately 94 shareholders. Based on
the shares outstanding as of September 20, 1999, there will be 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 such 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 September 20, 1999, there were 9,040,573 shares of preferred stock
outstanding and held of record by 24 stockholders. In connection with the
consummation 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 consummation of this offering, we will be authorized to issue
10,000,000 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.
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Registration Rights of Certain Holders
After this offering, and assuming we comply with other requirements, the
holders of approximately 11,169,573 shares of common stock will have the right
to cause us to register their 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 such 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 certain 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
61
<PAGE>
. 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.
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
such succeeding annual meeting, directors elected to succeed those
directors whose terms are expiring at such 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 such 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 such
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,
62
<PAGE>
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.
. Allow us to issue up to 10,000,000 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, such 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, such
provisions could have the effect of discouraging others from making tender
offers for our shares that could result from actual or rumored takeover
attempts. Such provision 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 . Its
address is , and its telephone number is ( ) -
.
63
<PAGE>
SHARES ELIGIBLE FOR FUTURE SALE
Excluding the shares of common stock offered hereby (which will
be freely tradable) and assuming no exercise of the underwriters' over-
allotment option, as of the effective date of the registration statement, there
will be 15,966,512 shares of common stock outstanding, of which are
"restricted" shares under the Securities Act. of the restricted shares and
shares underlying options are subject to lock-up agreements with the
underwriters pursuant to which 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 15,966,512 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:
<TABLE>
<CAPTION>
Eligibility of Restricted Shares for Sale in Public Market
----------------------------------------------------------
<S> <C>
At effective date........................................................
90 days after effective date.............................................
180 days after effective date............................................
---
After 180 days post-effective date.......................................
===
</TABLE>
Approximately 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 certain volume and other resale restrictions pursuant to 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
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 pursuant to 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
pursuant to 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 pursuant to 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 180-day period after the date of this prospectus
without the prior written consent of the underwriters. See "Underwriting."
64
<PAGE>
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
9,850,000 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 June 30,
1999, options to purchase 3,443,175 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 pursuant to certain "lock-up"
agreements 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.
65
<PAGE>
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.
<TABLE>
<CAPTION>
Number
Of
Underwriters Shares
------------ ------
<S> <C>
BancBoston Robertson Stephens Inc...................................
Hambrecht & Quist LLC...............................................
U.S. Bancorp Piper Jaffray Inc. ....................................
----
Total.............................................................
====
</TABLE>
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 additional shares of common stock at the same price per
share as we will receive for the 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 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 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.
<TABLE>
<CAPTION>
Per Without With
Share Option Option
----- ------- ------
<S> <C> <C> <C>
Public offering price................................. $ $ $
Underwriting discounts and commissions................ $ $ $
Proceeds, before expenses, to us...................... $ $ $
</TABLE>
66
<PAGE>
The expenses of the offering are estimated at $ and are payable
entirely by us. BancBoston Robertson Stephens Inc. expects to deliver the
shares of common stock to purchasers on , 1999.
We estimate that expenses payable by us in connection with this offering,
other than the underwriting discounts and commissions referred to above, will
be approximately $ .
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.
67
<PAGE>
Stabilization. The representatives have advised us that, pursuant to
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 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 350,000 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 120,000 shares of our Series D-X preferred stock for
$2.50 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 120,000 shares of
common stock.
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.
68
<PAGE>
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the Commission 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. We have applied to have our
common stock quoted on the Nasdaq National Market. If our common stock is
approved for quotation on the Nasdaq National Market, you will be able to
inspect reports, proxy and information statements and other information
concerning us at the National Association of Securities Dealers, Inc. at 1735 K
Street, N.W., Washington, D.C. 20006.
69
<PAGE>
DIGIMARC CORPORATION
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
Page
----
<S> <C>
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
</TABLE>
F-1
<PAGE>
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.
/s/ KPMG LLP
Portland, Oregon
March 9, 1999
F-2
<PAGE>
DIGIMARC CORPORATION
BALANCE SHEETS
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
December 31,
----------------
1997 1998 June 30, 1999
------- ------- -----------------------
(unaudited) (unaudited)
(Pro Forma)
ASSETS
<S> <C> <C> <C> <C>
Current assets:
Cash and cash equivalents........... $ 5,638 $ 2,137 $ 6,169
Trade accounts receivable, net...... 102 298 1,556
Prepaid expenses and other current
assets............................. 81 98 403
------- ------- --------
Total current assets............... 5,821 2,533 8,128
Property and equipment, net.......... 251 329 439
Other assets, net.................... 96 116 56
------- ------- --------
Total assets....................... $ 6,168 $ 2,978 $ 8,623
======= ======= ========
<CAPTION>
LIABILITIES, REDEEMABLE PREFERRED
STOCK AND STOCKHOLDERS' EQUITY
(DEFICIT)
<S> <C> <C> <C> <C>
Current liabilities:
Short-term borrowings............... $ 400 $ 250 $ --
Accounts payable.................... 335 228 433
Current portion of capital lease
obligations........................ 79 124 163
Accrued payroll and related costs... 186 390 276
Deferred revenue.................... 190 345 344
Current portion of notes payable to
stockholders....................... -- -- 305
------- ------- --------
Total current liabilities.......... 1,190 1,337 1,521
Capital lease obligations, less
current portion..................... 111 171 178
Notes payable to stockholders, less
current portion..................... 284 298 --
Other long-term liabilities.......... 78 82 82
------- ------- --------
Total liabilities.................. 1,663 1,888 1,781
------- ------- --------
Convertible redeemable preferred
stock; 21,748,000 shares authorized;
5,863,573 shares issued and
outstanding at December 31, 1997 and
1998 and 8,395,573 shares
outstanding at June 30, 1999;
aggregate liquidation preference
$10,315 and $16,645 at December 31,
1998 and June 30, 1999, respectively
(unaudited); pro forma no shares
issued
and outstanding..................... 10,185 10,185 16,476 $ --
------- ------- -------- --------
Commitments and contingencies
Stockholders' equity (deficit):
Convertible preferred stock; 650,000
shares authorized; aggregate
liquidation preference $429:
Series A-1, $.001 par value; issued
and outstanding 325,000 shares at
December 31, 1997 and 1998 and
June 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 25,000,000 shares;
issued and outstanding 4,505,986
and 4,627,247 and 4,775,374 shares
at December 31, 1997 and 1998, and
June 30, 1999, respectively; pro
forma 15,624,947 shares issued and
outstanding........................ 2 2 2 13
Additional paid-in capital.......... 851 878 1,118 17,583
Deferred compensation............... -- -- (202) (202)
Accumulated deficit................. (6,533) (9,975) (10,552) (10,552)
------- ------- -------- --------
Total stockholders' equity
(deficit)......................... (5,680) (9,095) (9,634) $ 6,842
------- ------- -------- ========
Total liabilities, convertible
redeemable preferred stock and
stockholders' equity (deficit).... $ 6,168 $ 2,978 $ 8,623
======= ======= ========
</TABLE>
See accompanying notes to financial statements.
F-3
<PAGE>
DIGIMARC CORPORATION
STATEMENTS OF OPERATIONS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Six Months Ended
Years Ended December 31, June 30,
------------------------------- --------------------
1996 1997 1998 1998 1999
--------- --------- --------- --------- ---------
(unaudited)
<S> <C> <C> <C> <C> <C>
Revenue:
License and
subscription......... $ 236 $ 161 $ 484 $ 282 $ 116
Service............... -- 25 500 125 1,939
--------- --------- --------- --------- ---------
Total revenue....... 236 186 984 407 2,055
--------- --------- --------- --------- ---------
Cost of revenue:
License and
subscription......... 7 126 114 62 57
Service............... -- -- 1,466 467 878
--------- --------- --------- --------- ---------
Total cost of
revenue............ 7 126 1,580 529 935
--------- --------- --------- --------- ---------
Operating expenses:
Sales and marketing... 376 1,330 825 498 394
Research and
development.......... 690 1,387 658 415 247
General and
administrative....... 834 1,282 1,407 606 1,028
--------- --------- --------- --------- ---------
Total operating
expenses........... 1,900 3,999 2,890 1,519 1,669
--------- --------- --------- --------- ---------
Operating loss...... (1,671) (3,939) (3,486) (1,641) (549)
Other income (expense):
Interest income....... 68 76 189 118 25
Interest expense...... (71) (86) (119) (61) (54)
Other................. 96 (30) (26) (25) 1
--------- --------- --------- --------- ---------
Loss before
provision for
income taxes....... (1,578) (3,979) (3,442) (1,609) (577)
Provision for income
taxes.................. -- -- -- -- --
--------- --------- --------- --------- ---------
Net loss............ $ (1,578) $ (3,979) $ (3,442) $ (1,609) $ (577)
========= ========= ========= ========= =========
Net loss per share--
basic and diluted...... $ (0.35) $ (0.94) $ (0.75) $ (0.35) $ (0.12)
========= ========= ========= ========= =========
Weighted average shares
used in computing net
loss per share--basic
and diluted............ 4,453,038 4,240,955 4,576,884 4,564,061 4,657,874
========= ========= ========= ========= =========
</TABLE>
See accompanying notes to financial statements.
F-4
<PAGE>
DIGIMARC CORPORATION
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
(In thousands, except share and per share data)
<TABLE>
<CAPTION>
Convertible
preferred stock Common stock Additional Total
----------------- ----------------- paid-in Deferred Accumulated stockholders'
Shares Amount Shares Amount capital compensation deficit deficit
--------- ------- --------- ------ ---------- ------------ ----------- -------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31,
1995................... -- $ -- 4,094,728 $ 2 $ 182 $ -- $ (874) $ (690)
Issuance of common stock
through conversion of
note payable........... -- -- 544,000 -- 41 -- -- 41
Repurchase and
cancellation of
common stock previously
issued................. -- -- (576,680) -- -- -- (102) (102)
Issuance of common stock
in exchange for
services............... -- -- 72,738 -- 5 -- -- 5
Issuance of Series A-1
preferred stock, net... 325,000 -- -- -- 439 -- -- 439
Net loss................ -- -- -- -- -- -- (1,578) (1,578)
--------- ------ --------- --- ------ ----- -------- -------
BALANCE AT DECEMBER 31,
1996................... 325,000 -- 4,134,786 2 667 -- (2,554) (1,885)
Exercise of stock
options................ -- -- 125,200 -- 13 -- 13
Repurchase and
cancellation of
common stock previously
issued................. -- -- (112,000) -- (8) -- -- (8)
Common stock issued for
the acquisition of a
business............... -- -- 358,000 -- 179 -- -- 179
Net loss................ -- -- -- -- -- -- (3,979) (3,979)
--------- ------ --------- --- ------ ----- -------- -------
BALANCE AT DECEMBER 31,
1997................... 325,000 -- 4,505,986 2 851 -- (6,533) (5,680)
Stock issued............ -- -- 54,289 -- 13 -- -- 13
Exercise of stock
options................ -- -- 66,972 -- 14 -- -- 14
Net loss................ -- -- -- -- -- -- (3,442) (3,442)
--------- ------ --------- --- ------ ----- -------- -------
BALANCE AT DECEMBER 31,
1998................... 325,000 -- 4,627,247 2 878 -- (9,975) (9,095)
Exercise of stock
options (unaudited).... -- -- 148,127 -- 38 -- -- 38
Deferred compensation
related to
stock options
(unaudited)............ -- -- -- -- 202 (202) -- --
Net loss (unaudited).... -- -- -- -- -- -- (577) (577)
--------- ------ --------- --- ------ ----- -------- -------
BALANCE AT JUNE 30, 1999
(unaudited)............ 325,000 $ -- 4,775,374 $ 2 $1,118 $(202) $(10,552) $(9,634)
========= ====== ========= === ====== ===== ======== =======
</TABLE>
See accompanying notes to financial statements.
F-5
<PAGE>
DIGIMARC CORPORATION
STATEMENTS OF CASH FLOWS
(in thousands, except share and per share data)
<TABLE>
<CAPTION>
Years Ended December Six Months
31, Ended June 30,
------------------------- ----------------
1996 1997 1998 1998 1999
------- ------- ------- ------- -------
(unaudited)
<S> <C> <C> <C> <C> <C>
Cash flows from operating
activities:
Net loss........................ $(1,578) $(3,979) $(3,442) $(1,609) $ (577)
Adjustments to reconcile net
loss to net cash used in
operating activities:
Depreciation and amortization.. 23 100 178 78 121
Amortization of discount on
note payable.................. 19 13 14 7 7
Asset impairment............... -- 453 -- -- --
Non-cash expenses.............. 15 27 20 14 --
Gain on forgiveness of debt.... (96) (33) -- -- --
Changes in assets and
liabilities:
Trade accounts receivable...... -- (102) (196) (27) (1,258)
Prepaid expenses and other
assets........................ (54) (36) (33) (41) (278)
Accounts payable............... 118 43 (107) (40) 205
Accrued payroll and related
costs......................... 32 199 204 (65) (114)
Deferred revenue............... (26) 173 152 407 (1)
------- ------- ------- ------- -------
Net cash used in operating
activities................... (1,547) (3,142) (3,210) (1,276) (1,895)
------- ------- ------- ------- -------
Cash flows from investing
activities:
Purchase of property and
equipment...................... (165) (23) (8) (9) (82)
Purchases of patents............ -- -- (50) (40) --
Sale of tradename............... -- -- -- -- 10
Acquisition of a business....... -- (417) -- -- --
------- ------- ------- ------- -------
Net cash used in investing
activities................... (165) (440) (58) (49) (72)
------- ------- ------- ------- -------
Cash flows from financing
activities:
Proceeds (repayment) of short-
term borrowings................ -- 400 (150) -- (250)
Net proceeds from issuance of
preferred stock................ 4,510 5,744 -- (3) 6,329
Net proceeds from issuance of
common stock................... -- 13 14 7 --
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) (42) (80)
------- ------- ------- ------- -------
Net cash provided by (used in)
financing activities......... 4,779 6,107 (233) (38) 5,999
------- ------- ------- ------- -------
Net (decrease) increase in cash
and cash equivalents............ 3,067 2,525 (3,501) (1,363) 4,032
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 $ 4,275 $ 6,169
======= ======= ======= ======= =======
Supplemental disclosure of cash
flow information:
Cash paid for interest.......... $ 3 $ 38 $ 125 $ 47 $ 54
======= ======= ======= ======= =======
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 64 202 115 127
Common stock issued for the
acquisition of a business...... -- 179 -- -- --
======= ======= ======= ======= =======
</TABLE>
See accompanying notes to financial statements.
F-6
<PAGE>
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 six-month periods ended
June 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 of
$17 and $2 at December 31, 1997 and 1998, respectively.
(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 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-7
<PAGE>
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(f) Funded Research and Development
Revenues recognized under vendor and end-user funding arrangements totaled
$500 for the year ended December 31, 1998 and $1,872 for the six months ended
June 30, 1999 (unaudited). Direct costs allocated to the arrangement were
$1,466 for the year ended December 31, 1998 and $878 for the six months ended
June 30, 1999 (unaudited). 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 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 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.
F-8
<PAGE>
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
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 obligations or customer
acceptance rights exist.
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.
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.
(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
F-9
<PAGE>
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
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 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 360,521, 1,281,714, and
2,654,852 are antidilutive in a net loss year and, therefore, are not included
in 1996, 1997 and 1998 diluted net loss per share, respectively.
F-10
<PAGE>
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(2) Acquisition of a Business
In July 1997, the Company acquired substantially all of the assets of
NetRights, LLC (NetRights) for approximately $417 and 358,000 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 acquisition has been accounted for as a purchase. The purchase accounting
allocations resulted in capitalization of purchased technology and goodwill 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 goodwill and purchased technology were considered impaired and
written off. Results of operations are only included from the date of
acquisition forward.
(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.
(4) Property and Equipment
<TABLE>
<CAPTION>
December
31,
-----------
1997 1998
---- -----
<S> <C> <C>
Furniture and fixtures.......................................... $ 38 $ 51
Office equipment................................................ 311 504
Leasehold improvements.......................................... -- 4
---- -----
349 559
Less accumulated depreciation and amortization.................. (98) (230)
---- -----
$251 $ 329
==== =====
</TABLE>
(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.
F-11
<PAGE>
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
Future minimum lease payments under non-cancelable operating leases and the
present value of future minimum capital lease payments are as follows:
<TABLE>
<CAPTION>
Capital Operating
Year ending December 31: leases leases
------------------------ ------- ---------
<S> <C> <C>
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
====
</TABLE>
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
<TABLE>
<CAPTION>
December 31,
-------------
1997 1998
------ ------
<S> <C> <C>
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
====== ======
</TABLE>
(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.
F-12
<PAGE>
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(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:
<TABLE>
<CAPTION>
December 31,
--------------- June 30,
1997 1998 1999
------- ------- -----------
(unaudited)
<S> <C> <C> <C>
Series B-1, $.001 par value; issued and
outstanding 1,804,000 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 4,059,573 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 2,532,000 shares at June 30, 1999;
liquidation preference $6,330: (unaudited).... -- -- 6,291
------- ------- -------
Total convertible redeemable preferred stock... $10,185 $10,185 $16,476
======= ======= =======
</TABLE>
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.
(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 pursuant to that registration statement.
F-13
<PAGE>
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
(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 $.125 per share for
Series A-1 and A-N, $.25 per share for Series B-1 and B-N and $.143 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 $1.25 for Series A-1 and A-N
(Series A), $2.50 for Series B-1 and B-N (Series B) and $1.43 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 larger than the Series A preferred stock preference. The conversion
price for Series A-1, Series B-1 and Series C-1 is $.625, $1.25 and $1.43,
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
F-14
<PAGE>
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
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 $5, 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 8,317,573 shares
of its common stock pursuant to the conversion privileges of preferred stock.
(c) Stock Incentive Plan
The Company has a Stock Incentive Plan (the Plan). Pursuant to 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 3,600,000 shares of its common stock for issuance under the Plan.
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:
<TABLE>
<CAPTION>
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
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%
</TABLE>
F-15
<PAGE>
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
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
$.109, $.154 and $.180 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:
<TABLE>
<CAPTION>
Years Ended December 31,
----------------------------
1996 1997 1998
-------- -------- --------
<S> <C> <C> <C>
Net loss....................................... $ (1,578) $(3,979) $(3,442)
Pro forma net loss............................. (1,613) (4,053) (3,552)
Net loss per share............................. (.35) (.94) (.75)
Pro forma net loss per share................... (.36) (.96) (.78)
</TABLE>
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.
Transactions involving the Plan are summarized as follows:
<TABLE>
<CAPTION>
Weighted
average
Number of exercise
shares price
--------- --------
<S> <C> <C>
Options outstanding,
December 31, 1995....................................... 294,000 $.075
Granted.................................................. 1,053,100 .16
Exercised................................................ -- --
Canceled................................................. (192,000) .075
--------- -----
Options outstanding,
December 31, 1996....................................... 1,155,100 .15
Granted.................................................. 833,800 .25
Exercised................................................ (125,200) .11
Canceled................................................. (39,300) .25
--------- -----
Options outstanding,
December 31, 1997....................................... 1,824,400 .20
Granted.................................................. 1,293,600 .25
Exercised................................................ (66,972) .25
Canceled................................................. (441,428) .25
--------- -----
Options outstanding,
December 31, 1998....................................... 2,609,600 .21
Granted (unaudited)...................................... 1,098,000 .72
Exercised (unaudited).................................... (148,127) .25
Canceled (unaudited)..................................... (116,298) .19
--------- -----
Options outstanding, June 30, 1999 (unaudited)........... 3,443,175 $.37
========= =====
</TABLE>
F-16
<PAGE>
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
At December 31, 1998, the range of exercise prices and the weighted average
remaining contractual life of outstanding options were $.075-$.25 and nine
years, respectively.
At December 31, 1997 and 1998, options to purchase 449,337 and 772,274 shares
of common stock, respectively, were exercisable. The weighted average exercise
price of those options was $.13 and $.15 at December 31, 1997 and 1998,
respectively, and 366,228 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.
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:
<TABLE>
<CAPTION>
Years Ended
December 31,
------------------
1996 1997 1998
---- ---- ----
<S> <C> <C> <C>
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...................................... -- % -- % -- %
=== === ===
</TABLE>
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:
<TABLE>
<CAPTION>
1997 1998
------- -------
<S> <C> <C>
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)................... $ -- $ --
======= =======
</TABLE>
F-17
<PAGE>
DIGIMARC CORPORATION
NOTES TO FINANCIAL STATEMENTS--(Continued)
(In thousands, except share and per share data)
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 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
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.
(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.
(b) Major Customers
Two customers represented approximately 78% and 30% of total net revenues for
the years ended December 31, 1996 and 1997. One customer represented
approximately 51% of total net revenues for the year ended December 31, 1998.
One customer represented approximately 91% of total revenues for the six months
ended June 30, 1999 (unaudited).
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 June 30, 1999 (unaudited).
F-18
<PAGE>
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 2,800,000 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 2,532,000 shares of Series D-1 stock outstanding at June 30,
1999.
On August 26, 1999, the Company issued 320,000 shares of Series D-X
convertible redeemable preferred stock at $2.50 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 5.6 million shares.
F-19
<PAGE>
[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."]
<PAGE>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
[THE DIGIMARC CORPORATION LOGO AND WEB ADDRESS.]
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>
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:
<TABLE>
<CAPTION>
Amount*
-------
<S> <C>
Securities and Exchange Commission Filing Fee........................ $9,730
NASD Filing Fee...................................................... 4,000
Nasdaq National Market Listing Fee................................... **
Accounting Fees and Expenses......................................... **
Blue Sky Fees and Expenses........................................... **
Legal Fees and Expenses.............................................. **
Transfer Agent and Registrar Fees and Expenses....................... **
Printing Expenses.................................................... **
Miscellaneous Expenses............................................... **
------
Total............................................................ $ **
======
</TABLE>
- --------
* All amounts are estimates except the SEC filing fee, the NASD filing fee and
the Nasdaq National Market listing fee.
** To be filed by amendment.
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 August 25, 1999, the Registrant granted
5,002,500 shares of restricted common stock and options to purchase shares
of common stock at prices ranging from $0.075 to $1.25 to employees,
directors and consultants pursuant to its 1995 Stock Incentive Plan.
II-1
<PAGE>
2. In May 1996, the Registrant issued an aggregate of 72,738 shares of
its common stock to Alliance Consulting Group, Inc., Hugh Mackworth and
Clay Davidson in exchange for services rendered.
3. In June 1996, the Registrant issued and sold an aggregate of 325,000
shares of its Series A-1 preferred stock to a total of 10 investors for an
aggregate purchase price of $428,428.
4. In July 1996, the Registrant issued and sold an aggregate of 1,804,000
shares of its Series B-1 preferred stock to a total of seven investors for
an aggregate purchase price of $4,510,000.
5. In July 1997, the Registrant issued an aggregate of 358,000 shares of
its common stock in connection with its acquisition of certain assets of
NetRights, LLC.
6. In December 1997, the Registrant issued and sold an aggregate of
4,059,573 shares of its Series C-1 preferred stock to a total of 16
investors for an aggregate purchase price of $5,805,189.39.
7. In December 1997, the Registrant issued an aggregate of 27,140 shares
of its common stock to each of Sandra Kinsler and Daniel Romano in exchange
for the release of certain claims against the Registrant.
8. In June 1999, the Registrant issued and sold an aggregate of 2,532,000
shares of its Series D preferred stock to a total of 14 investors for an
aggregate purchase price of $6,330,000.
9. In August 1999, the Registrant issued and sold an aggregate of 320,000
shares of its Series D-X preferred stock to a total of 3 investors for an
aggregate purchase price of $800,000.
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 or Regulation D promulgated thereunder 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.
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.
II-2
<PAGE>
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
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Registrant
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in Lake Oswego, State of Oregon, on the
21st day of September 1999.
Digimarc Corporation
/s/ Bruce Davis
By: _________________________________
Bruce Davis
President and Chief Executive
Officer
POWER OF ATTORNEY
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears
below constitutes and appoints Bruce Davis and E.K. Ranjit, and each of them,
as his true and lawful attorneys-in-fact and agents, with full power of
substitution and resubstitution, for him and in his name, place and stead, in
any and all capacities, to sign any and all amendments (including post-
effective amendments) to this Registration Statement, and to sign any
registration statement for the same offering covered by the Registration
Statement that is to be effective upon filing pursuant to Rule 462(b)
promulgated under the Securities Act of 1933 and to file the same, with all
exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith
and about the premises, as fully to all intents and purposes as he might or
could do in person, hereby ratifying and confirming all that said attorneys-in-
fact and agents, or any of them, or their or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this Registration
Statement has been signed by the following persons in the capacities and on the
dates indicated:
<TABLE>
<CAPTION>
Signature Title Date
--------- ----- ----
<S> <C> <C>
/s/ Bruce Davis President, Chief Executive Officer September 21, 1999
______________________________________ and Director (Principal Executive
(Bruce Davis) Officer)
/s/ E. K. Ranjit Chief Financial Officer (Principal September 21, 1999
______________________________________ Accounting Officer)
(E. K. Ranjit)
/s/ Geoffrey Rhoads Chief Technology Officer, Secretary September 21, 1999
______________________________________ and Director
(Geoffrey Rhoads)
/s/ Philip Monego, Sr. Chairman of the Board of Directors September 20, 1999
______________________________________
(Philip Monego, Sr.)
/s/ Brian J. Grossi Director September 21, 1999
______________________________________
(Brian J. Grossi)
/s/ John Taysom Director September 21, 1999
______________________________________
(John Taysom)
</TABLE>
II-4
<PAGE>
Exhibit Index
<TABLE>
<CAPTION>
Exhibit
Number Document
------- --------
<C> <S>
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
,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
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. Reference is made to Page II-4
27.1 Financial Data Schedule
</TABLE>
- --------
* To be filed by amendment
<PAGE>
EXHIBIT 10.2
DIGIMARC CORPORATION
1995 STOCK INCENTIVE PLAN, AS AMENDED
1. Purposes and Scope of the Plan.
1.1 Purposes of Plan. The purposes of this Stock Incentive Plan are to
attract and retain the best available personnel for positions of substantial
responsibility, to provide additional incentive to the Employees and Consultants
of the Company and to promote the success of the Company's business.
1.2 Scope of Plan. Options granted hereunder may be either "incentive
stock options," as defined in Section 422 of the Internal Revenue Code of 1986,
as amended, or "nonqualified stock options," at the discretion of the Board and
as reflected in the terms of the written option agreement. In addition, shares
of the Company's Common Stock may be Sold hereunder independent of any Option
grant.
2. Definitions. As used herein, the following definitions shall apply:
2.1 "Board" shall mean the Committee, if one has been appointed, or the
Board of Directors of the Company, if no Committee is appointed.
2.2 "Code" shall mean the Internal Revenue Code of 1986, as amended.
2.3 "Common Stock" shall mean the Common Stock of the Company.
2.4 "Company" shall mean Digimarc Corporation, an Oregon corporation.
2.5 "Committee" shall mean the Committee appointed by the Board of
Directors in accordance with Section of the Plan, if one is appointed.
2.6 "Consultant" shall mean any person who is engaged by the Company or
any Subsidiary to render consulting services and is compensated for such
consulting services and any director of the Company whether compensated for such
services or not.
2.7 "Continuous Status as an Employee or Consultant" shall mean the
absence of any interruption or termination of service as an Employee or
Consultant. Continuous Status as an Employee or Consultant shall not be
considered interrupted in the case of sick leave, military leave, or any other
leave of absence approved by the Board; provided that such leave is for a period
of not more than ninety days or reemployment upon the expiration of such leave
is guaranteed by contract or statute.
2.8 "Employee" shall mean any person, including officers and directors,
employed by the Company or any Parent or Subsidiary of the Company. The payment
of a director's fee by the Company shall not be sufficient to constitute
"employment" by the Company.
2.9 "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
2.10 "Incentive Stock Option" shall mean an Option intended to qualify as
an incentive stock option within the meaning of Section 422 of the Code.
<PAGE>
2.11 "Nonqualified Stock Option" shall mean an Option not intended to
qualify as an incentive stock option within the meaning of Section 422 of the
Code.
2.12 "Option" shall mean a stock option granted pursuant to the Plan.
2.13 "Optioned Stock" shall mean the Common Stock subject to an Option.
2.14 "Optionee" shall mean an Employee or Consultant who receives an
Option.
2.15 "Parent" shall mean a "parent corporation," whether now or hereafter
existing, as defined in Section 424 of the Code.
2.16 "Plan" shall mean this Stock Incentive Plan.
2.17 "Sale" or "Sold" shall include, with respect to the sale of Shares
under the Plan, the sale of Shares for consideration in the form of cash or
notes, as well as a grant of Shares without consideration, except past or future
services.
2.18 "Share" shall mean a share of the Common Stock, as adjusted in
accordance with Section of the Plan.
2.19 "Subsidiary" shall mean a "subsidiary corporation," whether now or
hereafter existing, as defined in Section 424 of the Code.
3. Stock Subject to the Plan.
3.1 Size of Plan Pool. Subject to the provisions of Section of the Plan,
the maximum aggregate number of Shares which may be optioned and/or Sold under
the Plan is 5,600,000 shares of Common Stock. The Shares may be authorized, but
unissued, or reacquired Common Stock.
3.2 Return of Unexercised Option Shares. If an Option should expire or
become unexercisable for any reason without having been exercised in full, the
unpurchased Shares which were subject thereto shall, unless the Plan shall have
been terminated, become available for future Option grants and/or Sales under
the Plan.
3.3 Return of Unvested or Restricted Shares. If Shares Sold under the
Plan or purchased upon the exercise of an Option are repurchased by the Company
pursuant to restrictions applicable to such Shares, the number of Shares
repurchased shall, unless the Plan shall have been terminated, become available
for future Option grants and/or Sales under the Plan.
3.4 Reservation of Shares. The Company, during the term of this Plan,
will at all times reserve and keep available such number of Shares as shall be
sufficient to satisfy the requirements of the Plan. 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.
4. Administration of the Plan.
2
<PAGE>
4.1 Procedure. The Plan shall be administered by the Board of Directors
of the Company.
4.1.1 Committee. Subject to subparagraph, the Board of Directors
may appoint a Committee consisting of not less than two (2) members of the
Board of Directors to administer the Plan on behalf of the Board of
Directors, subject to such terms and conditions as the Board of Directors
may prescribe. Once appointed, the Committee shall continue to serve until
otherwise directed by the Board of Directors. From time to time the Board
of Directors may increase the size of the Committee and appoint additional
members thereof, remove members (with or without cause) and appoint new
members in substitution therefor, fill vacancies however caused, or remove
all members of the Committee and thereafter directly administer the Plan.
4.1.2 Conflicts. Members of the Board who are either eligible for
Options and/or Sales or have been granted Options or Sold Shares may vote
on any matters affecting the administration of the Plan or the grant of any
Options or Sale of any Shares pursuant to the Plan, except that no such
member shall act upon the granting of an Option or Sale of Shares to
himself, but any such member may be counted in determining the existence of
a quorum at any meeting of the Board during which action is taken with
respect to the granting of Options or Sale of Shares to him.
4.1.3 Grants Following Registration, to Officers or Directors, Only
by Disinterested Persons. Notwithstanding the foregoing subparagraph, if
and in any event the Company registers any class of any equity security
pursuant to Section 12 of the Securities Exchange Act of 1934, from the
effective date of such registration until six (6) months after the
termination of such registration, any grants of Options to officers or
directors shall only be made by the Board if each member of the Board is a
disinterested person, or if every member of the Board is not a
disinterested person, by a committee of two or more directors, each of whom
is a disinterested person. A "disinterested person" is a director who has
not, during the one year period prior to service as an administrator of the
Plan, or during such service, been granted or awarded equity securities
pursuant to the Plan or any other plan of the Company or any of its
affiliates, with these qualifications:
(a) Formula Plans don't disqualify. Participation in a
formula plan meeting the conditions in paragraph (c)(2)(ii) of SEC
Rule 16b-3 shall not disqualify a director from being a disinterested
person.
(b) Ongoing Acquisition Plans Don't Disqualify. Participation
in an ongoing securities acquisition plan meeting the conditions in
paragraph (d)(2)(i) of SEC Rule 16b-3 shall not disqualify a director
from being a disinterested person.
(c) Annual Retainers in Stock Don't Disqualify. An election
to receive an annual retainer fee in either cash or an equivalent
amount of securities, or partly in cash and partly in securities,
shall not disqualify a director from being a disinterested person.
3
<PAGE>
(d) Disqualification applies Only To Plan In Which Director
Participates. Participation in a plan shall not disqualify a director
from being a disinterested person for the purpose of administering
another plan that does not permit participation by directors.
4.2 Powers of the Board. Subject to the provisions of the Plan, the Board
shall have the authority, in its discretion, to do any or all of these things:
4.2.1 Grant Options. To grant Incentive Stock Options in accordance
with Section 422 of the Code, or Nonqualified Stock Options.
4.2.2 Authorize Sales. To authorize Sales of Shares of Common Stock
hereunder.
4.2.3 Determine Fair Market Value. To determine, upon review of
relevant information and in accordance with Section of the Plan, the fair
market value of the Common Stock.
4.2.4 Determine Exercise or Purchase Price. To determine the
exercise/purchase price per Share of Options to be granted or Shares to be
Sold, which exercise/purchase price shall be determined in accordance with
Section of the Plan.
4.2.5 Decide Who Gets Options. To determine the Employees or
Consultants to whom, and the time or times at which, Options shall be
granted and the number of Shares to be represented by each Option.
4.2.6 Decide Who Gets Stock. To determine the Employees or
Consultants to whom, and the time or times at which, Shares shall be Sold
and the number of Shares to be Sold.
4.2.7 Interpret Plan. To interpret the Plan.
4.2.8 Make Rules About Plan. To prescribe, amend and rescind rules
and regulations relating to the Plan.
4.2.9 Set and Amend Option Terms. To determine the terms and
provisions of each Option granted (which need not be identical) and, with
the consent of the holder thereof, modify or amend each Option.
4.2.10 Set and Amend Sale Terms. To determine the terms and
provisions of each Sale of Shares (which need not be identical) and, with
the consent of the purchaser thereof, modify or amend each Sale.
4.2.11 Change Exercise Dates of Options. To accelerate or defer (with
the consent of the Optionee) the exercise date of any Option.
4
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4.2.12 Change Vesting Restrictions. To accelerate or defer (with the
consent of the Optionee or purchaser of Shares) the vesting restrictions
applicable to Shares Sold under the Plan or pursuant to Options granted
under the Plan.
4.2.13 Authorize Signers. To authorize any person to execute on
behalf of the Company any instrument required to effectuate the grant of an
Option or Sale of Shares previously granted or authorized by the Board.
4.2.14 Establish Shareholder Agreement Restrictions. To determine the
restrictions on transfer, vesting restrictions, repurchase rights, or other
restrictions applicable to Shares issued under the Plan.
4.2.15 Cancel and Reissue Options (subject to Price Restrictions). To
effect, at any time and from time to time, with the consent of the affected
Optionees, the cancellation of any or all outstanding Options under the
Plan and to grant in substitution therefor new Options under the Plan
covering the same or different numbers of Shares, but having an Option
price per Share consistent with the provisions of Section of this Plan as
of the date of the new Option grant.
4.2.16 Make Case by Case Exceptions at Termination of Employment. To
establish, on a case-by-case basis, different terms and conditions
pertaining to exercise or vesting rights upon termination of employment,
whether at the time of an Option grant or Sale of Shares, or thereafter.
4.2.17 Do Other Things Needed or Advisable. To make all other
determinations deemed necessary or advisable for the administration of the
Plan.
4.3 Effect of Board's Decision. All decisions, determinations and
interpretations of the Board shall be final and binding on all Optionees and any
other holders of any Options granted under the Plan or Shares Sold under the
Plan.
5. Eligibility.
5.1 Persons Eligible. Options may be granted and/or Shares Sold only to
Employees and Consultants. Incentive Stock Options may be granted only to
Employees. An Employee or Consultant who has been granted an Option or Sold
Shares may, if he is otherwise eligible, be granted an additional Option or
Options or Sold additional Shares.
5.2 ISO Limitation. No Incentive Stock Option may be granted to an
Employee which, when aggregated with all other Incentive Stock Options granted
to such Employee by the Company or any Parent or Subsidiary, would result in
Shares having an aggregate fair market value (determined for each Share as of
the date of grant of the Option covering such Share) in excess of $100,000
becoming first available for purchase upon exercise of one or more Incentive
Stock Options during any calendar year.
5.3 Section Limitations. Section of the Plan shall apply only to an Incentive
Stock Option evidenced by an "Incentive Stock Option Agreement" which sets forth
the intention of the Company and the Optionee that such Option shall qualify as
an Incentive Stock Option.
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Section of the Plan shall not apply to any Option evidenced by a "Nonqualified
Stock Option Agreement" which sets forth the intention of the Company and the
Optionee that such Option shall be a Nonqualified Stock Option.
5.4 No Right to Continued Employment. The Plan shall not confer upon any
Optionee any right with respect to continuation of employment or consulting
relationship with the Company, nor shall it interfere in any way with his right
or the Company's right to terminate his employment or consulting relationship at
any time.
6. Term of Plan. The Plan shall become effective upon the earlier to occur of
its adoption by the Board of Directors or its approval by the stockholders of
the Company as described in Section of the Plan. It shall continue in effect for
a term of ten (10) years, unless sooner terminated under Section of the Plan.
7. Term of Options.
7.1 Term of ISOs to 10% or Less Holders. The term of each Incentive Stock
Option shall be ten (10) years from the date of grant thereof or such shorter
term as may be provided in the Stock Option Agreement.
7.2 Term of Nonqualified Options to 10% or Less Holders. The term of each
Nonqualified Stock Option shall be ten (10) years and one (1) day from the date
of grant thereof or such other term as may be provided in the Stock Option
Agreement.
7.3 Terms for Holders of More than 10%. In the case of an Option granted
to an Optionee 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, (a) if the Option is an Incentive Stock
Option, the term of the Option shall be five (5) years from the date of grant
thereof or such shorter time as may be provided in the Stock Option Agreement,
or (b) if the Option is a Nonqualified Stock Option, the term of the Option
shall be five (5) years and one (1) day from the date of grant thereof or such
other term as may be provided in the Stock Option Agreement.
8. Exercise/Purchase Price and Consideration.
8.1 Exercise/Purchase Price. The per-Share exercise/purchase price for the
Shares to be issued pursuant to exercise of an Option or a Sale (other than a
Sale which is a grant for which no purchase price is payable) shall be such
price as is determined by the Board, but shall be subject to the requirements of
this Section.
8.2 ISO Price.
8.2.1 ISO Price to Holders of more than 10%. In the case of an
Incentive Stock Option 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 no less
than one hundred ten percent (110%) of the fair market value per Share on
the date of the grant.
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8.2.2 ISO Price to Holders of 10% or Less. In the case of an
Incentive Stock Option granted to any other Employee, the per Share
exercise price shall be no less than one hundred percent (100%) of the fair
market value per Share on the date of grant.
8.3 Nonqualified Option and Sale Price.
8.3.1 Nonqualified Price to Holders of More than 10%. In the case of
a Nonqualified Stock Option or Sale granted or Sold to a person who, at the
time of the grant of such Option or authorization of such Sale, 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/purchase price shall be no less than one hundred ten percent
(110%) of the fair market value per Share on the date of the grant or
authorization of Sale, unless otherwise expressly determined by the Board
of Directors.
8.3.2 Nonqualified Price to Holders of 10% or Less. In the case of a
Nonqualified Stock Option or Sale granted or Sold to any other person, the
per Share exercise/purchase price shall be no less than eighty-five percent
(85%) of the fair market value per Share on the date of grant or
authorization of Sale, unless otherwise expressly determined by the Board
of Directors.
8.3.3 Requirement for Below Market Options and Sales. Any
determination to sell stock at less than fair market value on the date of
the grant or authorization of Sale shall be accompanied by an express
finding by the Board of Directors specifying that the sale is in the best
interest of the Company, and specifying both the fair market value and the
grant or sale price of the stock.
8.4 Sales After Registration. In the case of an Option granted or Sale
authorized on or after the effective date of registration of any class of equity
security of the Company pursuant to Section 12 of the Exchange Act and prior to
six (6) months after the termination of such registration, the per Share
exercise/purchase price shall be no less than one hundred percent (100%) of the
fair market value per Share on the date of grant or authorization of Sale.
8.5 Fair Market Value.The fair market value per Share shall be determined
by the Board in its discretion; provided, however, that where there is a public
market for the Common Stock, the fair market value per Share shall be the
closing price of the Common Stock for the date of grant or authorization of
Sale, as reported in The Wall Street Journal (or, if not so reported, as
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otherwise reported by the National Association of Securities Dealers Automated
Quotation (NASDAQ) System) or, in the event the Common Stock is listed on a
stock exchange, the fair market value per Share shall be the closing price on
such exchange on the date of grant of the Option or authorization of Sale, as
reported in The Wall Street Journal.
-----------------------
8.6 Consideration. The consideration to be paid for the Shares to be
issued upon exercise of an Option or pursuant to a Sale, including the method of
payment, shall be determined by the Board and may consist in whole or part of:
8.6.1 Cash, Check, Note. Cash, Check, or Promissory Note.
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8.6.2 Transferred or Withheld Shares. Transfer to the Company of
Shares having a Fair Market Value at the time of such exercise equal to the
Option exercise price, or delivery of instructions to the Company to
withhold from the Shares that would otherwise be issued on the exercise
that number of Shares having a Fair Market Value at the time of such
exercise equal to the Option exercise price. If the Fair Market Value of
the number of whole Shares transferred or the number of whole Shares
surrendered is less than the total exercise price of the Option, the
shortfall must be made up in cash or by check.
9. Time of Granting Options. The date of grant of an Option shall, for all
purposes, be the date on which the Board makes the determination granting such
Option. Notice of the determination shall be given to each Employee or
Consultant to whom an Option is so granted within a reasonable time after the
date of such grant.
10. Option Agreement. Options shall be evidenced by written option agreements
in such form as the Board shall approve.
11. Nontransferability of Options. An Option may not be sold, pledged,
assigned, hypothecated, transferred or disposed of in any manner other than by
will, or by the laws of descent and distribution, and may be exercised during
the lifetime of the Optionee only by the Optionee or, if incapacitated, by his
or her legal guardian or legal representative.
12. Exercise of Option.
12.1 When Exercisable. Any Option granted hereunder shall be exercisable
at such times and under such conditions as determined by the Board, including
performance criteria with respect to the Company and/or the Optionee, and as
shall be permissible under the terms of the Plan.
12.2 No Fractional Shares. An Option may not be exercised for a fraction
of a Share.
12.3 How Exercised. An Option 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 Option by the person entitled to exercise the Option and full
payment for the Shares with respect to which the Option is exercised has been
received by the Company. Full payment may, as authorized by the Board, consist
of any consideration and method of payment allowable under Section of the Plan.
12.3.1 Deposits for Withholding Taxes. Each Optionee who exercises
an Option shall, upon notification of the amount due (if any) and prior to
or concurrent with delivery of the certificate representing the Shares, pay
to the Company amounts necessary to satisfy applicable federal, state and
local tax withholding requirements.
12.3.2 Shareholder Agreements. An Optionee must also provide a duly
executed copy of any stock transfer agreement then in effect and determined
to be applicable by the Board.
12.4 No Shareholder Rights or Adjustments Until Issuance. Until the
issuance (as evidenced by the appropriate entry on the books of the Company or
of a duly authorized transfer
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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 the Optioned Stock, notwithstanding the exercise of the Option.
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
Section of the Plan.
12.5 Effect of Exercise on Plan Pool. Exercise of an Option in any manner
shall result in a decrease in the number of Shares which thereafter may be
available, both for purposes of the Plan and for sale under the Option, by the
number of Shares as to which the Option is exercised.
12.6 Termination of Status as an Employee or Consultant. If an Employee or
Consultant ceases to serve as an Employee or Consultant (as the case may be), he
may, but only within three (3) months (or such other period of time not
exceeding the limitations of Section above as is determined by the Board at the
time of grant of an Option or thereafter) after the date he ceases to be an
Employee or Consultant (as the case may be) of the Company, exercise his Option
to the extent that he was entitled to exercise it at the date of such
termination. To the extent that he was not entitled to exercise the Option at
the date of such termination, or if he does not exercise such Option (which he
was entitled to exercise) within the time specified herein, the Option shall
terminate.
12.7 Disability of Optionee. Notwithstanding the provisions of Section
above, in the event an Employee or Consultant is unable to continue his
employment or consulting relationship (as the case may be) with the Company as a
result of his total and permanent disability (as defined in Section 22(e)(3) of
the Code), he may, but only within twelve (12) months (or such other period of
time not exceeding the limitations of Section above as is determined by the
Board at the time of grant of an Option or thereafter) from the date of
termination, exercise his Option to the extent he was entitled to exercise it at
the date of such termination. To the extent that he was not entitled to exercise
the Option at the date of termination, or if he does not exercise such Option
(which he was entitled to exercise) within the time specified herein, the Option
shall terminate.
12.8 Death of Optionee. In the event of the death of an Optionee during
the term of the Option who is at the time of his death an Employee or Consultant
of the Company and who shall have been in Continuous Status as an Employee or
Consultant since the date of grant of the Option, the Option may be exercised,
at any time within twelve (12) months (or such other period of time not
exceeding the limitations of Section above as is determined by the Board at the
time of grant of an Option or thereafter) following the date of death, by the
Optionee's estate or by a person who acquired the right to exercise the Option
by bequest or inheritance, but only to the extent of the right to exercise as of
the date of death.
13. Adjustments Upon Changes in Capitalization or Merger.
13.1 Stock Splits and the Like. Subject to any required action by the
stockholders of the Company, the number of shares of Common Stock covered by
each outstanding Option and the number of shares of Common Stock which have been
authorized for issuance under the Plan but as to which no Options have yet been
granted or Sales made or which have been returned to the Plan upon cancellation
or expiration of an Option, as well as the price per share of Common
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Stock covered by each such outstanding Option, shall be proportionately adjusted
for 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, or any other increase or decrease in
the number of issued shares of Common Stock effected without receipt of
consideration by the Company; 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 Board,
whose determination in that respect shall be final, binding and conclusive.
Except as expressly provided herein, 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 thereof shall be made with respect to,
the number or price of shares of Common Stock subject to an Option.
13.2 Termination on Dissolution or Liquidation. In the event of the
proposed dissolution or liquidation of the Company, the Option will terminate
immediately prior to the consummation of such proposed action, unless otherwise
provided by the Board. The Board may, in the exercise of its sole discretion in
such instances, declare that any Option shall terminate as of a date fixed by
the Board and give each Optionee the right to exercise his Option as to all or
any part of the Optioned Stock, including Shares as to which the Option would
not otherwise be exercisable.
13.3 Substitution or Exercise on Sale or Merger. In the event of a
proposed sale of all or substantially all of the assets of the Company, or the
merger of the Company with or into another corporation, the Option shall be
assumed or an equivalent option shall be substituted by such successor
corporation or a parent or subsidiary of such successor corporation, unless the
Board determines, in the exercise of its sole discretion and in lieu of such
assumption or substitution, that the Optionee shall have the right to exercise
the Option as to all of the Optioned Stock, including Shares as to which the
Option would not otherwise be exercisable. If the Board makes an Option fully
exercisable in lieu of assumption or substitution in the event of a merger or
sale of assets, the Board shall notify the Optionee that the Option shall be
fully exercisable for a period of thirty (30) days from the date of such notice
or such shorter period as the Board may specify in the notice, and the Option
will terminate upon the expiration of such period.
14. Amendment and Termination of the Plan.
14.1 Amendment and Termination. The Board may amend or terminate the Plan
from time to time in such respects as the Board may deem advisable; provided,
however, that if required to qualify the Plan under Rule 16b-3 promulgated under
Section 16 of the Securities Exchange Act of 1934, as amended ("Rule 16b-3"), no
amendment shall be made more than once every six months that would change the
amount, price or timing of the option grants, other than to comport with changes
in the Code, or the rules and regulations promulgated thereunder; and provided,
further, that, if required to qualify the Plan under Rule 16b-3, no amendment
shall be made without the approval of the stockholders of the Company in the
manner described in Section of the Plan and within the times required by Section
422 of the Code (if any), if the amendment would:
14.1.1 Increase Shares. Increase the number of Shares subject to the
Plan, other than in connection with an adjustment under Section 13 of the
Plan;
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14.1.2 Change Class of Employee or Consultant Eligible. Make a
change in the designation of the class of Employees or Consultants eligible
to be granted Options; or
14.1.3 Increase Benefits After Registration. If the Company has a
class of equity security registered under Section 12 of the Exchange Act at
the time of such revision or amendment, cause any material increase in the
benefits accruing to participants under the Plan.
14.2 Stockholder Approval. If any amendment requiring stockholder approval
under Section of the Plan is made subsequent to the first registration of any
class of equity security by the Company under Section 12 of the Exchange Act,
such stockholder approval shall be solicited as described in Section of the
Plan.
14.3 Effect of Amendment or Termination. Any such amendment or termination
of the Plan shall not affect Options already granted, and such Options shall
remain in full force and effect as if this Plan had not been amended or
terminated, unless mutually agreed otherwise between the Optionee and the Board,
which agreement must be in writing and signed by the Optionee and the Company.
15. Conditions Upon Issuance of Shares.
15.1 General Compliance Requirement. Shares shall not be issued pursuant
to the exercise of an Option or a Sale unless the exercise of such Option or
consummation of the Sale and the issuance and delivery of such Shares pursuant
thereto shall comply with all relevant provisions of law, including, without
limitation, the Securities Act of 1933, as amended, applicable state securities
laws, the Exchange Act, the rules and regulations promulgated thereunder, and
the requirements of any stock exchange (including NASDAQ) upon which the Shares
may then be listed, and shall be further subject to the approval of counsel for
the Company with respect to such compliance.
15.2 Investment Intent Warranty. As a condition to the exercise of an
Option or a Sale, the Company may require the person exercising such Option or
to whom Shares are being Sold to represent and warrant at the time of any such
exercise or Sale 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 relevant provisions of law.
16. Stockholder Approval. Continuance of the Plan shall be subject to approval
by the stockholders of the Company within twelve months before or after the date
the Plan is adopted. If such stockholder approval is obtained at a duly held
stockholders' meeting, it may be obtained by the affirmative vote of the holders
of a majority of the outstanding shares of the Company, such holders being
present or represented and entitled to vote thereon. If and in the event that
the Company registers any class of any equity security pursuant to Section 12 of
the Exchange Act, the approval of such stockholders of the Company shall be
obtained as follows:
16.1 Solicitation. Approval shall be solicited substantially in accordance
with Section 14(a) of the Exchange Act and the rules and regulations promulgated
thereunder, or
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solicited after the Company has furnished in writing to the holders entitled to
vote substantially the same information concerning the Plan as that which would
be required by the rules and regulations in effect under Section 14(a) of the
Exchange Act at the time such information is furnished.
16.2 Time. Approval shall be obtained at or prior to the first annual
meeting of stockholders held subsequent to the first registration of any class
of equity securities of the Company under Section 12 of the Exchange Act.
16.3 If by Written Consent: Compliance with State Law. If such
stockholder approval is obtained by written consent, it must be obtained by the
written consent of stockholders of the Company in compliance with the
requirements of applicable state law.
17. Six Month Holding Period for Affiliates. If the Company registers any class
of any equity security pursuant to Section 12 of the Exchange Act, then from the
effective date of such registration until six (6) months after the termination
of such registration (the Public Period), these limits will apply to each
officer, director and beneficial owner of ten percent (10%) or more of any class
of equity securities of the Company (Affiliates.) During the Public Period, any
Affiliate shall hold Shares Sold hereunder at least six months from the date of
Sale. During the Public Period, at least six months must elapse from the date of
grant of an Option to an Affiliate to the date the Affiliate disposes of the
Shares acquired upon exercise of the Option, or (if the Option is disposed of
other than by exercise) to the date of disposition of the Option itself.
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EXHIBIT 10.5
CENTERPOINTE
OFFICE LEASE AGREEMENT
THIS OFFICE LEASE AGREEMENT made and entered into this 16th day of April,
1998, between PROPERTY RESERVE, INC., (hereinafter referred to as "Landlord")
whose address for purposes hereof is c/o Norris Beggs & Simpson, One
Centerpointe Drive, Suite 140, Lake Oswego, Oregon, 97035 and Digimarc,
(hereinafter referred to as "Tenant"), whose address for purposes hereof is One
Centerpointe Drive, Suite 570, Lake Oswego, OR 97035.
W I T N E S S E T H:
ARTICLE I
LEASED PREMISES
1.00 Leased Premises. Landlord hereby leases to Tenant and Tenant hereby
---------------
leases from Landlord, subject to the terms and conditions of this Lease
Agreement, those certain premises hereinafter described, and referred to as the
"Leased Premises" in the building known as ONE CENTERPOINTE, located at One
Centerpointe Drive, Lake Oswego, Oregon 97035, (hereinafter referred to as the
"Building"), together with the right in common with others to the use of all
common entrance ways, lobbies, elevators, ramps, drives, stairs, and other
similar access and service ways and common areas in and adjacent to the Building
of which said Leased Premises are a part. The Leased Premises are more
particularly described as approximately 1,662 square feet of rentable area
located on the fifth floor, Suite No. 570, of the Building, as reflected on the
floor plan of such Leased Premises attached hereto and made a part hereof as
Exhibit "A".
1.01 Rentable Area. The Leased Premises shall include the appurtenant
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right to use, in common with others, the lobbies, entrances, stairs, elevators,
restrooms and other public portions of the Building(s). Landlord retains the
right to make changes in the common areas as he solely deems to be in the best
interest of the building. All of the outside walls and windows of the Leased
Premises and any space in the Leased Premises used for shafts, stacks, pipe,
conduits, ducts, and electric or other utilities, sinks or other Building(s)
facilities, and the use thereof and access thereto through the Leased Premises
for the purposes of operation, maintenance and repair, are reserved to Landlord.
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ARTICLE II
LEASE TERM
2.00 Term. Subject to and upon the terms and conditions set forth herein,
----
or in any Exhibit or Addendum hereto, this Lease Agreement shall continue in
force for a term of sixteen (16) months, beginning on the 1st day of July 1999,
and ending on the 31st day of October, 2000. In the event that the Leased
Premises should not be ready for occupancy by said commencement date for any
reason this Lease Agreement shall not be void or voidable, and Landlord shall
not be liable or responsible for any claims, damages or liabilities in
connection therewith or by reason thereof, and the term of this Lease Agreement
shall be for the same term of months as set forth in the sentence above, but the
commencement date shall be effective only from the time that the Leased Premises
are prepared for occupancy by the Tenant in accordance with the terms and
conditions set forth herein. Should the term of this Lease Agreement commence on
a date other than that specified in this Paragraph, Landlord and Tenant will, at
the request of either, execute a declaration specifying the revised commencement
date of the term of this Lease Agreement. In such event rental under this Lease
Agreement shall not commence until said revised commencement date, and the
stated term in this Lease Agreement shall thereupon commence and the expiration
date shall be extended so as to give effect to the full stated term. Within five
(5) days after Tenant receives Landlord's notice that the Leased Premises are
ready for occupancy, Tenant shall inspect the Leased Premises, and except for
items specified by Tenant to Landlord within five (5) days of Tenant's
inspection, Tenant shall be deemed to have accepted the Leased Premises in their
then condition, as is. The existence of "punch list" (as that term is generally
used in the construction industry) items shall not postpone the commencement
date of this Lease Agreement.
ARTICLE III
RENTAL
3.00 Rental Payment. Tenant shall pay to Landlord in legal tender of the
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United States of America, without prior notice or demand and without any set off
or deduction whatsoever, at the office of the Landlord, or at such place or to
such agent as Landlord may from time to time designate in writing, rental
comprised of both base rental and additional rental as hereinafter described:
(a) Base Rental. Tenant hereby agrees to pay a base rental ("Base
-----------
Rental") of three thousand one hundred & eight-five Dollars ($3,185.00)
advance on the 1st day of each month during the term of this Lease
Agreement, and any extensions or renewals thereof. If the Tenant's
obligation to pay Base Rental does not commence on the first day of a
calendar month nor expire on the last day of the calendar month, the Base
Rental payable by Tenant on the first fractional month, or the last
fractional month, as the case may be, shall be prorated for said
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month.
Tenant shall, however, be required to pay the first month's rent upon
execution of this Lease Agreement.
(b) Base Rent Escalation. The Base Rental payable under this Lease
--------------------
Agreement shall be adjusted on each anniversary of the commencement date of
this Lease to reflect a ___ percent increase over the amount of monthly
rental payable by Tenant during the month preceding the anniversary date.
(c) Proportionate Share of Estimated Operating Expenses. Tenant shall
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also pay, as additional rent, all such other sums of money as shall become
due and payable by Tenant to Landlord under this Lease Agreement. Tenant's
proportionate share of any Estimated Operating Expense Adjustment, as
hereinafter defined, for each calendar year shall be due and payable in
advance in twelve (12) equal installments on the first day of each calendar
month of said calendar year during the initial term and any extensions or
renewals thereof. The Base Rental, together with Tenant's proportionate
share of Estimated Operating Expense Adjustments and any other additional
rental are collectively referred to as "Gross Rental".
(d) Late Charges. Tenant agrees that if any rental, either Base
------------
Rental, Tenant's proportionate share of any Estimated Operating Expenses or
other money due hereunder from Tenant to Landlord remains unpaid five (5)
calendar days after said amount is due, a late charge shall be paid to
Landlord by Tenant in the amount of the greater of five (5%) percent of
such delinquent payment or twenty-five ($25.00) dollars provided that in no
event shall such charge be greater than that permitted by state law. Tenant
agrees that such amount is a reasonable estimate of Landlord's collection
and administrative expenses.
3.01 Operating Expenses Adjustment. The following terms are defined as
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follows:
(a) "Base Year" shall mean the calendar year in which the term of this
Lease Agreement commences. The parties agree that for purposes of this
Lease Agreement, the Base Year is 1998.
(b) "Tenant's Proportionate Share" shall mean a percentage, whose
numerator is the number of square feet of Rentable Area in the Leased
Premises and whose denominator is the approximate number of square feet of
Rentable Area in the Building. The parties agree that for the purposes of
this Lease Agreement, such percentage is 1.80%.
(c) "Operating Expenses" shall mean all direct costs of operation and
maintenance of the Building as determined by standard accounting practices
and shall include but shall not be limited to the following costs: real
property taxes and assessments, rent taxes, gross receipt taxes, business
license taxes, fees for
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permits relating to the Building, water and sewer charges, insurance costs,
utilities, janitorial services, labor of Building attendants, Building
management including property management fees and salaries (whether
management services are provided by the Landlord or by an independent
management company), lighting maintenance, maintenance of elevators and
mechanical systems, supplies, materials, equipment, tools used in Building
maintenance, and upkeep of any landscaping and common areas, together with
capital costs that may be required by governmental authority. Such capital
cost shall be amortized in accordance with sound management accounting
principles. Operating Expenses shall not include depreciation on the
Building, leasing commissions, or expenditures for other capital
improvements.
Notwithstanding anything to the contrary contained herein, in the event the
Building is not fully occupied during any calendar year, appropriate
adjustments shall be made by Landlord to determine Operating Costs as
though the Building had been fully occupied in such calendar year, but in
no event shall Tenant ever be required to pay more than Tenant's share of
Operating Expenses.
3.02 Estimated Operating Expense Adjustment. If the Operating Expenses for
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any calendar year after the Base Year exceed the Operating Expenses paid or
incurred for the Base Year, the Tenant shall pay its Proportionate Share, as
defined above, of such excess (which excess is referred to as the "Operating
Expense Adjustment"), prorated with respect to years in which this Lease
Agreement is in effect for less than the entire calendar year. Commencing
January 1, of the first year following the Base Year and for each year
thereafter, Landlord shall estimate, in a reasonable manner, the amount by which
Operating Expenses for the subject year are anticipated to exceed the Operating
Expenses for the Base Year (said estimate being hereinafter referred to as the
"Estimated Operating Expense Adjustment"). Landlord shall compute Tenant's
Proportionate Share of such Estimated Operating Expense Adjustment and one-
twelfth of said Tenant's Proportionate Share shall be paid by Tenant as
additional rent in connection with the payment of each monthly Base Rental
payment. At the conclusion of each calendar year after the Base Year, Landlord
shall determine the Operating Expense Adjustment and give Tenant notice thereof.
If the Estimated Operating Expense Adjustment payments collected from Tenant are
insufficient to cover Tenant's Proportionate Share of the actual Operating
Expense Adjustment, Tenant shall within thirty (30) days after receipt of a
billing from Landlord, relative thereto pay such deficiency. If Tenant's said
payments shall be greater than the amount of the actual Operating Expense
Adjustment, Landlord shall at its option either refund the amount of such
overage to Tenant or apply the overage towards reducing Tenant's Proportionate
Share of the Operating Expense Adjustment for the next calendar year in which
the Lease Agreement is in effect.
If at the time that Landlord's determination of the actual Operating
Expense Adjustment is made, the term hereof has expired or otherwise terminated,
nonetheless, Tenant shall pay any said deficiency or Landlord shall refund any
such overage, as the case may be. The provisions of the foregoing sentence
shall survive the expiration or termination of this Lease Agreement.
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Landlord's failure to give Tenant notice of the actual Operating Expense
Adjustment within a reasonable period of time after the closing of any calendar
year for which an Operating Cost Adjustment is due under the provisions of this
Lease Agreement, shall not release Tenant from paying nor diminish Tenant's
obligation to pay such Adjustment.
3.03 Proration. If on January 1, of any calendar year this Lease
---------
Agreement has not been in effect for 12 months, then the Estimated Operating
Expense Adjustment and the actual Operating Expense Adjustment, which would
otherwise be payable by Tenant commencing on such January 1, shall be prorated
by reducing the Estimated Operating Expense Adjustment and the actual Operating
Expense Adjustment, as the case may be, in proportion to the part of the year
that this Lease Agreement was not in effect.
If the term of this Lease Agreement expires on other than the last day of a
calendar year, then the Tenant's Proportionate Share of the Estimated Operating
Expense Adjustment and actual Operating Expense Adjustment shall be prorated for
said year.
ARTICLE IV
SECURITY DEPOSIT
4.00 Security Deposit. Upon execution of this Lease Agreement, Tenant
----------------
shall deposit with Landlord the sum of ($3,185.00) which sum shall be held by
Landlord without payment of interest to Tenant, as security for Tenant's full
and faithful performance of every provision of this Lease Agreement. Landlord
may commingle the deposit with other funds of Landlord and may apply the deposit
to the cost of performing any obligation which Tenant fails to perform within
the time required by this Lease, but such application shall not be Landlord's
exclusive remedy for Tenant's default. If any portion of said deposit is applied
by Landlord, Tenant shall pay the sum necessary to replenish the deposit to its
original amount upon demand by Landlord.
ARTICLE V
USE OF THE PREMISES
5.00 Proposed Use. Tenant represents, covenants and warrants that the
------------
premises will be used lawfully for the following purposes and for no other
purposes: general office use. Tenant shall continuously operate within the
Leased Premises during the term of the Lease Agreement.
5.01 Prohibited Activities. Tenant shall not do or permit anything to be
---------------------
done in or about the Leased Premises nor bring or keep anything therein which
will in any way increase the existing rate of or affect any fire or other
insurance upon the Building or any
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of its contents, or cause cancellation of any insurance policy covering said
Building or any part thereof or any of its contents. Tenant shall not do or
permit anything to be done in or about the Leased Premises which will in any way
obstruct or interfere with the rights of other tenant or occupants of the
Building or injure or annoy them or use or allow the Leased Premises to be used
for any improper, immoral, unlawful or objectionable purpose, nor shall Tenant
cause, maintain or permit any nuisance in, on, or about the Premises. Tenant
shall not commit or suffer to be committed any waste in or upon the Leased
Premises.
Tenant shall not do or permit to be done in or about the Leased Premises,
any of the following: (a) any violation of any Federal, State or Municipal
Ordinance, or any regulation, ordinance, order or directive of a governmental
agency, as such statutes, ordinances, regulations, orders or directives that now
exist or may hereafter concern the use, safety, or environment of the Property;
(b) any violation of any Certificate of Occupancy covering or affecting the use
of the Property or any part thereof; (c) commit any public or private nuisance.
5.02 Use of Name of Building. Tenant shall not use the name of the
-----------------------
Building for any purpose other than as an address of the business to be
conducted by the Tenant.
5.03 Building Name. Landlord and its agents shall have the right to
-------------
change the name, number, or designation of the building without liability to
Tenant.
ARTICLE VI
UTILITIES AND SERVICES
Landlord shall furnish or cause to be furnished from the operating expenses
of the Building, except as otherwise provided, the following utilities and
services:
6.00 Utilities. To cause public utilities to furnish any electricity and
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water utilized in operating any and all facilities serving the Leased Premises
during the usual and reasonable business hours.
6.01 Services. To furnish Tenant during Tenant's occupancy of the Leased
--------
Premises:
(a) Hot and cold water at those points of supply provided for
general use of other tenants in the Building.
(b) Landlord normally furnishes these services to other tenants in
the Building and at such temperatures and in such amounts as are considered
by Landlord to be standard, but such service at times during weekdays at
other than normal business hours for the Building, on Saturday afternoons,
Sundays and Holidays will be furnished only upon request of Tenant, who
shall bear the entire cost thereof.
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(c) Routine maintenance, painting and electric lighting service for
all public areas and special service areas of the Building in the manner
and to the extent deemed by Landlord to be standard.
(d) Janitorial service on a five (5) day week basis during
reasonable evening hours; provided however, if Tenant's leasehold
improvements are not consistent in quality and building standard with
leasehold improvements, Tenant shall pay any additional cleaning costs
attributable thereto as additional rent, which payment shall be made by
Tenant upon being invoiced by Landlord therefor. Interior and exterior
windows shall be cleaned by Landlord.
(e) Electrical facilities to provide sufficient power for "writers,
personal computers, and other office machines of similar low electrical
consumption, but not including electricity required for large electronic
data processing equipment, special lighting in excess of building standard,
and any other item of electrical equipment which (singly) consumes more
than .5 kilowatts per hour at rated capacity or requires a voltage other
than one hundred twenty (120) volts single phase; and provided if the
installation of said electrical equipment requires additional air
conditioning capacity above that provided by the building standard system,
then the additional air conditioning installation and operating costs will
be the obligation of Tenant. Landlord shall have the right, at Landlord's
option, to install a separate meter to properly meter the actual expenses
incurred in the Leased Premises, and to pass those expenses on directly to
Tenant.
In the event Tenant desires any of the aforementioned services
in amounts in excess of those deemed by Landlord to be Building Standard
and in the event Landlord elects to provide such additional quantities,
Tenant shall pay Landlord as additional rent hereunder the cost of
providing such additional quantities.
(f) It is understood that Landlord does not warrant that any of the
services referred to above, or any other services which Landlord may
supply, will be free from interruption. Tenant acknowledges that any one or
more such services may be suspended or reduced by reason of accident or
repairs, alterations or improvements necessary to be made, by strikes or
accident or by any cause beyond the reasonable control of Landlord, or by
orders or regulations of any federal, state, county or municipal authority.
Any such interruption or suspension of services shall never be
deemed an eviction or disturbance to Tenant's use and possession of the
demised premises or any part thereof, or render Landlord liable to Tenant
for damages by abatement of rent or relieve Tenant of performance of
Tenant's obligation under this Lease Agreement. Landlord will use its best
reasonable efforts to restore service to full operation, and in the event
of a strike, to secure parties not involved in the labor dispute to provide
services for cleaning restrooms, waste removal, and janitorial services.
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6.02 Graphics. Landlord shall initially provide and install Tenant's name
--------
and suite numerals at the entrance door to the Leased Premises. All graphics of
Tenant, visible in or from public corridors or the exterior of the Leased
Premises, shall be subject to Landlord's written approval. Landlord will also
provide directory information strips identifying Tenant in the Building
Directory located on the main floor. All of the above shall be in accordance
with Building Standards. Any additional directory strips or work shall be at
Tenant's expense.
6.03 Improvements to be Made by Landlord. Landlord's obligation to
-----------------------------------
construct and install tenant improvements in the Leased Premises is set forth in
Exhibit "B" hereto (sometimes called "Landlord Improvement Items" herein). The
cost for installation of these improvements, space planning,construction
drawings and permits in excess of $ 0 * shall be paid by Tenant. The excess
shall be paid to Landlord by tenant prior to commencement of construction.
Failure by Tenant to pay same in full within five (5) business days after being
notified by Landlord shall constitute failure to pay rent when due and shall
constitute an event of default by Tenant hereunder, giving rise to all remedies
available to Landlord under this Lease Agreement and at law for nonpayment of
rent.
* Tenant shall take space on an "as is" basis.
6.04 Repairs by Landlord. That Landlord shall only be required to make
-------------------
such repairs or replacements as may be required for normal maintenance which
shall include the repairs to walls, floors, corridors, windows and other
structures and equipment within and serving the Leased Premises, and such
additional maintenance as may be necessary because of damages by persons other
than Tenant, its agents, employees, invitees or visitors; provided, however,
that if Landlord is required to make repairs or take other corrective action by
reason of Tenant's acts or omissions to act, Landlord shall have the right to
recover from Tenant the cost of the repairs or other work, plus interest as
provided for herein. The obligation of Landlord to maintain and repair the
Leased Premises shall be limited to Landlord Improvement Items. Any leasehold
improvements exceeding the Landlord Improvement Items set forth on Exhibit "B",
or any other special leasehold improvements will, at Tenant's written request,
be maintained by Landlord at Tenant's expense and shall be paid as additional
rent within five (5) days after Landlord invoices Tenant therefor.
6.05 Peaceful Enjoyment. That tenant shall, and may peacefully have, hold
------------------
and enjoy the Leased Premises, subject to the other provisions hereof, provided
that Tenant pays the rent herein recited and performs all of Tenant's covenants
and agreements herein contained, including the observance of all reasonable
rules and regulations made by the Landlord from time to time pursuant to this
Lease Agreement. It is understood and agreed that this covenant and any and
all other covenants of Landlord contained in this Lease Agreement shall be
binding upon Landlord and its successors only with respect to breaches occurring
during its and their respective ownerships of Landlord's interest hereunder.
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6.06 Parking. Tenant shall be entitled to use the parking areas of the
-------
Building in common with all other tenants of the Building. Tenant agrees not to
overburden the parking areas and to cooperate with Landlord and the other
tenants in the use of the parking areas. Landlord reserves the right to
determine whether the parking areas are overburdened, and if so, to allocate
parking spaces between Tenant and the other tenants of the Building. Landlord
shall designate handicapped loading, reserved and visitor parking stalls.
Additional rules and regulations governing parking restrictions shall be set
forth in the Rules and Regulations pertaining to this Office Building, as
hereinafter described.
6.07 Regulations. Landlord shall have the right to make and enforce Rules
-----------
and Regulations consistent with this Lease Agreement for the purposes of
regulating access, parking, use of the common areas and promoting safety, order,
cleanliness and good service to the Building and Project. Tenant will promptly
comply with all such Rules and Regulations. The parties acknowledge that the
Rules and Regulations attached hereto as Exhibit "C" are presently the Rules and
Regulations now in effect, however, Landlord, may at its option and at any time,
reasonably amend and modify said Rules and Regulations and Tenant shall be
obligated to comply with said Rules and Regulations.
ARTICLE VII
CONDITION OF THE PREMISES
7.00 Condition of Premises. Tenant's taking possession of the Leased
---------------------
Premises shall be deemed conclusive evidence that as of the date of taking
possession, the Leased Premises are in good order and satisfactory condition. No
promise of Landlord to alter or remodel, repair or improve the premises, the
Building or the Project and no representation, express or implied, respecting
any matter or thing relating to the Leased Premises, the Building or this Lease
Agreement, including, without limitation, the condition of the Leased Premises
has been made to Tenant by Landlord other than as may be contained herein or in
a separate Exhibit or Addendum signed by Landlord and Tenant.
ARTICLE VIII
TENANT COVENANTS AND REPRESENTATIONS
Tenant covenants and agrees with Landlord.
8.00 Obligations of Tenant Regarding Improvements. Tenant's obligations
--------------------------------------------
regarding tenant improvements to be installed in the Leased Premises are set
forth in Exhibit "D" hereto ("Tenant Installed Items"). Should Tenant fail to
perform its obligations set forth in Exhibit "D", Tenant shall pay to Landlord,
an additional rent (for
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the purpose of reimbursing Landlord for additional expenses which will be
incurred by Landlord because of its inability to proceed), one (1) day's Gross
Rental on the Leased Premises for each day that Landlord is delayed because of
Tenant's failure to perform its obligations. Such additional rent shall be paid
by Tenant of Landlord within thirty (30) days after receipt by Tenant of
Landlord's invoice therefor.
8.01 Repairs by Tenant. To repair or replace any damage or injury done to
-----------------
the Building, or any part thereof, caused by Tenant or Tenant's agents,
employees, invitees or visitors at Tenant's own cost and expense; provided
however, if Tenant fails to make such repairs or replacements promptly, Landlord
may, at its option, make such repairs or replacements, and Tenant shall repay
the cost thereof to the Landlord on demand. However, Tenant shall not suffer any
repair work to be performed by it or its agents without Landlord's written
consent.
8.02 Care of Leased Premises. Not to commit or allow any waste or damage
-----------------------
to be committed on any portion of the Leased Premises. No later than the last
day of the Term, Tenant will remove all Tenant's personal property and repair
all injury done by or in connection with installation or removal of said
property and surrender the Leased Premises (together with all keys, access cards
or entrance passes to the Leased Premises and/or the Building) in as good a
condition as they were at the beginning of the Term, reasonable wear and tear,
unrepaired casualty not caused by Tenant and condemnation excepted. All property
of Tenant remaining in the Leased Premises after expiration of the Term shall be
deemed conclusively abandoned and may be removed by Landlord, and Tenant shall
reimburse Landlord for the cost of removing the same, subject, however, to
Landlord's right to require Tenant to remove any improvements or additions made
to the Leased Premises by Tenant pursuant to the preceding Paragraph.
In doing any work related to the installation of Tenant's furnishings,
fixtures, or equipment in the Leased Premises, Tenant will use only contractors
or workmen consented to by Landlord in writing prior to the time such work is
commenced. Landlord may condition its consent upon its receipt of acceptable
lien waivers from such contractors or workmen. Tenant shall promptly remove any
lien or claim of lien for material or labor claimed against the Leased Premises
or Building, or both, by such contractors or workmen if such claim should arise,
and hereby indemnifies and holds Landlord harmless from and against any and all
loss, cost, damage, expense, or liabilities including, but not limited to,
attorney's fees, incurred by Landlord, as a result of or in any way related to
such claims or such liens. Tenant agrees that all personal property brought
into the Leased Premises by Tenant, its employees, licensees and invitees shall
be at the sole risk of Tenant, and Landlord shall not be liable for theft
thereof or of money deposited therein or for any damages thereto, such theft or
damage being the sole responsibility of Tenant.
Upon termination of this Lease Agreement, Landlord shall have the right to
re-enter and resume possession of the Leased Premises. Landlord's costs of
post-termination clean-up required to return the Leased Premises to as good a
condition as existed at time of occupancy by Tenant, shall be billed to and
promptly paid by Tenant.
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8.03 Alterations, Additions and Improvements. Not to permit the Leased
---------------------------------------
Premises to be used for any purpose other than that stated in the Lease
Agreement, or in the Building Rules and Regulations, or to make or allow to be
made any alterations or physical additions in or to the Leased Premises without
first obtaining the written consent of Landlord which consent shall not be
unreasonably withheld. Any and all such alterations, physical additions or
improvements, when made to the Leased Premises by Tenant shall at once become
the property of Landlord and shall be surrendered to Landlord upon the
termination of this Lease Agreement by lapse of time or otherwise; provided,
however, this clause shall not apply to movable equipment or furniture owned by
Tenant. Landlord reserves the right to require Tenant, at Tenant's expense, to
remove such alterations, physical additions or improvements upon termination of
this Lease Agreement and to repair any damage caused by such removal.
8.04 Tenant to Keep the Premises Lien Free. Tenant shall keep the Leased
-------------------------------------
Premises and Building free from any mechanic's liens arising from any work
performed, material furnished or obligations incurred by Tenant, provided that
Tenant may contest the imposition of mechanic's liens or the amount due in
connection therewith as long as such contest suspends the rights to foreclose
such lien and as long as forfeiture of the Building is not imminent. Tenant
shall keep Landlord informed of the statute of any contest and shall agree to
defend, indemnify and hold harmless Landlord from and against any such lien or
claim or action thereon, together with costs of suit and reasonable attorneys'
fees incurred by Landlord in connection with any such claim or action.
8.05 Legal Use and Violations of Insurance Coverage. Not to occupy or
----------------------------------------------
use, or permit any portion of the Leased Premises to be occupied or used for any
business or purpose which violates any deed restrictions or covenants,
conditions or restrictions encumbering the Building or which is unlawful,
disrespectful or deemed to be extra hazardous on account of fire, or permit
anything to be done which would in any way increase the rate of fire casualty or
other insurance coverage on the Building and/or its contents. Tenant agrees
specifically that no food, soft drink or other vending machine will be installed
within the Leased Premises without the prior written consent of Landlord.
8.06 Laws, Ordinances and Regulations. To comply with all laws,
--------------------------------
ordinances, orders, rules and regulations (state, federal, municipal, or
promulgated by other agencies or bodies having any jurisdiction thereof)
relating to the use, condition or occupancy of the Leased Premises.
8.07 Entry for Repairs and Inspection. To permit Landlord or its agents
--------------------------------
or representatives to enter into and upon any part of the Leased Premises at all
reasonable hours to inspect same, clean, make repairs, alterations or additions
thereto or others for any reasonable purpose as Landlord may deem necessary or
desirable, the Tenant shall not be entitled to any abatement or reduction of
Base Rental, Operating Expense Adjustment, or any other sums due under this
Lease Agreement by reason thereof.
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8.08 Nuisance. To conduct its business and control its agents, employees,
--------
invitees, and visitors in such manner as not to create any nuisance, or
interfere with, annoy or disturb any other tenant or Landlord in its operation
of the Building.
8.09 Subordination to Mortgages. That this Lease Agreement shall be
--------------------------
subject and subordinate to the lien of any mortgage or deed of trust given by
Landlord which may hereafter encumber the Building of which the Leased Premises
form a pan and to all renewals, modifications, consolidations, replacements and
extensions thereof. Landlord shall also have the right to assign its interest in
this Lease Agreement for security purposes to any mortgagee or trust dead
beneficiary. Tenant agrees that it will execute any appropriate instrument or
certificate that Landlord or any mortgagee or trust deed beneficiary may require
to effect this subordination, provided that such mortgagee or trust deed
beneficiary shall agree with Tenant not to disturb Tenant's right to possess the
Leased Premises so long as Tenant complies with all of the terms and conditions
of this Lease Agreement. Tenant further agrees that it will provide any such
mortgagee or trust deed beneficiary with any evidence required to show the
authority of Tenant to execute any such subordination instrument or certificate
and will, if so requested by any such mortgagee or trust deed beneficiary,
provide a copy of any notice Tenant gives or is required to give Landlord under
this Lease Agreement. In the event of the enforcement by the mortgagee or the
beneficiary under such mortgage or deed of trust of the remedies provided for by
law or by such mortgage or deed of trust, or in the event Landlord gives a deed-
in-lieu-of-foreclosure to such mortgage or trust deed beneficiary, Tenant will,
upon request of any person or party succeeding to the interest of Landlord as a
result of such enforcement or termination, automatically become the Tenant of
such successor in interest without change in the terms or other provisions of
this Lease Agreement; provided however, that such successor in interest shall
not be bound by (i) any payment of rent or additional rent for more than one
month in advance, (ii) any amendment or modification of this Lease Agreement
made without the written consent of such mortgagee or such beneficiary or such
successor in interest, or (iii) any defaults of Landlord under this Lease
Agreement which remain uncured at the time such successor in interest obtains
title to the Building. Tenant shall execute and deliver any instrument or
instruments confirming the Attornment herein provided for.
In the event of any act or omission by Landlord by reason of which Tenant
may claim the right to terminate this Lease Agreement or claim a defense or
offset against the Gross Rent due hereunder, Tenant agrees not to exercise any
such right until: (i) Tenant has notified the mortgagee or trust deed
beneficiary in writing of such act or omission by Landlord, and (ii) Tenant has
given the mortgagee or trust deed beneficiary a reasonable opportunity to cure
such act or omission, including the time as shall be reasonably required to
obtain possession of the property and to commence and carry to completion the
foreclosure of its mortgage or deed of trust.
8.10 Estoppel Certificate. Tenant shall at any time and from time to time
--------------------
upon not less than ten (10) days prior written notice from Landlord execute,
acknowledge and deliver to Landlord a statement in writing, (a) certifying that
this Lease Agreement is unmodified and in full force and effect (or, if
modified, stating the nature of such modification and certifying that this Lease
Agreement as so modified, is in full force and
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effect), and the date to which the rental and other charges are paid in advance,
and the amount of the Base Rental, Estimated Operating Expense Adjustment, and
the commencement and termination dates of the Lease Agreement, and (b)
acknowledging that there are not, to Tenant's knowledge, any uncured defaults on
the part of the Landlord hereunder, or specifying such defaults if any are
claimed. Any such statement may be relied upon by any prospective purchaser or
encumbrancer of all or any portion of the real property of which the Leased
Premises are a part. Tenant's failure to deliver such statement within such time
shall be conclusive upon Tenant that: (i) this Lease Agreement is in full force
and effect, without modification except as may be represented by Landlord; (ii)
there are no uncured defaults in Landlord's performance, and (iii) not more than
one month's Base Rental, or Estimated Operating Expense Adjustment installment,
has been paid in advance. If Landlord desires to finance or refinance the
Building, or any part thereof, Tenant agrees to deliver to any lender designated
by Landlord such financial statements of Tenant as may be reasonably required by
such financial institution. All such financial statements shall be received by
Landlord in confidence and shall be used only for the purpose herein set forth.
8.11 Tenant's Remedies. That Tenant specifically agrees to look solely
-----------------
to Landlord's interest in the Building for the recovery of any personal judgment
from Landlord; it being agreed that Landlord, or if Landlord is a partnership,
its partners whether general or limited, or if Landlord is a corporation, its
directors, officers, or shareholders, shall never be personally liable for any
such judgment.
8.12 Abandonment. Tenant shall not vacate nor abandon Leased Premises at
-----------
any time during the term of this Lease Agreement, nor permit the Leased Premises
to remain unoccupied for a period longer than fifteen (15) consecutive days
during the term of this Lease; and such abandonment is a default of the Lease
Agreement. If Tenant shall abandon, vacate or surrender the Leased Premises, or
be dispossessed by process of law, or otherwise, any personal property belonging
to Tenant and left on the Leased Premises shall, at the option of the Landlord,
be deemed abandoned and title thereto shall vest to Landlord.
8.13 Toxic Waste. Tenant does hereby represent to Landlord and does
-----------
hereby agree to certify to Landlord, at any time during the Lease Agreement term
or any extension thereof, is requested by Landlord, that to the best of Tenant's
knowledge, no toxic or hazardous substances have been deposited in or located on
the Leased Premises, or has any activity been undertaken in the Leased Premises
which would cause hazardous waste or pollutants.
Tenant, at its sole cost, shall comply with all laws relating to the
storage, use and disposal of hazardous toxic or radioactive matter. If Tenant
does store, use, or dispose of any Toxic Materials, Tenant shall inform Landlord
in, writing at least ten (10) days prior to their first appearance on the Leased
Premises and Tenant's failure to do so shall constitute default under the Lease
Agreement. Tenant shall be solely responsible for and shall defend, indemnify
and hold Landlord and Landlord's agents, harmless from and against all claims,
costs and liabilities, including attorney's fees and costs, arising out of or in
connection with the removal, clean-up, and restoration work and materials
necessary
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to return the Leased Premises and any other property of whatsoever nature to
their condition existing prior to the appearance of the Toxic Materials on the
Premises. Tenant's obligations hereunder shall survive the termination of this
Lease Agreement.
ARTICLE IX
TAX
9.00 Personal Property Tax. Tenant shall be liable for and shall pay not
---------------------
later than ten (10) days before delinquency, all taxes levied against any person
or property or trade fixture placed by Tenant, in or about the Leased Premises.
If any such taxes on Tenant's personal property or trade fixtures are levied
against Landlord or Landlord's property and if Landlord, after written notice to
Tenant, pays the same, which Landlord shall have the right to do regardless of
the validity of such levy, but only under proper protest if requested by Tenant,
or if the assessed value of Landlord's property is increased by the inclusion
therein of a value placed upon such personal property or trade fixture of Tenant
and if Landlord, after written notice to Tenant, pays the taxes based upon such
increased assessment, which Landlord shall have the right to do regardless of
the validity thereof, but only proper protest if requested by Tenant, Tenant
shall upon demand, as the case may be, repay to Landlord the taxes so levied
against Landlord, or the proportion of such taxes resulting from such increase
in the assessment; provided that, in any such event Tenant shall have the right,
in the name of the Landlord and with Landlord's full cooperation, at no cost to
Landlord, to bring suit in any court of competent jurisdiction to recover the
amount of any such taxes so paid under protest, any amounts so recovered to
belong to Tenant.
9.01 Sales Tax. In addition to the rental payments hereunder, all state,
---------
county and municipal transaction privilege (sales) taxes or similar excise taxes
imposed by any state, county, municipality or other governmental entity relative
to the rental activity under this Lease Agreement shall be reimbursed to the
Landlord by the Tenant.
ARTICLE X
DAMAGE OR DESTRUCTION
10.00 Damage to Premises. If all or a portion of the Leased Premises are
------------------
rendered untenable by damage by any casualty, the damage shall be repaired
forthwith by and at the expense of Landlord, provided such repairs can, in
Landlord's opinion, be made within one hundred twenty (120) days after notice to
Landlord of the occurrence of such damage, without the payment of overtime or
other premiums. Except as set forth herein below, until such repairs are
completed, the rent shall be abated in proportion to the part of the Leased
Premises which is unusable by Tenant in the conduct of business. There shall be
no abatement of rent by reason of any portion of the premises being
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unusable for a period equal to one day or less. The Landlord's opinion as to
completion date of any repair shall be given to Tenant in writing within 30 days
of the occurrence of the damage.
10.01 Election by Landlord to Repair. If such repairs cannot, in
------------------------------
Landlord's opinion, be made within such one hundred twenty (120) day period
Landlord may, at its option, make them within a reasonable time, which
reasonable time shall not exceed an additional sixty (60) days for a total
repair time of six months, and in such event this Lease Agreement shall continue
in effect and the rent shall be abated in the manner and to the extent provided
above. Landlord's election to make such repairs must be evidenced by written
notice to Tenant within thirty (30) days after notice to Landlord of the
occurrence of the significant damage advising Tenant whether or not Landlord
will make such repairs and the estimated time for completing the same. If
Landlord does not so elect to make such repairs which cannot be made within such
one hundred twenty (120) day period, then either party may by written notice to
the other cancel this Lease Agreement as of the date of the occurrence of such
damage. The Landlord will make all reasonable efforts to repair the damaged
premises.
10.02 Tenant's Election to Terminate. In case of any significant damage
------------------------------
or destruction mentioned in this Article which Landlord is required or
undertakes to repair as provided herein, Tenant may terminate this Lease
Agreement by written notice to Landlord any time prior to completion of the
required repairs if Landlord has not restored and rebuilt the premises
(exclusive of any property of Tenant or improvements installed by Tenant located
therein) to substantially the same condition as existed immediately prior to
such damage or destruction within one hundred twenty (120) days after notice to
Landlord of the occurrence of such damage or destruction, or such longer period
as Landlord has estimated pursuant to Section 10.01, plus such additional period
thereafter (not exceeding six months) as shall equal the aggregate period
Landlord may have been delayed in doing so by acts of God, adjustment of
insurance, labor trouble, governmental controls, unavailability of materials, or
any other cause beyond Landlord's reasonable control.
10.03 Inconvenience Damage. No damages, compensation or claim shall be
--------------------
payable by Landlord for inconvenience, loss of business or annoyance arising
from any repair or restoration of say portion of the Leased Premises or other
portion of the Building. Landlord shall use its best efforts to effect such
repair or restoration promptly and in such manner as to not unreasonably
interfere with Tenant's use and occupancy.
10.04 Total Destruction. A total destruction of the Building shall
-----------------
automatically terminate this Lease Agreement.
10.05 Tenant's Property. Landlord shall not be required to carry
-----------------
insurance of any kind on Tenant's personal property and, shall not be obligated
to repair any damage thereto or replace the same for any other reason.
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ARTICLE XI
EMINENT DOMAIN
11.00 Total Taking - Termination. If the whole of the Leased Premises or
--------------------------
so much thereof as to render the balance unusable by Tenant shall be taken by
any governmental authority under power of Eminent Domain, this Lease Agreement
shall automatically terminate as of the date of such condemnation, or as of the
date possession is taken by the condemning authority, whichever is earlier. No
award for any partial or entire taking shall be apportioned, and Tenant hereby
assigns to Landlord any award which may be made in such taking or condemnation,
together with any and all rights of Tenant now or hereafter arising in or to the
same or any part thereof; provided, however, that nothing contained herein shall
be deemed to give Landlord any interest in or to require Tenant to assign to
Landlord any award made to Tenant for the taking of personal property, equipment
and fixtures belonging to Tenant and/or for the interruption of or damage to
Tenant's business or for Tenant's unamortized cost of leasehold improvements
and/or the cost of moving and/or the lost value of Tenant's unexpired lease
term.
11.01 Partial Taking. In the event of a partial taking, which does not
--------------
result in a termination of this Lease Agreement, rent shall be abated in
proportion to the part of the Leased Premises so made unusable by said partial
taking.
11.02 Temporary Taking. No temporary taking of the Leased Premises and/or
----------------
of Tenant's rights therein or under this Lease Agreement shall terminate this
Lease Agreement or give Tenant any right to any abatement of rent hereunder; any
award made to Tenant by reason of any such temporary taking shall belong
entirely to Tenant and Landlord shall not be entitled to share therein. The
Tenant and Landlord will work together to cause the governmental agency
responsible for the taking to restore the Leased Premises and Building to its
original condition prior to the taking.
ARTICLE XII
DEFAULTS AND REMEDIES
12.00 Default by Tenant. If default shall be made in the payment of any
-----------------
sum to be paid by Tenant under this Lease Agreement, and default shall continue
for ten (10) days, or default shall be made in the performance of any of the
other covenants or conditions which Tenant is required to observe and to
perform, and such default shall continue for twenty (20) days, or if the
interest of Tenant under this Lease Agreement shall be levied, or under
execution or other legal process, or if any petition shall be filed by or
against Tenant to declare Tenant as bankrupt or to delay, reduce or modify
Tenant's debts or obligations, or if any petition shall be filed or other action
taken to reorganize or modify Tenant's capital structure if Tenant be a
corporation or other entity, or if Tenant be declared insolvent, or if any
assignment or Tenant's property shall be made for the benefit of creditors or if
a receiver or trustee is appointed for Tenant or its property, or if
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Tenant abandons the Leased Premises during the term of this Lease Agreement or
any extensions thereof, or if Tenant makes any transfer of any interest in the
Leased Premises not in accordance with the requirements of this Lease Agreement,
then Landlord may treat the occurrence of any one or more of the foregoing
events as a breach of this Lease Agreement (provided that no such execution,
legal process or petition filed against Tenant shall constitute a breach of this
Lease Agreement if Tenant shall vigorously contest the same by appropriate
proceedings and shall remove or vacate the same within sixty (60) days from the
date of the creation, service or filing) and thereupon at Landlord's option,
Landlord shall have one or more of the following described remedies in addition
to all other rights and remedies provided at law or in equity:
(a) Landlord may terminate this Lease Agreement and forthwith
repossess the Leased Premises and remove all persons or property therefrom,
and be entitled to recover forthwith as damages a sum of money equal to the
total of (i) the cost of recovering the Leased Premises (ii) the unpaid
rent owed thereon from due date it the rate of 18% per annum or the maximum
rate permitted by applicable law, whichever is lower, (iii) the balance of
the rent for the remainder of the term, less the amount of rent Tenant
proves could be reasonably mitigated by Landlord, and (iv) any other sum of
money and damages owed by Tenant to Landlord; or
(b) Landlord shall also be entitled to terminate Tenant's right of
possession and to repossess the Leased Premises, without demand or notice
of any kind to Tenant, by summary proceedings, any other applicable action
or proceeding, or otherwise, all without terminating this Lease Agreement,
in which event Landlord may, but shall be under no obligation to, relet the
same for the account of Tenant for such rent and upon such terms as shall
be satisfactory to Landlord. None of these actions will be deemed an
acceptance of surrender of the Leased Premises. For the purpose of such
reletting Landlord is authorized to decorate or to make any repairs,
changes, alterations or additions in or to the Leased Premises that may be
necessary or convenient, and (i) if Landlord shall fail or refuse to relet
the Leased Premises, or (ii) if the same are relet and a sufficient sum
shall not be realized from such reletting, after paying the unpaid Gross
Rental due hereunder earned or unpaid at the time of reletting, plus
interest thereon at the rate set forth herein, the cost of recovering
possession, and all of the costs and expenses of such decoration, repairs,
changes, alterations and additions, and the expense of such reletting, and
of the collection of the rent accruing therefrom to satisfy the rent
provided for in this Lease Agreement to be paid, then Tenant shall pay to
Landlord as damages a sum equal to the amount of the rental reserved in
this Lease Agreement for such period or periods, or if the Leased Premises
have been relet, Tenant shall satisfy and pay any such deficiency upon
demand therefor from time to time, and Tenant agrees that Landlord may file
suit to recover any sums falling due under the terms of this Article from
time to time on one or more occasions without Landlord being obligated to
wait until expiration of the term of this Lease Agreement and without
barring or affecting in any manner Landlord's right to bring a later action
or actions for further damages; nor shall such reletting be construed as an
election on the part of Landlord to terminate this Lease Agreement unless a
written notice of such intention be given
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to Tenant by Landlord. Notwithstanding any such reletting without
termination, Landlord may at any time thereafter elect to terminate this
Lease Agreement for such previous breach.
(c) Without prejudice to any other remedy for default, Landlord may
perform any obligation or make any payment required to cure a default by
Tenant. The cost of performance, including attorneys' fees and all
disbursements, shall immediately be paid by Tenant to Landlord upon demand
as additional rental.
(d) Any monies or rent (whether Base Rental, Estimated Operating
Expense Adjustment, actual Operating Expense Adjustment or additional rent)
due from Tenant to Landlord, which is not paid when due, shall bear
interest at the rate of 18% per annum or the maximum rate permitted by law,
whichever is lower, from the due date until paid.
12.01 Waiver. Failure of Landlord to declare any default immediately upon
------
occurrence thereof, or delay in taking any action in connection therewith, shall
not waive such default, but Landlord shall have the right to declare any such
default at any time thereafter.
ARTICLE XIII
INSURANCE
13.00 Landlord. Landlord shall, at all times during the term of this
--------
Lease Agreement, insure the building, including personal property owned by
Landlord, against all risks of direct physical loss or damage, for the actual
repair or replacement value thereof, without depreciation. Landlord shall not be
obligated to insure any furniture, equipment, machinery, goods, or supplies
owned by Tenant or which Tenant may bring or obtain upon the Leased Premises, or
any additional improvement which Tenant may construct thereon. If the annual
premiums charged Landlord for such insurance exceed the standard premium rates
because of the nature of Tenant's operations, then Tenant shall, upon receipt of
appropriate premium invoices, reimburse Landlord for such increases in premium.
13.01 Tenant. Tenant shall, at all times during the term of this Lease
------
Agreement, insure Tenant's personal property, including any additional
improvements made by Tenant, while in or upon the Leased Premises. In addition,
tenant shall maintain a policy or policies of Commercial General Liability
insurance with the premiums thereon fully paid on or before due date, issued by
an insurance company having at least an A.M. Best rating of B VII or better, and
licensed to do business within the state the project is located. The limits
afforded by said liability policy shall not be less than One Million Dollars
($1,000,000) combined single limit, for personal injury and property damage, in
respect to any one occurrence, $2,000,000 annual aggregate. Landlord shall be
added as an additional insured thereto and said policy shall not be canceled or
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substantially modified without first giving Landlord thirty (30) days written
notice thereof. In addition, Tenant shall maintain Workers Compensation as
required by statute. Tenant shall furnish, subject to Landlord's request and
approval, a certificate of insurance evidencing the Commercial General Liability
and Workers Compensation coverages referred to herein.
ARTICLE XIV
RELOCATION
14.00 Relocation. At any time after the execution of this Lease
----------
Agreement, Landlord may relocate for the Leased Premises, other Premises in the
Building ("New Premises") in which event the new Premises shall be deemed to be
the Leased Premises for all purposes hereunder provided:
If the size of the Premises is less than Four Thousand (4,000) rentable
square feet, Landlord reserves the right to relocate Tenant during the Term of
this Lease Agreement or any renewal thereof, to similar or higher quality office
space within the Building. If Landlord exercises this right to relocate Tenant,
then any and all costs incident to said relocation shall be the responsibility
of Landlord, said costs to be determined prior to relocation of Tenant.
ARTICLE XV
HOLDING OVER
15.00 Holding Over. In the event of holding over by Tenant, after
------------
expiration or termination of this Lease Agreement without the written consent of
Landlord, Tenant shall pay to Landlord twice the Gross Rental which Tenant was
obligated to pay for the month immediately preceding the end of the term of this
Lease Agreement for each month or any part thereof of any such holdover period.
No holding over by Tenant after the termination of this Lease Agreement shall
operate to extend the lease term; in the event of any unauthorized holding over,
Tenant shall indemnify Landlord against all claims for damages by any other
tenant to whom Landlord may have leased all or any part of the Leased Premises
covered hereby effective upon the termination of this Lease Agreement. Any
holding over with the written consent of Landlord shall thereafter constitute
this Lease Agreement a lease from month to month.
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ARTICLE XVI
ATTORNEY'S FEES
16.00 Attorney's Fees. In the event either party places the enforcement
---------------
of this Lease Agreement, or say part thereof, or the collection of say rent due,
or to become due hereunder, or recovery of the possession of the Leased Premises
in the hand of an attorney, or files suit upon the same, the non-prevailing (or
defaulting) party shall pay the other party's reasonable attorney's fees and
court costs, in any proceeding, whether at trial, or appeal therefrom, or on any
petition for review.
ARTICLE XVII
ASSIGNMENT AND SUBLETTING
17.00 Assignment of Sublease. Tenant shall not, either voluntarily or by
----------------------
operation of law, assign, encumber, pledge or otherwise transfer or hypothecate
all or any part of Tenant's leasehold estate hereunder, or permit the Leased
Premises to be occupied by anyone other than Tenant or Tenant's employees or
sublet the Leased Premises or any portion thereof without Landlord's prior
written consent in any instance, which consent shall not be unreasonably
withheld, as set forth herein in Section.
In the event Tenant should desire to assign this Lease Agreement or sublet
the Leased Promises or any part thereof, Tenant shall give Landlord written
notice of such desire at least sixty (60) days in advance of the date on which
Tenant desires to make such assignment or sublease, which notice shall include
the name, address, evidence of financial capability, and other pertinent
information regarding the proposed assignee or sublessee. Landlord shall then
have a period of thirty (30) days following receipt of such notice within which
to notify Tenant in writing that Landlord elects (i) to terminate this Lease
Agreement as to the space so affected on the date so specified by Tenant in
which event Tenant will be relieved of all further obligations hereunder as to
such space, or (ii) to permit Tenant to assign or sublet such space, subject,
however, to subsequent written approval of the proposed assignee or sublessee by
Landlord, such consent not to be unreasonably withheld so long as the use of the
Leased Premises by such proposed assignee or sublessee would be similar to
Tenant's use of such premises, the proposed assignee or sublessee is of sound
financial condition as determined by Landlord and any rent or other
consideration to be paid by such proposed assignee or sublessee, which exceeds
the rent paid by Tenant for such space shall be paid to Landlord. If Landlord
should fail to notify Tenant in writing of such election within said thirty (30)
day period, Landlord shall be deemed to have elected option (ii) above, but
subsequent written approval by Landlord of the proposed assignee or sublessee
shall be required. No assignment or subletting by Tenant shall relieve Tenant
of any obligations under this Lease Agreement. If Tenant is a corporation,
partnership, trust or other legal fictional entity, the transfer of fifty
percent (50%) or more of the beneficial ownership of Tenant shall be deemed an
assignment of this Lease Agreement for purposes of this paragraph.
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Any attempted transfer by Tenant without the consent of Landlord, shall be null
and void and, at the option of Landlord, shall cause termination of this Lease
Agreement. The giving of consent by Landlord in one instance shall not preclude
the need for Tenant, and its successors and assigns, to obtain Landlord's
consent to further transfers.
In the event Tenant shall assign or sublet the Leased Premises, or request
the consent of Landlord to any assignment or subletting, or if Tenant shall
request consent of Landlord to any act Tenant proposes to do, as herein
provided, then Tenant shall pay Landlord's reasonable attorney's fees incurred
in connection therewith, such attorney's fees not to exceed $500.00 for each
request. Any assignment or subletting shall not relieve Tenant from
responsibility under the Lease, and Tenant shall therefore remain liable for the
faithful performance of the Lease in case of breach or default by assignee or
sublessee.
17.01 No Release of Liability. No consent by Landlord to any assignment
-----------------------
or subletting by Tenant shall relieve Tenant of any obligation to be performed
by the Tenant under this Lease Agreement, whether accruing before or after such
assignment or subletting unless granted by Landlord to Tenant in writing. The
consent by Landlord to any assignment or subletting shall not relieve Tenant
from the obligation to obtain Landlord's express written consent to any other
assignment or subletting. Any assignment or subletting which is not in
compliance with this Article shall be void, and at the option of Landlord, shall
constitute a material default by Tenant under this Lease Agreement.
17.02 Joint Liability. Each assignee or transferee other than Landlord,
---------------
shall assume, as provided in this section, all obligations of the Tenant under
this Lease Agreement which relates to all or a portion of the Leased Premises
assigned or sublet, as the case may be and shall be and remain liable jointly
and severally with Tenant for the payment of the rent, and for due performance
of all the terms, covenant, conditions and agreements herein contained on,
Tenant's part to be performed for the term of this Lease Agreement.
ARTICLE XVIII
HOLD HARMLESS AND NON-LIABILITY
18.00 Hold Harmless and Non-liability.
-------------------------------
(a) Tenant hereby indemnifies and holds Landlord harmless from and
against any injury, expense, damage liability or claim, imposed on Landlord
by any person whomsoever, whether due to damage to the Premises, claims for
injuries to the person or property of any other tenant of the Building, or
of any other person in or about the Building for any purpose whatsoever, or
administrative or criminal action by a governmental authority, whether such
injury, expense, damage, liability or claim results either directly or
indirectly from
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the act, omission, negligence, misconduct or breach of any provisions of
this Lease Agreement by Tenant, the agents, servants, or employees of
Tenant, or any other person entering upon the Leased Premises under express
or implied invitation or consent of Tenant. Tenant further agrees to
reimburse Landlord for any costs or expenses, including, but not limited
to, court costs and reasonable attorney's fees, which Landlord may incur in
investigating, handling or litigating any such claim or any action by a
governmental authority
(b) Tenant agrees to report in writing to Landlord any defective
condition in or about the Leased Premises known to Tenant, and further
agrees to attempt to contact Landlord by telephone immediately in such
instance.
ARTICLE XIX
WAIVER OF SUBROGATION
19.00 Waiver of Subrogation. Anything in this Lease Agreement to the
---------------------
contrary notwithstanding, to the extent of insurance coverage required to be
obtained under this Lease Agreement, Landlord and Tenant each hereby waives any
and all rights of recovery, claim, action or cause of action, against the
officers, directors, shareholders or employees, for any loss or damage that may
occur to the Leased Premises, or any improvements thereto, or said Building of
which the Leased Premises are a part, or any improvements thereof, or any
personal property of such party therein, by reason of fire, the elements, or any
other cause which is, or could have been insured against, regardless of cause or
origin, including negligence of the other party hereto, its agents, officers or
employees, and covenants that no insurer shall hold any right of subrogation
against such other party.
ARTICLE XX
GENERAL PROVISIONS
20.00 Severability. If any term or provision of this Lease Agreement, or
------------
the application thereof to any person or circumstances shall to any extent be
invalid or unenforceable, the remainder of this Lease Agreement, or the
application of such provision to persons or circumstances other than those as to
which it is invalid or unenforceable, shall not be affected thereby, and each
provision of this Lease Agreement shall be valid and shall be enforceable to the
extent permitted by law.
20.01 Notices. All notices, demands, consents and approvals, which may or
-------
are required to be given by either party to the other hereunder shall be in
writing and shall be deemed to have been fully given when personally delivered
or, if the notice is deposited in the United States mail, certified or
registered, return receipt requested, postage prepaid,
22
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and addressed to the party to be notified at the address for such party
specified in this Lease Agreement (with copies to Property Reserve, Inc., 10 E.
South Temple Street, Suite 400 Salt Lake City, Utah 84133 and Kirton, McConkie &
Poelman, 60 E. South Temple, 18th Floor, Salt Lake City, Utah 84111), then the
notice shall be deemed fully given on the earlier of (i) the date set forth on
the receipt or (ii) three (3) days after the notice is deposited in the mail.
Either party may change its address for notification as the party to be notified
may from time to time designate by at least fifteen (15) days written notice to
the notifying party. Tenant hereby appoints as its agent to receive the service
of all dispossessory or distraint proceedings and notices thereunder the person
in charge of or occupying the Leased Premises at the time, and, if no person
shall be in charge of or occupying the same, then such service may be made by
attaching the same on the main entrance of the Leased Premises.
20.02 No Joint Venture. This Lease Agreement shall not be deemed or
----------------
construed to create or establish any relationship of partnership or joint
venture or similar relationship or arrangement between Landlord and Tenant
hereunder.
20.03 Successors and Assigns. This Lease Agreement shall be binding upon
----------------------
and inure to the benefit of Landlord, its successors and assigns, and shall be
binding upon and inure to the benefit of Tenant, its successors, and, to the
extent assignment may be approved by Landlord hereunder, Tenant's assigns.
20.04 Choice of Law. All rights and remedies of Landlord under this Lease
-------------
Agreement shall be cumulative and none shall exclude any other rights or
remedies allowed by law. All of the terms hereof shall be construed and enforced
according to the laws of the State in which the Leased Premises are located.
20.05 Entire Agreement. This instrument along with any exhibits and
----------------
attachments or other documents affixed hereto or referred to herein, constitute
the entire and exclusive agreement between Landlord and Tenant relative to the
Leased Premises herein described, and this Agreement and said exhibits and
attachments and other documents may be altered and/or revoked only by an
instrument in writing signed by both Landlord and Tenant. Landlord and Tenant
hereby agree that all prior written and oral agreements, understandings and/or
practices relative to the leasing of the Leased Premises are merged in or
revoked by this Agreement.
20.06 Banker's Commission. Tenant represents and warrants to Landlord
-------------------
that Tenant has not entered into any agreements whereby Landlord would be
obligated to pay any broker's commissions or finder's fees in connection with
Tenant's execution of this Lease Agreement. Tenant agrees to indemnify Landlord
against, and to hold Landlord harmless from, all liabilities arising from any
such claim. Tenant does acknowledge the following as broker or agent for
Landlord who are due fees or commissions from Landlord: Norris, Beggs & Simpson
and Grubb & Ellis.
20.07 Force Majeure. Any prevention, delay or stoppage of work to be
-------------
performed by Landlord or Tenant which is due to strikes, labor disputes,
inability to obtain labor or materials, equipment or reasonable substitutes
therefor, acts of God,
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governmental restrictions or regulations or controls, judicial orders, enemy or
hostile government actions, civil commotion, fire or other casualties, or other
causes beyond the reasonable control of the party obligated to perform
hereunder, shall excuse performance of the work by that party for a period equal
to the duration of that prevention, delay or stoppage. Nothing in this Article
shall excuse or delay Tenant's obligation to pay rent or other charges under
this Lease Agreement, except as otherwise provided in this Lease Agreement.
20.08 Binding. Each individual executing this Lease on behalf of Tenant
-------
and Landlord, represents and warrants that he/she is duly authorized to execute
and deliver this Lease on behalf of the Tenant and Landlord, and that this Lease
is binding upon each in accordance with its terms.
This Lease Agreement shall not be considered binding until it has been
fully executed by the Landlord.
20.09 Lease Memorandum. Neither this Lease, nor any notice nor memorandum
----------------
regarding the terms hereof, shall be recorded by Tenant without the written
consent of the Landlord.
ARTICLE XXI
RIDER
21.00 Rider. Attached hereto as a Rider to this Lease Agreement are
-----
additional provisions which shall be determined to be a part of this Lease
Agreement. In the event there is a conflict between the body of the Lease
Agreement and the Rider, the language of the Rider shall prevail.
24
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IN WITNESS WHEREOF, the parties have executed this Lease Agreement the day
and year first above written.
LANDLORD: TENANT:
PROPERTY RESERVE, INC. DIGIMARC CORPORATION
By: /s/ Wayne Facer By: /s/ Kathy Brogdon
Its: President Its: V.P. Finance
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EXHIBIT 10.6
SUBLEASE
(Suite 500)
This Sublease is entered into this 23rd day of April, 1998, between
SOUTHERN PACIFIC FUNDING CORPORATION ("Sublessor") and DIGIMARC CORPORATION
("Sublessee").
Sublessor is the tenant under a Lease from Property Reservices, Inc.
("Landlord'), dated September 13, 1995 (the "Lease"), a copy of which is
attached hereto as Exhibit A. The Lease covers Suite 500 in the building
located at One Centerpointe Drive, Lake Oswego, Oregon.
Sublessee wishes to sublease from Sublessor all of the premises covered by
the Lease.
NOW, THEREFORE, Sublessor hereby subleases the premises described in the
attached Exhibit B (the "Premises"), an area of approximately 3,391 sq.ft., and
Sublessee agrees to sublease the Premises from Sublessor on the following terms:
1. Term. The term of this Sublease shall commence on May 2, 1998, and
shall continue through and including October 31, 2000.
2. Base Rent. Sublessee shall pay directly to Landlord base rent in the
sum of $5,655.27 per month of the first day of each month of the sublease term.
Base rent shall be escalated at the same time and in the same amount per square
foot as the base rent paid by Sublessor to the Landlord under any escalation
clause or expense pass-through clause of the Lease.
2.2 Additional Rent. Sublessee shall pay directly to Landlord all
additional rent required under the Lease, including without limitation any
Estimated Operating Expense Adjustments. Any refund of Estimated Operating
Expense Adjustment payments for calendar year 1998 shall be prorated between
Sublessor and Sublessee.
3. Sublease Consideration. Sublessee shall pay the sum of $5,655.27 as
sublease consideration. Sublessor may apply the sublease consideration to pay
the cost of performing any obligation which Sublessee fails to perform within
the time required by this Sublease, but such application by Sublessor shall not
be the exclusive remedy for Sublessee's default. If the sublease consideration
is applied by Sublessor, Sublessee shall on demand pay the sum necessary to
replenish the sublease consideration to its original amount. To the extent not
applied by Sublessor to cure defaults by Sublessee, the sublease consideration
shall be applied against the rent payable for the last month of the sublease
term. The sublease consideration shall not be refundable. This sublease does not
include an assignment by Sublessor to Sublessee of Sublessor's rights in the
security deposit required under the Lease.
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4. Obligations of Sublessee. Sublessee shall perform all of the
obligations of the tenant under the Lease as if Sublessee were the tenant under
the Lease and Sublessor was the landlord under the Lease. The terms of the Lease
are hereby expressly incorporated as part of this Sublease. In the event
Sublessee fails to comply with such terms, or the terms of this Sublease,
Sublessor shall be entitled to have all of the remedies granted to Landlord in
the Lease, together with any other rights Sublessor might otherwise have. All
provisions in the Lease dealing with indemnity and liability between Landlord
and the tenant under the Lease shall be applicable as between both Sublessor and
Sublessee and Landlord and Sublessee. Sublessee shall name both Sublessor and
Landlord and Landlord's managing agent under the Lease as named insureds in the
insurance policies it is required to obtain hereunder.
5. Representations of Sublessor. Sublessor represents and warrants that
the Lease is in good standing and that Sublessor has, to the best of its
knowledge, complied with all of its obligations thereunder through the date
hereof. Sublessor represents and warrants that there is currently no default
under the Lease and no factual situation that, but for the passage of time,
would become a default. Sublessor shall not be obligated to perform, nor does it
guarantee the performance of, Landlord's duties under the Lease. In the event of
any default of Landlord, Sublessee shall send any required notices to landlord
with a copy to Sublessor. Sublessee agrees that Sublessor's only obligation in
such event will be to join with Sublessee, at Sublessee's expense, in making
demand on Landlord to fulfill its obligations under the Lease. In no event shall
Sublessee be allowed any abatement or diminution of rent under this sublease
because of Landlord's failure to perform any of its obligations under the Lease,
unless Sublessor is likewise allowed an abatement or diminution of rent under
the Lease.
6. Condition of the Premises. Sublessor shall clean the carpeting and do
"spot" painting within the Premises as necessary so that the Premises are in
"like new" condition after the painting. In all other respects, the Premises are
leased as is, in the condition now existing, with no additional work to be
performed by Sublessor or Landlord.
7. Notices. With respect to notices between Sublessor and Sublessee, the
addresses for notice shall be the addresses state din this Sublease.
8. Waiver of Subrogation. Neither Sublessor, Sublessee nor the Landlord
under the Lease (nor Landlord's managing agent) shall have any claim against the
other for any loss or damage of a type which is coverable by fire and extended
coverage insurance, including water damage or sprinkler leakage, regardless of
negligence.
9. Renewal Option and right of First Refusal. Sublessee shall have no
right to exercise the renewal option provided in Section 3.02 of Addendum A to
the Lease nor the right of first refusal provided in Section 3.03 of Addendum A
to the Lease unless prior to or simultaneously with exercising such options
Sublessee obtains the complete release from Landlord of Sublessor of all further
obligations under the Lease.
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10. Early Termination Option. In the event Sublessee elects to terminate
the Lease pursuant to the early termination option in Section 3.04 of Addendum
A, Sublessee shall be solely responsible for payment of all unamortized costs of
tenant improvements, unamortized costs of commissions, and one month's rental
for each remaining year on the Lease, all as specified in said Section 3.04j.
11. Cross-Default. Sublessor and Sublessee are simultaneously entering
into a sublease of Suite 540 and a sub-sublease of Suite 570. Any default by
Sublessee under such sublease or sub-sublease shall also constitute a default
under this sublease and Sublessor shall be entitled to enforce all remedies
stated herein.
12. Parking. Sublessee shall be entitled to use all parking spaces
provided under the Lease.
13. Additional Provisions. This Sublease incorporates the terms and
conditions contained in the following Exhibits:
Exhibit A - The Lease
Exhibit B - Description of the Premises
IN WITNESS WHEREOF, the parties have executed this Sublease as of the date
first above written.
SUBLESSOR: SOUTHERN PACIFIC FUNDING
Address for notices: CORPORATION
4949 Meadows Road, Suite 600 By: /s/ Dave Shaffer
Lake Oswego, Oregon 97035 Title: VP Facilities
SUBLESSEE: DIGIMARC CORPORATION
Address for notices:
One Centerpointe, Suite 500 By: /s/ Kathy Brogdon
Lake Oswego, Oregon 97035 Title: VP Finance
3
<PAGE>
EXHIBIT 10.7
SUBLEASE
(Suite 540)
This Sublease is entered into this 27th day of April, 1998, between
SOUTHERN PACIFIC FUNDING CORPORATION ("Sublessor") and DIGIMARC CORPORATION
("Sublessee").
Sublessor is the tenant under a Lease from Property Reserves, Inc.
("Landlord"), dated November 29, 1995 (the "Lease"), a copy of which is attached
hereto as Exhibit A. The Lease covers Suite 540 and 550 in the building located
at One Centerpointe Drive, Lake Oswego, Oregon.
Sublessee wishes to sublease from Sublessor Suite 540, but not Suite 550.
NOW, THEREFORE, Sublessor hereby subleases Suite 540 described in the
attached Exhibit B (the "Premises"), an area of approximately 942 sq. ft., and
Sublessee agrees to sublease the Premises from Sublessor on the following terms:
1. Term. The term of this Sublease shall commence on May 2, 1998, and
shall continue through and including October 31, 2000.
2. Rent.
2.1 Base Rent. Sublessee shall pay directly to Landlord base rent
in the sum of $1,600.00 per month on the first day of each month of the
sublease term. Base rent shall be escalated at the same time and in the
same amount per square foot as the base rent paid by Sublessor to the
Landlord under any escalation clause or expense pass-through clause of the
Lease.
2.2 Additional Rent. Sublessee shall pay directly to Landlord all
additional rent required under the Lease pertaining to the Premises,
including without limitation any Estimated Operating Expense Adjustments.
The parties agree that "Tenants Proportionate Share" as defined in the
Lease is 1.0 percent for the Premises. Any refund of Estimated Operating
Expense Adjustment payments for calendar year 1998 shall be prorated
between Sublessor and Sublessee.
3. Sublease Consideration. Sublessee shall pay the sum of $1,600.00 as
sublease consideration. Sublessor may apply the sublease consideration to pay
the cost of performing any obligation which Sublessee fails to perform within
the time required by this Sublease, but such application by Sublessor shall not
be the exclusive remedy for Sublessee's default. If the sublease consideration
is applied by Sublessor, Sublessee shall on demand pay the sum necessary to
replenish the sublease consideration to its original amount. To the extent not
applied by Sublessor to cure defaults by Sublessee, the sublease consideration
shall be applied against the rent payable for the last month of the sublease
term. The sublease consideration shall not be refundable. This sublease does
not include an assignment by Sublessor to Sublessee of Sublessor's rights in the
security deposit required under the Lease.
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4. Obligations of Sublessee. Sublessee shall perform all of the
obligations of the tenant under the Lease as if Sublessee were the tenant under
the Lease and Sublessor was the landlord under the Lease. The terms of the Lease
are hereby expressly incorporated as part of this Sublease. In the event
Sublessee fails to comply with such terms, or the terms of this Sublease,
Sublessor shall be entitled to have all of the remedies granted to Landlord in
the Lease, together with any other rights Sublessor might otherwise have. All
provisions in the Lease dealing with indemnity and liability between Landlord
and the tenant under the Lease shall be applicable as between both Sublessor and
Sublessee and Landlord and Sublessee. Sublessee shall name both Sublessor and
Landlord and Landlord's managing agent under the Lease as named insureds in the
insurance policies it is required to obtain hereunder.
5. Representations of Sublessor. Sublessor represents and warrants that
the Lease is in good standing and that Sublessor has, to the best of its
knowledge, complied with all of its obligations thereunder through the date
hereof. Sublessor represents and warrants that there is currently no default
under the Lease and no factual situation that, but for the passage of time,
would become a default. Sublessor shall pay to the Landlord under the Lease all
base rent, additional rent, and other amounts required to be paid by the tenant
under the Lease which pertain to Suite 550. Sublessor shall not be obligated to
perform, nor does it guarantee the performance of, Landlord's duties under the
Lease. In the event of any default of Landlord, Sublessee shall send any
required notices to Landlord with a copy to Sublessor. Sublessee agrees that
Sublessor's only obligation in such event will be to join with Sublessee, at
Sublessee's expense, in making demand on Landlord to fulfill its obligations
under the Lease. In no event shall Sublessee be allowed any abatement or
diminution of rent under this sublease because of Landlord's failure to perform
any of its obligations under the Lease, unless under the terms of the Lease the
tenant would likewise be allowed an abatement or diminution of rent under the
Lease.
6. Condition of the Premises. Sublessor shall clean the carpeting and do
"spot" painting within the Premises as necessary so that the Premises are in
"like new" condition after the painting. In all other respects, the Premises
are leased as is, in the condition now existing, with no additional work to be
performed by Sublessor or Landlord.
7. Notices. With respect to notices between Sublessor and Sublessee, the
addresses for notice shall be the addresses stated in this Sublease.
8. Waiver of Subrogation. Neither Sublessor, Sublessee nor the Landlord
under the Lease (nor Landlord's managing agent) shall have any claim against the
other for any loss or damage of a type which is coverable by fire and extended
coverage insurance, including water damage or sprinkler leakage, regardless of
negligence.
9. Renewal Option. Sublessee shall have no right to exercise the renewal
option provided in Section 3.02 of Addendum A to the Lease unless prior to or
simultaneously with exercising such option Sublessee obtains the complete
release from Landlord of Sublessor or all further obligations under the Lease.
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10. Early Termination Option. In the event Sublessee elects to terminate
the Lease pursuant to the early termination option in Section 3.04 of Addendum
A, Sublessee shall be solely responsible for payment of all unamortized costs of
tenant improvements, unamortized costs of commissions, and one month's rental
for each remaining year on the Lease, all as specified in said Section 3.04.
11. Cross-Default. Sublessor and Sublessee are simultaneously entering
into a sublease of Suite 500 and a sub-sublease of Suite 570. Any default by
Sublessee under such sublease or sub-sublease shall also constitute a default
under this sublease and Sublessor shall be entitled to enforce all remedies
stated herein.
12. Parking. Sublessee shall be entitled to use 19% of the parking spaces
provided under the Lease.
13. Additional Provisions. This Sublease incorporates the terms and
conditions contained in the following Exhibits:
Exhibit A - The Lease
Exhibit B - Description of the Premises
IN WITNESS WHEREOF, the parties have executed this Sublease as of the date
first above written.
SUBLESSOR: SOUTHERN PACIFIC FUNDING CORPORATION
Address for notices:
4949 Meadows Road, Suite 600 By: /s/ Dave Shaffer
Lake Oswego, Oregon 97035 Title: VP Facilities
SUBLESSEE: DIGIMARC CORPORATION
Address for notices:
One Centerpointe, Suite 500 By: /s/ Kathy Brogdon
Lake Oswego, Oregon 97035 Title: VP Finance
3
<PAGE>
EXHIBIT 10.8
LEASE AGREEMENT
THIS LEASE, dated as of June 25, 1999, is by and between SOUTHPLACE
ASSOCIATES LLC, an Oregon limited liability company ("Landlord") and DIGIMARC,
an Oregon corporation ("Tenant").
W I T N E S S E T H:
1. PRINCIPAL TERMS. Capitalized terms, first appearing in quotations in
---------------
this Section, elsewhere in the Lease or any Exhibits, are definitions of such
terms as used in the Lease and Exhibits and shall have the defined meaning
whenever used.
<TABLE>
<S> <C>
1.1 "BUILDING": SouthPlace Office Building, 2000 SW 72nd Avenue, Tualatin, Oregon
97062
1.2 "PREMISES": approximately 16,509 rentable square
feet Suite #250
1.3 "INITIAL TERM": 60 calendar months
"Commencement Date": January 1, 2000
"Expiration Date": December 31, 2004
1.4 "BASE RENT": Period Monthly
------ -------
Months 1-12 $29,579.00
Months 13-36 $31,298.00
Months 37-60 $33,362.00
1.5 OPERATING EXPENSES: Base Year: 1999
Pro Rata Share: 16.667%
1.6 "DEPOSIT": None, but see Addendum re required Letter of Credit
1.7 "PERMITTED USE": General office
1.8 "GUARANTOR": None
1.9 PARKING: 4.4 unreserved spaces per 1,000 rentable square feet leased
1.10 LANDLORD'S NOTICE ADDRESS: Miller Global Properties, LLC
4643 South Ulster Street, Suite 1500
Denver, CO 80237
Attn: Mr. Paul Hogan
1.11 RENT PAYMENT ADDRESS: Miller Global Properties, LLC
4643 South Ulster Street, Suite 1500
Denver, CO 80237
1.12 LANDLORD'S TAX I.D.: 84-1441355
1.13 TENANT'S NOTICE ADDRESS:
Precommencement Address: One Centerpointe Drive
Suite 500
Lake Oswego, Oregon 97035
Post Commencement Address: 19801 SW 72nd Avenue, #250
Tualatin, Oregon 97062
1.14 TENANT'S TAX I.D.: 93-1170830
1.15 LANDLORD'S BROKER: Cushman & Wakefield of Oregon, Inc.
1.16 COOPERATING BROKER: Grubb & Ellis
</TABLE>
<PAGE>
1.17 ATTACHMENTS: [check if applicable]
x Addendum
---
x Work Letter
---
x Exhibit A - The Premises
---
x Exhibit B - Real Property
---
x Exhibit C - Operating Expenses
---
x Exhibit D - Commencement Certificate
---
x Exhibit E - Rules and Regulations
---
x Exhibit F - Letter of Credit
---
x Exhibit G - Right of Refusal Space
x Exhibit H - Janitorial/Cleaning
Schedule
2. GENERAL COVENANTS. Tenant covenants and agrees to pay Rent and perform
-----------------
the obligations hereafter set forth and in consideration therefor Landlord
leases to Tenant the Premises as depicted on the plat attached as Exhibit A,
together with a non-exclusive right, subject to the provisions hereof, to use
plazas, common areas, or other areas on the real property legally described on
Exhibit B (the "Real Property") designated by Landlord for the exclusive or non-
exclusive use of the tenants of the Building ("Common Areas"). The Building,
Real Property, Common Areas, and appurtenances are hereinafter collectively
sometimes called the "Building Complex."
3. TERM. The Initial Term of the Lease commences at 12:01 a.m. on the
----
Commencement Date and terminates at 12:00 midnight on the Expiration Date (the
Initial Term together with any extensions thereof is herein referred to as the
"Term.").
4. RENT. Subject to the provisions below, commencing on the Commencement
----
Date and on the first day of each month thereafter, Tenant shall pay Base Rent
in the amount stated in Section 1.4, in advance without notice (all amounts,
including Base Rent, to be paid by Tenant pursuant to this Lease as the context
requires are sometimes referred to collectively as "Rent(s)"). Rents shall be
paid without set off, abatement, or diminution, at the address set forth in
Section 1.11, or at such other place as Landlord from time to time designates in
writing.
5. COMPLETION OR REMODELING OF THE PREMISES.
----------------------------------------
5.1 All provisions regarding remodeling or tenant finish work in the
Premises, if any, are set forth in the work letter attached hereto (the "Work
Letter"). "Initial Tenant Finish" means the Premises in its as is condition as
modified by all work, if any, performed by Landlord at its expense in accordance
with the Work Letter. Except as provided in the Work Letter, Landlord has no
obligation for the completion or remodeling of the Premises, and Tenant accepts
the Premises in its "as is" condition upon delivery in accordance with the Work
Letter. If Landlord is delayed in delivering the Premises to Tenant in
accordance with the Work Letter beyond the Commencement Date, then the
Commencement Date will be postponed to the date Landlord delivers the Premises
to Tenant. If delivery is on other than the first day of the month, then the
Commencement Date will be the first day of the month following the delivery date
but all provisions hereof, including Tenant's obligation to pay Rent (prorated
for a partial month), will be in effect as of the delivery date. The
postponement of Tenant's obligation to pay Rent is in full settlement of all
claims which Tenant may otherwise have by reason of such delay. If the
Commencement Date is delayed, the Expiration Date shall be extended so that the
Term will continue for the full period set forth in Section 1.3. As soon as the
Term commences, Landlord and Tenant agree to execute a commencement agreement in
the form attached as Exhibit D, setting forth the exact Commencement Date and
Expiration Date and the date the Premises were delivered Ready for Occupancy in
accordance with the Work Letter. In accordance with the Work Letter, upon notice
from Landlord that the Premises have been substantially completed in accordance
with the Work Letter (which completion is currently estimated to be on or about
September 1, 1999), Tenant may occupy the Premises from the date of notice of
substantial completion until January 1, 2000 for purposes of installing its
furniture, fixtures and equipment and conducting its business. During such
period, all terms of the Lease, except for the payment of Base Rent and Tenant's
Pro Rata Share of increases in Operating Expenses, shall be in effect with
regard to Tenant's occupancy thereof.
5.2. Except as provided in the Work Letter, taking possession of the
Premises by Tenant is conclusive evidence that the Premises are in the condition
agreed between Landlord and Tenant and acknowledgment by Tenant of satisfactory
completion of any work which Landlord has agreed to perform.
6. OPERATING EXPENSES. Tenant shall pay additional Rent in accordance
------------------
with Exhibit C attached hereto.
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<PAGE>
7. SERVICES.
--------
7.1 Subject to the provisions below, Landlord agrees, without charge,
in accordance with typical Class A suburban office standards for the Portland,
Oregon metropolitan area as reasonably determined by Landlord from time to time
for the Building: (1) to furnish running water at those points of supply for
general use of tenants of the Building; (2) during Ordinary Business Hours to
furnish to interior Common Areas heated or cooled air (as applicable),
electrical current, janitorial services, and maintenance; (3) during Ordinary
Business Hours to furnish heated or cooled air to the Premises for standard
office use provided the recommendations of Landlord's engineer regarding
occupancy and use of the Premises are complied with by Tenant; (4) to furnish,
subject to availability and capacity of building systems, unfiltered treated
chilled water for use in Tenant's packaged HVAC systems provided that such
systems are approved by Landlord, including strainers, pumping systems and
controls; (5) to provide, during Ordinary Business Hours, the general use of
passenger elevators for ingress and egress to and from the Premises (at least
one such elevator shall be available at all times except in the case of
emergencies or repair); (6) to provide janitorial services for the Premises to
the extent of the Initial Tenant Finish (including window washing of the outside
of exterior windows) in accordance the cleaning schedule attached as Exhibit H;
and (7) to cause electric current to be supplied to the Premises for Tenant 's
Standard Electrical Usage (items (1) through (7) are collectively called
"Services"). "Tenant's Standard Electrical Usage" means electricity for normal
office purposes including fluorescent and incandescent lighting (including task
and task ambient lighting systems) and for normal office equipment, including
duplicating (reproduction) machines and personal computers (provided they do not
require any additional voltage, special electrical or HVAC requirements beyond
the systems existing in the Premises), and internal communications systems.
"Ordinary Business Hours" means 7:00 a.m. to 6:00 p.m. Monday through Friday and
9:00 a.m. to 12:00 p.m. on Saturdays, Legal Holidays excepted. "Legal Holidays"
mean New Year's Day, Martin Luther King Day, Presidents' Day, Memorial Day,
Independence Day, Labor Day, Thanksgiving Day, Christmas Day, and such other
national holidays hereafter established by the United States Government.
7.2 "Excess Usage" means any usage of electricity (1) during other
than Ordinary Business Hours; (2) in an amount in excess of Tenant's Standard
Electrical Usage; or (3) for Special Equipment or for standard HVAC services
during other than Ordinary Business Hours. "Special Equipment" means (a) any
equipment consuming more than 0.5 kilowatts at rated capacity, (b) any equipment
requiring a voltage other than 120 volts, single phase, or (c) equipment that
requires the use of self-contained HVAC units. If Tenant desires Excess Usage,
Landlord will use reasonable efforts to supply the same. Tenant shall reimburse
Landlord for all Landlord's costs of providing services for Excess Usage,
including costs for materials, additional wear and tear on equipment, utilities,
and labor (including fringe and overhead costs). Computation of such costs will
be made by Landlord's engineer, based on his engineering survey of Tenant's
Excess Usage; as of the Commencement Date, the costs for providing HVAC services
after hours shall be $25 per hour for each zone (with the zone being determined
on the basis of space served by each separate rooftop unit), which costs are
subject to change from time to time thereafter. Tenant shall also reimburse
Landlord for all costs of supplementing the Building HVAC System and/or
extending or supplementing any electrical service, as Landlord determines is
necessary, as a result of Tenant's Excess Usage. Prior to installation or use of
Special Equipment or operation of the Premises for extended hours on an ongoing
basis, Tenant shall notify Landlord of such intended installation or use and
obtain Landlord's consent. Not less than 48 hours' prior notice shall be given
Landlord of Tenant's request for such services; provided, however, that notice
for evening service shall be adequate if given by 3:00 PM of the same day and
notice for Legal Holidays and weekends shall be adequate if given by 3:00 PM of
the preceding weekday that is not a Legal Holiday. Tenant may request that
Landlord install at Tenant's cost a check meter and/or flow meter to determine
the cost of Tenant's Excess Usage. Tenant shall also pay the cost of replacing
light bulbs and/or tubes and ballast used in all lighting in the Premises other
than that provided by Landlord to all tenants of the Building.
7.3 If Tenant requires janitorial services other than those included
as standard Services or if Tenant desires to separately contract for janitorial
services for security reasons, Tenant shall separately contract for such
janitorial services at Tenant's sole cost and expense, upon not less than 60
days prior notice to Landlord (provided, that, if Tenant elects to separately
contract for janitorial services in accordance with the foregoing, such
janitorial services shall include at a minimum those services normally provided
by Landlord to other tenants in the Building and the contractor shall be subject
to Landlord's approval, which approval shall not be unreasonably withheld).
7.4 Landlord may discontinue, reduce, or curtail Services (either
temporarily or permanently) when necessary due to accident, repairs,
alterations, strikes, lockouts, Applicable Laws, or any other happening beyond
Landlord's reasonable control. Landlord is not liable for damages to Tenant or
any other party as a result of any interruption, reduction, or discontinuance of
Services (either temporary or permanent) nor shall the occurrence of any such
event be construed as an
3
<PAGE>
eviction of Tenant, cause or permit an abatement, reduction or setoff of Rent,
or operate to release Tenant from Tenant's obligations.
7.5 Tenant shall promptly notify Landlord of any accidents or defects
in the Building of which Tenant becomes aware, including defects in pipes,
electric wiring, and HVAC equipment, and of any condition which may cause injury
or damage to the Building or any person or property therein.
8. QUIET ENJOYMENT. So long as an Event of Default has not occurred,
---------------
Tenant is entitled to the quiet enjoyment and peaceful possession of the
Premises subject to the provisions of this Lease. Landlord shall under no
circumstances be held responsible for restriction or disruption of access to the
Building from public streets caused by construction work or other actions taken
by or on behalf of governmental authorities, or for actions taken by other
tenants (their employees, agents, visitors, contractors or invitees), or any
other cause not entirely within Landlord's direct control, and same shall not
constitute a constructive eviction of Tenant nor give rise to any right or
remedy of Tenant against Landlord of any nature or kind. This covenant of quiet
enjoyment is in lieu of any covenant of quite enjoyment provided or implied by
law, and Tenant expressly waives any such other covenant of quiet enjoyment to
the extent broader than the covenant contained in this Section.
9. DEPOSIT. [Intentionally Deleted]
-------
10. CHARACTER OF OCCUPANCY. Tenant shall occupy the Premises for the
----------------------
Permitted Use and for no other purpose, and use it in a careful, safe, and
proper manner and pay on demand for any damage to the Premises caused by misuse
or abuse by Tenant, Tenant's agents or employees, or any other person entering
upon the Premises under express or implied invitation of Tenant (collectively,
"Tenant's Agents"). Tenant, at Tenant's expense, shall comply with all
applicable federal, state, city, quasi-governmental and utility provider laws,
codes, rules, and regulations now or hereafter in effect ("Applicable Laws")
which impose any duty upon Landlord or Tenant with respect to the occupation or
alteration of the Premises. Tenant shall not commit or permit waste or any
nuisance on or in the Premises. Tenant agrees not to store, keep, use, sell,
dispose of or offer for sale in, upon or from the Premises any article or
substance prohibited by any insurance policy covering the Building Complex nor
shall Tenant keep, store, produce or disclose of on, in or from the Premises or
the Building Complex any substance which may be deemed an infectious waste or
hazardous substance under any Applicable Laws, except customary office and
cleaning supplies.
11. MAINTENANCE, ALTERATIONS AND REENTRY BY LANDLORD.
------------------------------------------------
11.1 Landlord will (i) make repairs and replacements to HVAC,
mechanical, life safety and electrical systems in the Premises (to the extent
such systems are Building standard) deemed necessary by Landlord for normal
operations of the Building Complex; and (ii) provide upkeep, maintenance, and
repairs to the roof and shell and all Common Areas. Except as provided in this
Section or otherwise expressly required in this Lease, Landlord is not required
to make improvements or repairs to the Premises during the Term.
11.2 Landlord or Landlord's agents may at any time after reasonable
prior notice to Tenant (except in an emergency and during regularly scheduled
janitorial or cleaning, repairs or maintenance, when no notice is required)
enter the Premises for examination and inspection, or to perform, if Landlord
elects, any obligations of Tenant which Tenant fails to perform or such
cleaning, maintenance, janitorial services, repairs, replacements, additions, or
alterations as Landlord deems necessary for the safety, improvement, or
preservation of the Premises or other portions of the Building Complex or as
required by Applicable Laws. Landlord or Landlord's agents may also show the
Premises to prospective tenants, purchasers and Mortgagees, provided Tenant
shall not have an obligation to allow Landlord's brokers to show space until the
last 12 months of the Term. Tenant shall have a right to accompany Landlord or
Landlord's agents during any entry into the Premises. Any such reentry does not
constitute an eviction or entitle Tenant to abatement of Rent. Landlord may
make such alterations or changes in other portions of the Building Complex as
Landlord desires so long as such alterations and changes do not unreasonably
interfere with Tenant's occupancy of the Premises. Landlord may use the Common
Areas and one or more street entrances to the Building Complex as may be
necessary in Landlord's judgment to complete such work.
12. ALTERATIONS AND REPAIRS BY TENANT.
---------------------------------
12.1 Tenant shall not make any alterations to the Premises during the
Term, including installation of equipment or machinery which requires
modifications to existing electrical outlets or increases Tenant's usage of
electricity beyond Tenant's Standard Electrical Usage (collectively
"Alterations") without in each instance first obtaining the written
4
<PAGE>
consent of Landlord, which consent shall not be unreasonably withheld, delayed
or conditioned. Landlord's consent or approval of the plans, specifications and
working drawings for any Alterations shall not constitute any warranty or
representation by Landlord (and shall not impose any liability on Landlord) as
to their completeness, design sufficiency, or compliance with Applicable Laws.
Tenant shall at its cost: pay all engineering and design costs incurred by
Landlord as to all Alterations, obtain all governmental permits and approvals
required, and cause all Alterations to be completed in compliance with
Applicable Laws and requirements of Landlord's insurance. All such work relating
to Alterations shall be performed in a good and workmanlike manner, using new
materials and equipment at least equal in quality to the Initial Tenant Finish.
All Alterations, repair and maintenance work performed by Tenant shall be done
at Tenant's expense by Landlord's employees or, with Landlord's prior consent
and subject to any conditions imposed by Landlord, by other persons requested by
Tenant; however, if such work is not performed by Landlord's employees, Tenant
shall pay Landlord a supervisory fee (not to exceed 3% of the total cost of the
Alterations involved) upon receipt of an invoice. If Landlord authorizes such
persons to perform work, Tenant shall deliver to Landlord prior to commencement
certificates issued by insurance companies qualified to do business in the state
in which the Premises are located, evidencing that worker's compensation, public
liability insurance, and property damage insurance (in amounts, with companies
and on forms satisfactory to Landlord) are in force and maintained by all
contractors and subcontractors engaged to perform such work. All liability
policies shall name Landlord, Building Manager, and Mortgagee as additional
insureds. Each certificate shall provide that the insurance may not be canceled
or modified without 10 days' prior written notice to Landlord and Mortgagee.
Landlord also has the right to post notices in the Premises in locations
designated by Landlord stating that Landlord is not responsible for payment for
such work and containing such other information as Landlord deems necessary. All
such work shall be performed in a manner which does not unreasonably interfere
with Landlord or other tenants of the Building, or impose additional expense
upon Landlord in the operation of the Building Complex.
12.2 Tenant shall keep the Premises in as good order, condition, and
repair and in an orderly state, as on the Commencement Date, loss by fire or
other casualty or ordinary wear excepted.
12.3 All Alterations, including partitions, paneling, carpeting,
drapes or other window coverings, and light fixtures (but not including movable
office furniture not attached to the Building and security and card key devices
installed by Tenant at Tenant's sole cost that can be removed without damage to
the Premises), are deemed a part of the real estate and the property of Landlord
and remain upon and be surrendered with the Premises at the end of the Term,
whether by lapse of time or otherwise, unless Landlord notifies Tenant no later
than 15 days prior to the end of the Term that it elects to have Tenant remove
all or part of such Alterations, and in such event, Tenant shall at Tenant's
expense promptly remove the Alterations specified and restore the Premises to
its prior condition, reasonable wear and tear excepted.
13. MECHANICS' LIENS. Tenant shall pay for all work done on the Premises
----------------
by Tenant or at its request (other than the Initial Tenant Finish) of a
character which may result in liens on Landlord's or Tenant's interest and
Tenant will keep the Premises free of all construction liens, and other liens on
account of such work. Tenant indemnifies, defends, and saves Landlord and all
Mortgagees harmless from all liability, loss, damage, or expenses, including
attorneys' fees, on account of any claims of laborers, materialmen or others for
work performed or for materials or supplies furnished to Tenant or persons
claiming under Tenant. If any lien is recorded against the Premises or Building
or any suit affecting title thereto is commenced as a result of such work, or
supplying of materials, Tenant shall cause such lien to be removed of record
within 20 days after notice from Landlord. Tenant desires to contest any claim,
Tenant must furnish Landlord a bond in accordance with applicable laws adequate
to ensure payment in full of all such claims, costs and interest and release of
the claims or adequate security of at least 150% or the amount of the claim,
plus estimated costs and interest and, if a final judgment establishing the
validity of any lien is entered, Tenant shall immediately pay and satisfy the
same. If Tenant fails to proceed as aforesaid, Landlord may pay such amount and
any costs, and the amount paid, together with reasonable attorneys' fees
incurred, shall be immediately due Landlord upon notice.
14. SUBLETTING AND ASSIGNMENT.
-------------------------
14.1 Tenant shall not sublet any part of the Premises nor assign or
otherwise transfer this Lease or any interest herein (sometimes referred to as
"Transfer," and the subtenant or assignee may be referred to as "Transferee")
without the consent of Landlord first being obtained, which consent will not be
unreasonably withheld provided that: (1) Tenant complies with the provisions of
Section 14.4; (2) Landlord declines to exercise its rights under Section 14.3;
(3) the Transferee is engaged in a business and the portion of the Premises will
be used for the Permitted Use in a manner which is in keeping with the then
standards of the Building and does not conflict with any exclusive use rights
granted to any other tenant of the Building Complex; (4) the Transferee has
reasonable financial worth in light of the responsibilities
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involved taking into account the amount of space being leased; (5) Tenant is not
in default at the time it makes its request; (6) the Transferee is not a
governmental or quasi-governmental agency; (7) the Transferee is not a tenant or
currently negotiating a lease with Landlord in any building owned by Landlord in
the metropolitan area of the Buildings Complex (including the Building Complex);
and (8) the rent to be paid by the Transferee is not less than 80% of the
rental rate then being offered by Landlord for similar space in the Building.
Transfer includes a sale by Tenant of substantially all of its assets or stock
if Tenant is a publicly traded corporation, a merger of Tenant with another
corporation, the transfer of 25% or more of the stock in a corporate tenant
whose stock is not publicly traded, or transfer of 25% or more of the
beneficial ownership interests in a partnership or limited liability company
tenant.
14.2 Following any Transfer in accordance with this Section 14, Landlord
may, after default by Tenant, collect rent from the Transferee or occupant and
apply the net amount collected to the Rent, but no Transfer or collection will
be deemed an acceptance of the Transferee or occupant as Tenant or release
Tenant from its obligations. Consent to a Transfer shall not relieve Tenant
from obtaining Landlord's consent to any other Transfer. Notwithstanding
Landlord's consent to a Transfer, Tenant shall continue to be primarily liable
for its obligations. If Tenant collects any rent or other amounts from a
Transferee in excess of the Rent for any monthly period, Tenant shall pay
Landlord the excess monthly, as and when received.
14.3 Notwithstanding the above, if Tenant requests Landlord's consent to
sublet 25% or more of the Premises, Landlord may refuse to grant such consent
in its sole discretion and terminate this Lease as to the portion of the
Premises with respect to which such consent was requested; provided, however, if
Landlord does not consent and elects to terminate the Lease as to such portion,
Tenant may within 15 days after notice from Landlord to this effect withdraw
Tenant's request for consent. If such termination occurs, it shall be effective
on the date designated in a notice from Landlord and shall not be more than 30
days following such notice.
14.4 Tenant must notify Landlord at least 90 days prior to the desired
date of the Transfer ("Tenant's Notice"). Tenant's Notice shall describe the
portion of the Premises to be transferred and the terms and conditions.
Landlord has, without obligation, 60 days following receipt of Tenant's Notice
to sublet the space on Tenant's behalf or to exercise its rights pursuant to
Section 14.3 if Tenant's Notice discloses that 25% or more of the Premises is
involved. If the space covered by Tenant's Notice is' subleased by Landlord,
rent and other sums due from the subtenant will be paid to Tenant directly and
Landlord has no responsibility for the performance by such subtenant of its
obligations under its sublease with Tenant. If Landlord is unwilling or unable
to locate a subtenant (and, if applicable, declines to exercise its rights under
Section 14.3), Landlord will notify Tenant not later than 60 days after receipt
of Tenant's Notice and Tenant shall be free to sublet the specified portion of
the Premises to any third party on terms substantially identical to those
described in Tenant's Notice, subject to Landlord's consent as set forth above.
If Tenant does not sublet such portion of the Premises within 60 days following
Landlord's notice to Tenant, Tenant must reoffer the Premises to Landlord in
accordance with the provisions hereof prior to subleasing to a third party.
14.5 All documents utilized by Tenant to evidence a Transfer are subject
to approval by Landlord. Tenant shall pay Landlord's expenses, including
reasonable attorneys' fees, of determining whether to consent and in reviewing
and approving the documents (not to exceed a total of $1,000.00 for the specific
transaction). Tenant shall provide Landlord with such information as Landlord
reasonably requests regarding a proposed subtenant, including financial
information.
14.6 If a trustee or debtor in possession in bankruptcy is entitled to
assume control over Tenant's rights under this Lease and assigns such rights to
any third party notwithstanding the provisions hereof, the rent to be paid by
such party shall be increased to the current Base Rent (if greater than that
being paid for the Premises) which Landlord charges for comparable space in the
Building as of the date of such third party s occupancy. If Landlord is
entitled under the Bankruptcy Code to "Adequate Assurance" of future performance
of this Lease, the parties agree that such term includes the following:
(1) Any assignee must demonstrate to Landlord's reasonable
satisfaction a net worth (as defined in accordance with generally accepted
accounting principles consistently applied) at least as large as the net worth
of Tenant on the Commencement Date increased by 7%, compounded annually, or each
year thereafter through the date of the proposed assignment. Tenant's financial
condition was a material inducement to Landlord in executing this Lease.
(2) The assignee must assume and agree to be bound by the
provisions of this Lease.
14.7 Notwithstanding anything to the contrary contained hereinabove but
subject to Section 14.2 and provided that the conditions of clauses (3) and (5)
of Section 14.1 are met, Tenant may, without obtaining Landlord's prior written
consent, assign or sublease all or any portion of the Premises to the following
parties on the following conditions:
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(i) any subsidiary or affiliate in which Tenant owns a substantial interest;
(ii) any parent of Tenant; (iii) any subsidiary or affiliate in which Tenant's
parent owns a substantial interest; or (iv) any corporation into which Tenant
may be merged or consolidated or which purchases all or substantially all of the
assets or stock of Tenant provided that the resulting corporation has a net
worth at least equal to Tenant's net worth as of the date hereof. Not less than
30 days following the effective date of such transaction, Tenant will provide
Landlord with documentation evidencing such transaction and such other evidence
as Landlord may reasonably require to establish that such transaction falls
within the terms and provisions of this Section.
15. DAMAGE TO PROPERTY. Tenant agrees Landlord is not liable for any
------------------
injury or damage, either proximate or remote, occurring through or caused by
fire, water, steam, or any repairs, alterations, injury, accident, or any other
cause to the Premises, to any furniture, fixtures, Tenant improvements, or other
personal property of Tenant kept or stored in the Premises, or in other parts of
the Building Complex, whether by reason of the negligence or default of
Landlord, other occupants, any other person, or otherwise; and the keeping or
storing of all property of Tenant in the Premises and Building Complex is at the
sole risk of Tenant.
16. INDEMNITY TO LANDLORD.
---------------------
16.1 Tenant agrees to indemnify, defend, and hold Landlord and
Building Manager harmless from all liability, costs, or expenses, including
attorneys' fees, on account of damage to the person or property of any third
party, including any other tenant in the Building Complex, to the extent caused
by the negligence or breach of this Lease by the Tenant or Tenant's Agents.
16.2 Tenant shall maintain throughout the Term a commercial general
liability policy, including protection against death, personal injury and
property damage, issued by an insurance company qualified to do business in the
state in which the Premises are located, with a single limit of not less than
$1,000,000.00. Such policy shall name Landlord, Building Manager, and Mortgagee
as additional insureds, be primary to any other similar insurance of such
additional insureds, and provide that it may not be canceled or modified without
at least 20 days' prior notice to Landlord and Mortgagee. The minimum limits of
such insurance do not limit the liability of Tenant hereunder. Prior to
occupancy of the Premises, and prior to expiration of the then-current policy,
Tenant shall deliver certificates evidencing that insurance required under this
Lease is in effect.
17. SURRENDER AND NOTICE. Upon the expiration or other termination of this
--------------------
Lease, Tenant shall immediately quit and surrender to Landlord the Premises
broom clean, in good order and condition, ordinary wear and tear and loss by
fire or other casualty excepted, and Tenant shall remove all of its movable
furniture and other effects, all security and card key devices (to the extent
such devices can be removed without damage to the Premises) and telephone cable
and related equipment in the Building installed for Tenant, and such
Alterations, as Landlord requires. If Tenant fails to timely vacate the Premises
as required, Tenant is responsible to Landlord for all resulting costs and
damages of Landlord, including any amounts paid to third parties who are delayed
in occupying the Premises.
18. INSURANCE, CASUALTY, AND RESTORATION OF PREMISES.
------------------------------------------------
18.1 Landlord shall maintain property insurance for the Building
Complex, the shell and core of the Building and the Premises in such amounts,
from such companies, and on such terms and conditions, including insurance for
loss of Rent as Landlord deems appropriate, from time to time. Landlord's
insurance coverage shall be at least as broad as ISO Special Form Coverage
against risks of direct physical loss or damage (commonly known as "all risk")
the full replacement cost of Landlord's property with a deductible.
18.2 Tenant shall maintain throughout the Term insurance coverage at
least as broad as ISO Special Form Coverage against risks of direct physical
loss or damage (commonly known as "all risk") for the full replacement cost of
Tenant's property and betterments in the Premises, including tenant finish in
excess of the Initial Tenant Finish.
18.3 If the Building is damaged by fire or other casualty which
renders the Premises wholly untenantable and the damage is so extensive that an
architect selected by Landlord certifies in writing to Landlord and Tenant
within 60 days of said casualty that the Premises cannot, with the exercise of
reasonable diligence, be made fit for occupancy within 180 working days from the
happening thereof, then, at the option of Landlord or Tenant exercised in
writing to the other within 30 days of such determination, this Lease shall
terminate as of the occurrence of such damage. In the event of termination,
Tenant shall pay Rent duly apportioned up to the time of such casualty and
forthwith surrender the Premises and all interest. If Tenant fails to do so,
Landlord may reenter and take possession of the Premises and remove Tenant. If,
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however, the damage is such that the architect certifies that the Premises can
be made tenantable within such 180-day period or neither Landlord or Tenant
elects to terminate the Lease despite the extent of damage, then the provisions
below apply.
18.4 If the Premises are damaged by fire or other casualty that does
not render it wholly untenantable or require a repair period in excess of 180
days, Landlord shall with reasonable promptness except as hereafter provided
repair the Premises to the extent of the Initial Tenant Finish.
18.5 If the Building is damaged (though the Premises may not be
affected, or if affected, can be repaired within 180 days) and within 60 days
after the damage Landlord decides not to reconstruct or rebuild the Building,
then, notwithstanding anything contained herein, upon notice to that effect from
Landlord within said 60 days, Tenant shall pay the Rent apportioned to such
date, this Lease shall terminate from the date of such notice, and both parties
discharged from further obligations except as otherwise expressly provided.
18.6 Landlord and Tenant waive all rights of recovery against the
other and its respective officers, partners, members, agents, representatives,
and employees for loss or damage to its real and personal property kept in the
Building Complex which is capable of being insured against under ISO Special
Form Coverage, or for loss of business revenue or extra expense arising out of
or related to the use and occupancy of the Premises. Tenant also waives all such
rights of recovery against Building Manager. Each party shall, upon obtaining
the property damage insurance required by this Lease, notify the insurance
carrier that the foregoing waiver is contained in this Lease and use reasonable
efforts to obtain an appropriate waiver of subrogation provision in the
policies.
18.7 Rent shall abate during any period of repair and restoration in
the same proportion that the part of the Premises rendered unusable unusable for
Tenant's normal office operations bears to the whole; provided, however, if the
casualty is the fault of Tenant or Tenant's Agents, then the Rent will abate
during any such period of repair and restoration but only to the extent or any
recovery by Landlord under its rental insurance related to the Premises.
19. CONDEMNATION. If the Premises or substantially all of it or any
------------
portion of the Building Complex which renders the Premises untenantable is taken
by right of eminent domain, or by condemnation (which includes a conveyance in
lieu of a taking), this Lease, at the option of either Landlord or Tenant
exercised by notice to the other within 30 days after the taking, shall
terminate and Rent shall be apportioned as of the date of the taking. Tenant
shall forthwith surrender the Premises and all interest in this Lease, and, if
Tenant fails to do so, Landlord may reenter and take possession of the Premises.
If less than all the Premises is taken, Landlord shall promptly repair the
Premises as nearly as possible to its condition immediately prior to the taking,
unless Landlord elects not to rebuild under Section 18.5. Landlord shall receive
the entire award or consideration for the taking.
20. DEFAULT BY TENANT.
-----------------
20.1 Each of the following events is an "Event of Default":
(1) Any failure by Tenant to pay Rent on the due date unless such
failure is cured within 5 business days after notice by Landlord; however,
Tenant is not entitled to more than 2 notices of delinquent payments during any
calendar year and, if thereafter during such calendar year any Rent is not paid
when due, an Event of Default shall, automatically occur;
(2) Tenant abandons the Premises;
(3) This Lease or Tenant's interest is transferred whether
voluntarily or by operation of law except as permitted in Section 14;
(4) This Lease or any part of the Premises is taken by process of
law and is not released within 15 days
(5) Commencement by Tenant of a proceeding under any provision of
federal or state law relating to Insolvency, bankruptcy, or reorganization
("Bankruptcy Proceeding");
(6) Commencement of a Bankruptcy Proceeding against Tenant,
unless dismissed within 60 days after commencement;
(7) The insolvency of Tenant or execution by Tenant of an
assignment for the benefit of creditors; the convening by Tenant of a meeting of
its creditors or any significant class thereof for purposes of effecting a
moratorium
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upon or extension or composition of its debts; or the failure of Tenant
generally to pay its debts as they mature, or the occurrence of any of the
foregoing with respect to any guarantor, if any, of Tenant's obligations;
(8) The admission in writing by Tenant (or any general partner
of Tenant if Tenant is a partnership), that it is unable to pay its debts as
they mature or it is generally not paying its debts as they mature;
(9) Tenant fails to take possession of the Premises on the
Commencement Date;
(10) Tenant fails to perform any of its other obligations and
non-performance continues for 30 days after notice by Landlord or, if such
performance cannot be reasonably had within such 30 day period, Tenant does not
in good faith commence performance within such 30 day period and diligently
proceed to completion; provided, however, Tenant's right to cure shall not
exceed the period provided by Applicable Law;
(11) Any event which is expressly defined as or deemed an Event
of Default under this Lease.
20.2 Remedies of Landlord. If an Event of Default occurs, Landlord
--------------------
may then or at any time thereafter, either:
(1) (a) Without further notice except as required by Applicable
Laws, reenter and repossess the Premises or any part and expel Tenant and those
claiming through or under Tenant and remove the effects of both without being
deemed guilty of any manner of trespass and without prejudice to any remedies
for arrears of Rent or preceding breach of this Lease. Should Landlord reenter
or take possession pursuant to legal proceedings or any notice provided for by
Applicable Law, Landlord may, from time to time, without terminating this Lease,
relet the Premises or any part, either alone or in conjunction with other
portions of the Building Complex, in Landlord's or Tenant's name but for the
account of Tenant, for such periods (which may be greater or less than the
period which would otherwise have constituted the balance of the Term) and on
such conditions and upon such other terms (which may include concessions of free
rent and alteration and repair of the Premises) as Landlord, in its sole
discretion, determines and Landlord may collect the rents therefor. Landlord is
not in any way responsible or liable for failure to relet the Premises, or any
part thereof, or for any failure to collect any rent due upon such reletting.
If there is other unleased space in the Building, Landlord may lease such other
space without prejudice to its remedies against Tenant. No such reentry or
repossession or notice from Landlord shall be construed as an election by
Landlord to terminate this Lease unless specific notice of such intention is
given Tenant. Acts of maintenance or preservation or efforts to relet the
Premises or the appointment of a receiver upon initiative of Landlord to protect
Landlord's interest under this Lease shall not constitute a termination of
Tenant's contractual liability under this Lease unless written release of
liability is given by Landlord to Tenant. Landlord reserves the right following
any reentry and/or reletting to exercise its right to terminate this Lease by
giving Tenant notice, in which event this Lease will terminate as specified in
the notice.
(b) If Landlord takes possession of the Premises without
terminating this Lease, Tenant shall pay Landlord (i) the Rent which would be
payable if repossession had not occurred, less (ii) the net proceeds, if any, of
any reletting of the Premises after deducting all of Landlord's expenses
incurred in connection with such reletting, including all repossession costs,
brokerage commissions, attorneys' fees, expenses of employees, alteration, and
repair costs (collectively "Reletting Expenses"). If, in connection with any
reletting, the new lease term extends beyond the Term or the premises covered
thereby include other premises not part of the Premises, a fair apportionment of
the rent received from such reletting and the Reletting Expenses, will be made
in determining the net proceeds received from the reletting. In determining such
net proceeds, rent concessions will also be apportioned over the term of the new
lease. Tenant shall pay such amounts to Landlord monthly on the days on which
the Rent would have been payable if possession had not been retaken, and
Landlord is entitled to receive the same from Tenant on each such day; or
(2) Give Tenant notice of termination of this Lease on the date
specified and, on such date, Tenant's right to possession of the Premises shall
cease and the Lease will terminate except as to Tenant's liability as hereafter
provided as if the expiration of the term fixed in such notice were the end of
the Term. If this Lease terminates pursuant to this Section, Tenant remains
liable to Landlord for damages in an amount equal to the Rent which would have
been owing by Tenant for the balance of the Term had this Lease not terminated,
less the net proceeds, if any, of reletting of the Premises by Landlord
subsequent to termination after deducting Reletting Expenses. Landlord may
collect such damages from Tenant monthly on the days on which the Rent would
have been payable if this Lease had not terminated and Landlord shall be
entitled to receive the same from Tenant on each such day. Alternatively, if
this Lease is terminated, Landlord at its option may recover forthwith against
Tenant as damages for loss of the bargain and not as a penalty an amount equal
to the worth at the time of termination of the excess, if any, of the Rent
reserved in this Lease for the balance of the Term over the then Reasonable
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Rental Value of the Premises for the same period plus all Reletting Expenses.
"Reasonable Rental Value" is the amount of rent Landlord can obtain for the
remaining balance of the Term.
20.2 Cumulative Remedies. Suits to recover Rent and damages may be
-------------------
brought by Landlord, from time to time, and nothing herein requires Landlord to
await the date the Term would expire had there been no Event of Default or
termination, as the case may be. Each right and remedy provided for in this
Lease is cumulative and non-exclusive and in addition to every other right or
remedy now or hereafter existing at law or equity, including suits for
injunctive relief and specific performance. The exercise or beginning of the
exercise by Landlord of one or more rights or remedies shall not preclude the
simultaneous or later exercise by Landlord of other rights or remedies. All
costs incurred by Landlord to collect any Rent and damages or to enforce this
Lease are also recoverable from Tenant. If any suit is brought because of an
alleged breach of this Lease, the prevailing party is also entitled to recover
from the other party all reasonable attorneys' fees and costs incurred in
connection therewith.
20.4 No Waiver. No failure by Landlord to insist upon strict
---------
performance of any provision or to exercise any right or remedy, upon a breach
thereof, and no acceptance of full or partial Rent during the continuance of any
breach constitutes a waiver of any such breach or such provision, except by
written instrument executed by Landlord. No waiver shall affect or alter this
Lease but each provision hereof continues in effect with respect to any other
then existing or subsequent breach thereof.
20.5 Bankruptcy. Nothing contained in this Lease limits Landlord's
----------
right to obtain as liquidated damages in any bankruptcy or similar proceeding
the maximum amount allowed by law at the time such damages are to be proven,
whether such amount is greater, equal to, or less than the amounts recoverable,
either as damages or Rent, referred to in any of the preceding provisions of
this Section. Notwithstanding anything in this Section to the contrary, any
proceeding described in Section 20.1(5),(6),(7) and (8) is an Event of Default
only when such proceeding is brought by or against the then holder of the
leasehold estate under this Lease.
20.6 Late Payment Charge. Any Rent not paid within 5 days after the
-------------------
due date shall thereafter bear interest at 5 percentage points above the Prime
Rate or the highest rate permitted by law, whichever is lower, until paid.
Further, if such Rent is not paid within 5 days after notice, Tenant agrees
Landlord will incur additional administrative expenses, the amount of which will
be difficult to determine; Tenant therefore shall also pay Landlord a late
charge for each late payment of 2% of such payment. Any amounts paid by Landlord
to cure a default of Tenant which Landlord has the the right but not the
obligation to do, shall, if not repaid by Tenant within 5 days of demand by
Landlord, thereafter bear interest at 5 percentage points above the Prime Rate
until paid. "Prime Rate" means that rate announced by Wells Fargo Bank, N.A. as
its prime rate on the date closest to the date interest commences.
20.7 Waiver of Jury Trial. Tenant and Landlord waive any right to a
--------------------
trial by jury in suits arising out of or concerning the provisions of this
Lease.
21. DEFAULT BY LANDLORD. In the event of any alleged default on the part
-------------------
of Landlord, Tenant shall give notice to Landlord and afford Landlord a
reasonable opportunity to commence to cure such default and thereafter proceed
with due diligence to cure such default. Such notice shall be ineffective unless
a copy is simultaneously also delivered in the manner required in this Lease to
any holder of a mortgage and/or deed of trust affecting all or any portion of
the Building Complex (collectively, "Mortgagee"), provided that prior to such
notice Tenant has been notified (by way of notice of Assignment of Rents and
Leases, or otherwise), of the address of a Mortgagee. If Landlord fails to cure
such default within the time provided, then Mortgagee shall have an additional
30 days following a second notice from Tenant or, if such default cannot be
cured within that time, such additional time as may be necessary provided within
such 30 days, Mortgagee commences and diligently pursues a cure (including
commencement of foreclosure proceedings if necessary to effect such cure).
Tenant's sole remedy will be equitable relief or actual damages but in no event
is Landlord or any Mortgagee responsible for consequential damages or lost
profit incurred by Tenant as a result of any default by Landlord. If a
Mortgagee, or transferee under such Mortgage (hereafter defined), succeeds to
Landlord's interest as a result of foreclosure or otherwise, such party shall
not be: (i) liable for any default, nor subject to any setoff or defenses that
Tenant may have against Landlord, (ii) bound by any amendment (including an
agreement for early termination) without its consent made at any time after
notice to Tenant that such Mortgager requires such consent; and (iii) bound by
payment of Rent in advance for more than 30 days. Tenant agrees to pay Rent (and
will receive credit under this Lease) as directed in any Mortgagee's notice of
Landlord's default under the Mortgage reciting that Mortgagee is entitled to
collect Rent.
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22. SUBORDINATION AND ATTORNMENT.
----------------------------
22.1 This Lease at Landlord's option will be subordinate to any
mortgage, deed of trust and related documents now or hereafter placed upon the
Building Complex (including all advances made thereunder), and to all
amendments, renewals, replacements, or restatements thereof (collectively,
"Mortgage").; provided, however that the subordination by Tenant to any such
future mortgage, deed of trust or related documents shall be subject to Tenant
obtaining a non-disturbance agreement on such lender s standard form agreement,
whereby such lender agrees, provided Tenant is not then in default under this
Lease, that Tenant's occupancy of the Premises and rights and privileges under
this Lease shall not be disturbed or impaired with in connection with any
proceeding to enforce or foreclose any such mortgage, trust indenture or other
lien and if such party succeeds to the interests of Landlord by reason of such
proceedings or conveyance in lieu or other lien and if such party succeeds to
the interests of Landlord by reason of such proceedings or conveyance in lieu
thereof, Tenant shall attorn hereunder directly to such party; provided,
however, such party shall not be (i) liable for any act or omission of any prior
landlord or (ii) subject to any offsets or defenses which Tenant might have
against any prior landlord (including Landlord); or (iii) bound by any rental
which Tenant might have paid for more than one (1) month in advance to any prior
landlord; or (iv) bound by any amendment or modification of the Lease made
without its consent.
22.2 If any Mortgagee elects to have this Lease superior to the lien
of its Mortgage and gives notice to Tenant, this Lease will be deemed prior to
such Mortgage whether this Lease is dated prior or subsequent to the date of
such Mortgage or the date of recording thereof.
22.3 In confirmation of subordination or superior position, as the
case may be, Tenant will execute such documents as may be required by Mortgagee
and if it fails to do so within 10 days after demand, Tenant hereby irrevocably
appoints Landlord as Tenant's attorney-in-fact and in Tenant's name, place, and
stead, to do so.
22.4 Tenant hereby attorns to all successor owners of the Building,
whether such ownership is acquired by sale, foreclosure of a Mortgage, or
otherwise.
22.5 After the Lease is fully executed, Landlord agrees to use its
reasonable efforts to obtain a non-disturbance agreement from the present
mortgagee or the Real Property and/or the Building for such purposes.
23. REMOVAL OF TENANT'S PROPERTY. All movable personal property of Tenant
----------------------------
not removed from the Premises upon vacation, abandonment, or termination of this
Lease shall be conclusively deemed abandoned and may be sold, or otherwise
disposed of by Landlord without notice to Tenant and without obligation to
account; Tenant shall pay Landlord's expenses in connection with such
disposition.
24. HOLDING OVER: TENANCY MONTH-TO-MONTH. If, after the expiration or
------------------------------------
termination of this Lease, Tenant remains in possession of the Premises without
a written agreement as to such holding over and continues to pay rent and
Landlord accepts such rent, such possession is a tenancy from month-to-month,
subject to all provisions hereof but at a monthly rent equivalent to 150% of
the monthly Rent paid by Tenant immediately prior to such expiration or
termination. Rent shall continue to be payable in advance on the first day of
each calendar month. Such tenancy may be terminated by either party upon 10
days' notice prior to the end of any monthly period. Nothing contained herein
obligates Landlord to accept rent tendered after the expiration of the Term or
relieves Tenant of its liability under Section 17.
25. PAYMENTS AFTER TERMINATION. No payments by Tenant after expiration or
--------------------------
termination of this Lease or after any notice (other than a demand for payment
of money) by Landlord to Tenant reinstates, continues, extends the Term, or
affects any notice given to Tenant prior to such payments. After notice,
commencement of a suit, or final judgment granting Landlord possession of the
Premises, Landlord may collect any amounts due or otherwise exercise Landlord's
remedies without waiving any notice or affecting any suit or judgment.
26. STATEMENT OF PERFORMANCE. Tenant agrees at any time upon not less
------------------------
than 10 business days' notice to execute and deliver to Landlord a written
statement certifying that this Lease is unmodified and in full force and effect
(or, if there have been modifications, that the same is in full force and effect
as modified stating the modifications); that there have been no defaults by
Landlord or Tenant and no event which with the giving of notice or passage of
time, or both, would constitute such a default (or, if there have been defaults,
setting forth the nature thereof); the date to which Rent has been paid in
advance and such other information as Landlord requests. Such statement may be
relied upon by a prospective purchaser of Landlord's interest or Mortgagee.
Tenant's failure to timely deliver such statement is conclusive upon Tenant
that: (i) this Lease is in full force and effect without modification except as
may be represented by Landlord; (ii) there are no uncured
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defaults in Landlord's performance; and (iii) not more than 1 month's Rent has
been paid in advance. Upon request, Tenant will furnish Landlord an appropriate
resolution confirming that the party signing the statement is authorized to do
so.
27. MISCELLANEOUS.
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27.1 Transfer by Landlord. The term "Landlord" means so far as
--------------------
obligations of Landlord are concerned, only the owner of the Building at the
time in question and, if any transfer of the title occurs, Landlord herein named
(and in the case of any subsequent transfers, the then grantor) is automatically
released from and after the date of such transfer of all liability as respects
performance of any obligations of Landlord thereafter to be performed. Any
funds in Landlord's possession at the time of transfer in which Tenant has an
interest must be turned over to the grantee and any amount then due Tenant under
this Lease will be paid to Tenant.
27.2 No Merger. The termination or mutual cancellation of this Lease
---------
will not work a merger, and such termination or cancellation will at the option
of Landlord either terminate all subleases or operate as an automatic assignment
to Landlord of such subleases.
27.3 Common Area Use. Landlord may temporarily use any of the Common
---------------
Areas for the purposes of completing or making repairs or alterations in any
portion of the Building Complex.
27.4 Independent Covenants. This Lease is to be construed as though
---------------------
the covenants between Landlord and Tenant are independent and not dependent and
Tenant is not entitled to any setoff of the Rent against Landlord if Landlord
fails to perform its obligations; provided, however, the foregoing does not
impair Tenant's right to commence a separate suit against Landlord for any
default by Landlord so long as Tenant complies with Section 21.
27.5 Validity of Provisions. If any provision is invalid under
----------------------
present or future laws, then it is agreed that the remainder of this Lease is
not and that in lieu of each provision that is invalid, there will be added as
part of this Lease a provision as similar to such invalid provision as may be
possible and is valid and enforceable.
27.6 Captions. The caption of each Section is added for convenience
--------
only and has no effect in the construction of any provision of this Lease.
27.7 Construction. The parties waive any rule of construction that
------------
ambiguities are to be resolved against the drafting party. Any words following
the words "include," "including," "such as," "for example," or similar words or
phrases shall be illustrative only and are not intended to be exclusive, whether
or not language of non-limitation is used.
27.8 Applicability. Except as otherwise provided, the provisions of
-------------
this Lease are applicable to and binding upon Landlord's and Tenant's respective
heirs, successors and assigns. Such provisions are also considered to be
covenants running with the land to the fullest extent permitted by law.
27.9 Authority. Tenant and the party executing this Lease on behalf
---------
of Tenant represent to Landlord that such party is authorized to do so by
requisite action of Tenant and agree, upon request, to deliver Landlord a
resolution, similar document or opinion of counsel to that effect.
27.10 Severability. If there is more than one party which is the
------------
Tenant, the obligations imposed upon Tenant are joint and several.
27.11 Acceptance of Keys, Rent or Surrender. No act of Landlord or
-------------------------------------
its representatives during the Term, including any agreement to accept a
surrender of the Premises or amend this Lease, is binding on Landlord unless
such act is by a partner, member or officer of Landlord, as the case may be, or
other party designated in writing by Landlord as authorized to act. The delivery
of keys to Landlord or its representatives will not operate as a termination of
this Lease or a surrender of the Premises. No payment by Tenant of a lesser
amount than the entire Rent owing is other than on account of such Rent nor is
any endorsement or statement on any check or letter accompanying payment an
accord and satisfaction. Landlord may accept payment without prejudice to
Landlord's right to recover the balance or pursue any other remedy available to
Landlord.
27.12 Building Name and Size. Landlord may as it relates to the
----------------------
Building and Building Complex: change the name, increase the size by adding
additional real property, construct other buildings or improvements, change the
location and/or character, or make alterations or additions in accordance with
Section 11.2. If additional buildings are constructed or the size is increased,
Landlord and Tenant shall execute an amendment which incorporates any necessary
modifications to Tenant's Pro Rata Share. Tenant may not use the Building's
name for any purpose other than as part of its business address.
12
<PAGE>
27.13 Diminution of View. Tenant agrees that no diminution of light,
------------------
air, or view from the Building entities Tenant to any reduction of Rent under
this Lease, results in any liability of Landlord, or in any way affects Tenant's
obligations.
27.14 Limitation of Liability. Notwithstanding anything to the
-----------------------
contrary contained in this Lease, Landlord's liability is limited to Landlord's
interest in the Building and Landlord shall never be personally liable for
recovery of any judgment.
27.15 Non-Reliance. Tenant confirms it has not relied on any
------------
statements, representations, or warranties by Landlord or its representatives
except as set forth herein.
27.16 Written Modification. No amendment or modification of this
--------------------
Lease is valid or binding unless in writing and executed by the parties.
27.17 Lender's Requirements. Tenant will make such modifications to
---------------------
this Lease as may hereafter be required to conform to any lender's requirements,
so long as such modifications do not increase Tenant's obligations or materially
adversely alter its rights or obligations.
27.18 Effectiveness. Submission of this instrument for examination or
-------------
signature by Tenant does not constitute a reservation of or option to lease and
it is not effective unless and until execution and delivery by both Landlord and
Tenant.
27.19 Survival. This Lease, notwithstanding expiration or
--------
termination, continues in effect as to any provisions requiring observance or
performance subsequent to termination or expiration.
27.20 Time of Essence. Time is of the essence herein.
---------------
27.21 Rules and Regulations. If rules and regulations are attached
---------------------
hereto, they are a part of this Lease and Tenant agrees that Tenant and Tenant's
Agents shall at all times abide by such rules and regulations. In the event of
a direct conflict between the rules and regulations and Tenant's rights under
the other parts of this Lease (including the provisions of the Addendum), the
other parts of this Lease shall control. Landlord acknowledges that Landlord
approves the installation of "whiteboards" as part or Tenant s decor.
27.22 Recording. Tenant will not record this Lease. Recording of the
---------
Lease by or on behalf of Tenant is an Event of Default.
28. AUTHORITIES FOR ACTION AND NOTICE.
---------------------------------
28.1 Unless otherwise provided, Landlord may act through Landlord's
Building Manager or other designated representatives from time to time.
28.2 All notices or other communications required or desired to be
given to Landlord must be in writing and shall be deemed received when delivered
personally to any officer, partner, or member of Landlord (depending upon the
nature of Landlord) or the manager of the Building (the "Building Manager")
whose office is in the Building, or when deposited in the United States mail,
postage prepaid, certified or registered, return receipt requested, addressed as
set forth in Section 1.10. All notices or communications required or desired to
be given to Tenant shall be in writing and deemed duly served when delivered
personally to any officer, partner, or member of Tenant (depending upon the
nature of Tenant), individually if a sole proprietorship, or when deposited in
the United States mail, postage prepaid certified or registered, return receipt
requested, addressed to the appropriate address set forth in Section 1.13.
Either party may designate in writing served as above provided a different
address to which notice is to be mailed. The foregoing does not prohibit notice
from being given as provided in the rules of civil procedure, as amended from
time to time, for the state in which the Real Property is located..
29. PARKING. Landlord will make available the number of parking spaces set
-------
forth in Section 1.9, if any. All parking spaces shall be in and out, non-
assigned parking spaces in the surface parking area located on the Real
Property. Tenant's use of the parking spaces will be without additional charge
during the Initial Term of the Lease. Notwithstanding the above, the right
granted to Tenant to use such spaces is a license only and Landlord's inability
to make such spaces available at any time for reasons beyond Landlord's
reasonable control is not a material breach by Landlord of its obligations
hereunder. Tenant has no rights to use parking spaces except as provided in this
Section. All vehicles parked in the parking
13
<PAGE>
area and the personal property therein shall be at the sole risk of Tenant,
Tenant's Agents and the users of such spaces and Landlord shall have no
liability for loss or damage thereto for whatever cause.
30. SUBSTITUTE PREMISES.
-------------------
31. BROKERAGE. Tenant represents it has not employed any broker with
---------
respect to this Lease and has no knowledge of any broker's involvement in this
transaction except those listed in Sections 1.14 and 1.15 (collectively, the
"Brokers") for which Landlord is responsible for payment of commissions under
separate agreement with the Brokers. Tenant and Landlord shall each indemnify
the other against any expense incurred by other as a result or any claim for
commissions or fees by any other broker, finder, or agent, whether or not
meritorious, employed by the other or claiming by, through, or under the other,
other than the Brokers. Tenant acknowledges Landlord is not liable for any
representations by the Brokers regarding the Premises, Building, Building
Complex, or this Lease.
32. COUNTERPARTS. This Lease may be executed in two or more counterparts,
------------
each of which shall be deemed an original, but all of which together shall
constitute one and the same instrument. Any one or more counterpart signature
pages may be removed from one counterpart of the Lease and annexed to another
counterpart of the Lease to form a completely executed original instrument
without impairing the legal effect of the signature thereon.
33. ADDENDUM/EXHIBITS. Any Addenda and/or Exhibits referred to herein and
-----------------
attached hereto are incorporated herein by reference.
IN WITNESS WHEREOF, the parties have executed this Lease as of the day and
year first above written and it is effective upon delivery of a fully-executed
copy to Tenant.
DIGIMARC, an Oregon corporation SOUTHPLACE ASSOCIATES LLC, an Oregon
limited liability company
By: /s/ Bruce Davis
Print Name: Bruce Davis
Print Title: Chief Executive Officer By: /s/ Paul B. Hogan
ATTEST "Landlord"
By: /s/ Kathy Brogdon
Print Name: Kathy Brogdon
Print Title: Vice President of Finance
"Tenant"
14
<PAGE>
ADDENDUM
THIS ADDENDUM is to that certain lease agreement (the "Lease") by and
between SOUTHPLACE ASSOCIATES LLC, an Oregon limited liability company
("Landlord"), and DIGIMARC, an Oregon corporation ("Tenant"), with respect to
approximately 16,509 rentable square feet of space (the "Premises") in the
Building. In the event of any conflict between the terms and provisions of the
Lease and the terms and provisions of this Addendum, the terms and provisions of
this Addendum shall control.
1. Landlord grants Tenant a right of refusal (the "Right of Refusal") to
lease approximately 5,875 rentable square feet on the first floor of the
Building (the "Right of Refusal Space") in the location labeled as "RFR Space"
on Exhibit G attached hereto on the following basis:
1.1 If Landlord receives an offer to lease from a third party (other
than Praegitzer Industries, Inc.) to lease the Right of Refusal Space, or any
portion thereof, Landlord will give Tenant notice prior to entering into a
binding agreement with such third party (other than agreement that is contingent
on Tenant waiving its right to such space under this provision), which notice
shall set forth the primary terms and provisions of such offer (the "RFR
Notice"). Tenant has three (3) business days after receipt of the RFR Notice
within which to notify Landlord of its election to exercise its Right of Refusal
as to such space. Landlord will determine the exact square footage of the Right
of Offer Space in the RFR Notice and Tenant must take all of the Right of
Refusal Space offered by Landlord (the "Offered Space") and may not elect to
lease only a portion thereof.
1.2 If Tenant does not timely notify Landlord, it will be
conclusively presumed that Tenant has waived its Right of Refusal and Landlord
shall be free to lease the Offered Space in accordance with the RFR Notice in
all material respects and Tenant will have no further rights under this
Paragraph 1, provided that if Landlord desires to lease the Offered Space at
materially more beneficial terms, then Landlord shall again offer the space to
Tenant at the terms provided in such third party offer before leasing it at such
materially more beneficial terms. For purposes of this provision, "materially
more beneficial terms" shall mean a net effective rent (taking into account the
applicable term, periods without payment of rent, and improvement allowance, if
any) which is 10% more beneficial than that offered to Tenant.
1.3 Upon exercise of the Right of Refusal, the Offered Space will be
deemed added to the Premises effective as of the commencement date provided in
the RFR Notice and Tenant will accept such space in its "as is" condition
without any remodeling or fix-up work performed by Landlord except as may be
expressly provided in the RFR Notice. After exercise of the Right of Refusal,
the parties will execute an amendment to the Lease evidencing the addition of
such space.
1.4 Tenant's right to exercise the Right of Refusal is conditioned
on: (i) Tenant not being in default under the Lease at the time it exercises the
Right of Refusal or on the date that Tenant's occupancy of the Offered Space is
scheduled to commence, (ii) Tenant not having vacated more than 25% of the
Premises and not having assigned its interest in the Lease at the time it
exercises the Right of Refusal or on the date that Tenant's occupancy of the
Offered Space is scheduled to commence; and (iii) there being at least 24 months
remaining in the Term.
1.5 All notifications contemplated by this Section, whether from
Tenant to Landlord, or from Landlord to Tenant, must be in writing and given in
the manner provided in this Lease.
2. Tenant shall provide to Landlord, at the time of execution hereof by
Tenant, a clean, unconditional, irrevocable letter of credit from a lending
institution reasonably acceptable to Landlord in the form attached hereto as
Exhibit F (the "Letter of Credit") as a guaranty and security for the
performance of Tenant's obligations under this Lease on the following terms and
conditions:
A. It is understood and agreed that the Letter of Credit, or a
renewal or substitute therefor approved by Landlord, shall be kept in effect
from the date of execution of this Lease through the Expiration Date (the "LC
Termination Date") in the form attached hereto as Exhibit F or in form
otherwise approved by Landlord. The initial Letter of Credit shall be in the
amount of $350,000.00 (the "LC Maximum"). If the Letter of Credit has not been
presented for payment in accordance with this paragraph, the LC Maximum shall be
reduced and Landlord agrees to cooperate with Tenant in amending the then-
current Letter of Credit to reflect the respective reduction in accordance with
the following provisions: (a) the LC Maximum shall be reduced by $175,000.00 if
Tenant provides
15
<PAGE>
evidence to Landlord, in form and substance approved by Landlord (which approval
shall not be unreasonably withheld), of either of the following (i) an increase
in Tenant's equity capitalization of $15,000,000.00 over the existing
$17,000,000.00 equity capitalization or (ii) following the first anniversary of
the Commencement Date, the existence of unrestricted cash reserves of
$7,000,000.00 or more; the LC Maximum shall be reduced by $87,500.00 as of the
commencement of the 19/th/ calendar month following the Commencement Date; and
(c) the LC Maximum shall be reduced by $87,500.00 as of the commencement of the
25/th/ calendar month following the Commencement Date. The foregoing reductions
shall not be applicable if and so long as Tenant is the subject of a proceeding
under any provision of federal or state law relating to insolvency, bankruptcy,
or reorganization at the time. If the Letter of Credit would otherwise expire
prior to the LC Termination Date, Tenant shall present Landlord with an
extension or renewal of the initial Letter of Credit, or a substitute Letter of
Credit in the same form as Exhibit F in the amount of the then applicable LC
Maximum, no later than ten (10) business days prior to the expiration date of
such initial Letter of Credit, from a lending institution subject to Landlord's
reasonable approval; such extension, renewal or substitute Letter of Credit
shall be effective no later than the day prior to the expiration of the initial
Letter of Credit and shall continue in effect for not less than the period
ending with the LC Termination Date and shall be in the amount provided above.
Tenant agrees that in an Event of Default by Tenant (as defined in Section 20),
Landlord shall have a right to present the Letter of Credit (or the renewal,
extension or substitute) for payment, with amounts received to be held and
applied in accordance with subparagraph B below. Any failure of Tenant to
provide Landlord with an extension, renewal or substitute Letter of Credit, as
required hereunder, shall be deemed an Event of Default under the Lease and
Landlord shall have a right to present the Letter of Credit in accordance with
the foregoing provision. If the Letter of Credit has not been presented for
payment in accordance with this Section on or before the LC Termination Date,
Landlord shall return the Letter of Credit to Tenant within thirty (30) days
after the LC Termination Date. Tenant agrees that in the event of any transfer
or mortgage, Landlord shall have the right to transfer the Letter of Credit or
substitute to the transferee or mortgagee, and if the Letter of Credit has been
transferred, Tenant shall look solely to such transferee for the return of the
Letter of Credit (or substitute). Landlord shall give written notice to Tenant
of transfer of Landlord's interest resulting in transfer of the Letter of
Credit. Landlord shall deliver the then-current effective Letter of Credit to
Tenant upon receipt of any conforming renewal or substitute Letter of Credit
provided in accordance with this Paragraph and cooperate with the issuing bank
to effect the release of such then-current effective Letter of Credit.
B. If an Event of Default occurs or this Lease is terminated
pursuant to Section 20, Landlord may use, apply or retain all or any portion of
the amounts received under the Letter of Credit, if any, for the payment of any
rent or other charge in default or for the payment of any other sum to which
Landlord may become obligated by reason of Tenant's default, or to compensate
Landlord for any loss or damage which Landlord may suffer thereby in accordance
with Section 20 of the Lease. By the later of 60 days following the later of the
expiration of the Lease or Tenant's vacation of the Premises, any amounts drawn
upon the Letter of Credit that are not applied for payment of amounts in
accordance with on foregoing provision shall be returned to Tenant, without
payment of interest.
C. Landlord and Tenant agree that the annual fees charged be the
lending institution issuing the Letter of Credit (or any renewal, extension, or
substitute therefor) shall be paid by Tenants.
3. Notwithstanding anything to the contrary set forth in Exhibit E,
Tenant shall have a right to install, as Alterations (in accordance with Section
12 above), security systems in the Premises and change the locks to the Premises
to the extent required for the operation of Tenant's business, provided that the
proposed systems and locks shall be subject to the approval of Landlord (which
approval shall not be unreasonably withheld provided with keys or codes for such
security and locks to permit access on an emergency basis or as otherwise
permitted under the terms of the Lease.
4. Tenant shall have the right to install a single freeway oriented
occupant identification sign on the west side of the Building. Such sign shall
be located on the top sign band, south of the center protrusion of the western
portion of the Building, and shall be subject to Landlord's final approval,
which shall not be unreasonably withheld, and subject to the provisions of and
approvals under Applicable Law. Tenant's non-building-standard signage rights
pursuant to this paragraph are personal to Tenant and may not be assigned. It
shall be reasonable for Landlord to withhold approval of Tenant's signage based
upon noncompliance with the CCR's affecting the Premises. Landlord may base its
withholding of approval upon good faith aesthetic objections to the design of
the signage (based upon signage standards used for other comparable class A
office buildings in the Portland, Oregon, metropolitan area) and the signage
limitations set forth in the lease between Landlord and Praegitzer Industries,
Inc. The costs for the
16
<PAGE>
design, fabrication and installation of such Tenant's signage shall be borne by
Tenant (subject to the allowance provisions of the Work Letter). Tenant will
bear the costs of removal of any signage at the termination or expiration of the
Lease, including restoring or repairing damages to the Building caused by such
removal to the condition at the time of installation. In addition, if Landlord
is required at any time to remove any signage, including any approved signage,
due to any Applicable Law or if Tenant elects to remove of change the signage at
any time, Tenant shall bear the costs of such change or removal. Tenant shall
not otherwise affix signage to the outside of the Building and no signage shall
be affixed to the inside of the Building that is visible outside the Building
without the approval of Landlord. The provisions of this Section are intended to
prevail over any contrary provisions in the rules and regulations for the
Building.
IN WITNESS WHEREOF, the parties hereto execute this Addendum.
DIGIMARC, an Oregon corporation SOUTHPLACE ASSOCIATES LLC, an Oregon
limited liability company
By: /s/ Bruce Davis
Print Name: Bruce Davis
Print Title: Chief Executive Officer By: /s/ Paul B. Hogan
ATTEST:
"Landlord"
By: /s/ Kathy Brogdon
Print Name: Kathy Brogdon
Print Title: Vice President of Finance and Operations
"Tenant"
<PAGE>
EXHIBIT 23.2
CONSENT OF KPMG LLP, INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
The Board of Directors
Digimarc Corporation:
We consent to the use of our report included in the Registration Statement
and Prospectus to be filed by Digimarc Corporation with the Securities and
Exchange Commission on or about September 20, 1999 and to the reference to our
firm under the headings "Selected Financial Data" and "Experts" in the
Prospectus.
/s/ KPMG LLP
Portland, Oregon
September 20, 1999
<TABLE> <S> <C>
<PAGE>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997 DEC-31-1998
<PERIOD-START> JAN-01-1997 JAN-01-1998
<PERIOD-END> DEC-31-1997 DEC-31-1998
<CASH> 5,638 2,137
<SECURITIES> 0 0
<RECEIVABLES> 119 300
<ALLOWANCES> (17) (2)
<INVENTORY> 0 0
<CURRENT-ASSETS> 5,821 2,533
<PP&E> 349 559
<DEPRECIATION> (98) (230)
<TOTAL-ASSETS> 6,168 2,978
<CURRENT-LIABILITIES> 1,190 1,337
<BONDS> 0 0
10,185 10,185
439 439
<COMMON> 414 441
<OTHER-SE> (6,533) (9,975)
<TOTAL-LIABILITY-AND-EQUITY> 6,168 2,978
<SALES> 161 484
<TOTAL-REVENUES> 186 984
<CGS> 126 114
<TOTAL-COSTS> 126 1,580
<OTHER-EXPENSES> 3,999 2,890
<LOSS-PROVISION> 17 0
<INTEREST-EXPENSE> (86) 119
<INCOME-PRETAX> (3,979) (3,442)
<INCOME-TAX> 0 0
<INCOME-CONTINUING> (3,979) (3,442)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (3,979) (3,442)
<EPS-BASIC> (.94) (.75)
<EPS-DILUTED> (.94) (.75)
</TABLE>
